2020 | Q1

Beware of the “Easy” Times In The Stock Market

A Bear Market is defined as “A condition in which prices fall 20% or more from recent highs”.

The talking heads loudly proclaimed we were in a bear market on December 24th, 2018.
We were nearing the final days of one of the worst quarters in the last 10 years and the doom and gloom prognosticators were all over the TV telling everyone to get out before it gets worse. Certainly, it was a rather difficult time to be optimistic in the face of all the negative talk. Note, I said negative talk not negative economic data.

What Happened?

We just finished the single best quarter in ten years with investor optimism again reaching lofty levels. One might ask why? Especially considering many of the talking heads have shifted their chatter to a coming economic recession. I have no doubt we will in fact face another recession at some point especially with the world economy slowing. Long-term investors understand the stock market and that the economy is never a one-way street upward. Short-term investors are not really investors, but in a sense are gamblers.

When panic selling occurs, as on December 24th, there is usually an explanation. Basically, panic selling can be described as get out at any price. Panic selling is an emotional reaction to fear of losing rather than evaluating the fundamentals. I can’t think of a better time to “buy” select closed-end funds (CEF) than during these periods. In declining markets, CEF discounts tend to widen as investors sell first and ask questions later, which may cause CEF’s to underperform This dynamic of widening discounts means that the CEF underperforms not because the NAV performed worse but because the share price fell faster than the NAV. It may be counterintuitive to many but purchasing underperforming CEFs as a result of the widening is typically an attractive buying opportunity.

What has changed?

Really, it is the fear of the unknown. When the Federal Reserve tightened interest rates In Dec 2018 it helped cause the sell off. The Fed has been very clear that the rate hikes are over, at least for the foreseeable future. China is still a wild card, but as talks progress investors are clearly becoming less and less fearful of an all-out trade war. The Mueller investigation created political uncertainty with impeachment talks. Jobs and earnings growth continue to be above expectations with rather strong numbers and the trade deficit improved with exports rising .9% an imports falling 2.9%.

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