It feels nice to be able to breathe again. What a difference a few weeks can make.
March 10 was the day of the big turnaround, but the Friday before was when we hit our new low. I remember thinking that day that institutional investors don’t normally like to hold positions over the weekend for fear that bad news might come out and they would be stuck in a bad place come Monday morning.
As the market neared its low point of this bear market at 6,469.95 on the Dow Jones Industrial Average, I wondered how low we could go. Even those of us who understand that the price of the market on any given day doesn’t have much to do with the real value, we can still feel amazed, shocked, depressed, and all those other feelings the rest of you have. The difference is that we don’t act on those feelings no matter how much we feel them. Or at least we aren’t supposed to.
But for some reason, we rallied to end higher at the close than we started. I was hoping that rally would carry over to Monday’s trading session, but we were down on March 9. Not much, but down. And then came Tuesday, and out of nowhere the market rallied to one of the largest one day percentage gains in history at almost 6 percent.
I realize that there was a lot of news on that Tuesday, and by Wednesday all the pundits were explaining what was happening and why it happened. But I have to tell you that I believe that the particular news that came out that day had less to do with the market rise than the fact that investors were getting tired of a down market. They were looking for a reason to buy and they happened to find one that day.
Looking for the light
I read somewhere this week that, “the market does not change when it sees the light at the end of the tunnel, it changes when the tunnel is still dark, but just not quite as dark as it has been.”
That’s a pretty good analogy. We don’t need good news, we just need news that is better than we expected. And I have even better news: The bear market is over.
That’s right – you were all wondering when it would happen and now you know. How can I be so sure? Well, the market managed to rally from its low on March 6 of 6,469.95 to a high on March 26 of 7,931.33. That is a move of 22.58 percent and one of the defining characteristics of a bull or bear market is a move of more than 20 percent.
So, following that logic, we are now in a bull market. I don’t know about you, but I’m glad that bear market thing is over. Now we can move on. Although it doesn’t really feel like the bear market is over, does it? Unemployment is still very high. Corporate earnings are still very low. As I write this on April 1, people in London were protesting the G20 meeting. How could we possibly be in a bull market?
That’s the thing. The market doesn’t wait until everything feels just right before it makes a move. I don’t want you to start thinking that I know what the market is going to do from this point. I don’t have a clue whether we are going to keep going up or retest our previous lows or even find new lows. That’s why I have to keep making decisions based on what we do know.
We do know that the perceived value of this market is significantly lower than the replacement value of the underlying securities. We do know that it is going to be a hard fight to stop inflation from running higher in the next few years with all the government spending that is going on these days. We do know that our economy will recover and thrive at some point.
History tells that low market prices and the threat of inflation are good reasons to own equities. It also tells us that high bond prices and low interest rates are good indicators that the bond market is priced too high. Knowing these things, we should act accordingly when we decide how we are going to allocate our investments over the next five years.
Are we out of the woods or still in them? I don’t know, but it sure feels nice to have a little breathing room.
Scott Reed is CEO of Hardy Reed Capital Advisors in Tupelo.
Scott Reed/Special to the Journal