The classic drivers of the stockmarket are Fear and Greed. Right now, we are in Fear mode. To be fair, last week it was FOMO – Fear Of Missing Out – as the market bounce continued.
But this was a short term reaction, not a turning point.
The sell off in March was vicious. Once investors woke up to the dangers of the pandemic, pandemonium broke loose. The hedge funds piled into to short positions as everyone else piled out. And so the market overshot and went far too low. The small rebound sine then can be characterised in three ways.
- Bargain hunters thinking shares look cheap – on account of them being cheaper than they were. This doesn’t necessarily make them a bargain though.
- Hedge funds taking profit by closing out their short positions
- The classic dead-cat bounce, very often seen after a large fall. Incidentally, does anyone know if a dead-cat really does bounce if dropped from a great height? We vote that the classic TV programme Mythbusters should be reprised just to test this theory.
Dear reader, please note that none of these reasons refer to the Efficient Market Hypothesis, which we have previously claimed to be bunk. Click here to read why.
We do not believe this is the bottom of the market, nor anywhere near. It seems clear that with unemployment quickly rising to 10% and many firms only carrying on as staggering survivors, it is wishful thinking topped by political sleight-of-hand to think that the economy will just restart where it left off. Thanks for giving us so much of our children’s money, Mr Sunak. Bridging the gap makes sense, but what will we find on the other side? Will this economic viaduct be like the Humber Bridge, leaving Lincolnshire full of optimism, but then finding the other end is in Hull?
The harsh reality is that we are heading for a recession. The economy will take years to return to those heady levels of 2019. All the subsidies in the chancellor’s imagination cannot create a thirst to invest and grow. Nor can it revive dead firms.
If you must play in the market, think of using 1 or 2% of your portfolio as speculative fun. Otherwise, hunker down. This will be a long haul.