Nightmare On Wall Street: It’s Too Early To Buy Stocks (Or Anything Else)

The dip is now a correction, but the stock market is still hazardous. The road to 2021 growth has reached a fundamental chasm. There simply are too many uncertainties that are growing in number and seriousness.

“But those cheap prices….” Prices are irrelevant now because fundamentals are unknowable and risks are huge. Worse, the spread of risk includes virtually all investments, including bonds and real estate.

The stock market is ensnared by a uniquely dangerous pandemic-recession.

Disclosure: Author is fully invested in cash reserves

Uncertainties overwhelm fundamentals, so hold cash reserves

Do not try to guess where there might be value. And don’t get sucked into the price drop vortex of the “sure” winners. Everything now is fragile, including the house-of-cards 2021 optimism that supported rising stock prices.

Uncertainties put the stock market at a breaking point

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First are the uncertainties (risks) covered in my past two articles:

Sept. 30 – “Stock Market: Here Comes October With Scary Tricks Aplenty

“October’s list of potentially negative surprises is long. The month will see the results of…

  • The end of some coronavirus shutdown/unemployment protections and benefits
  • The end of the summer seasonal spending and employment
  • The result of the Fed’s inability to produce real economic improvement (see any of Jerome Powell’s recent pleas to the U.S. congress to do something)
  • The flu season joins the coronavirus pandemic
  • The wildfire and hurricane seasons continue
  • The pre-election, political uncertainties reach a boiling point
  • The malaise among banks continues
  • Finally, there are the earnings reports, leading off with JPMorgan Chase on Tuesday, October 13, at 8:30 am. They should be much better than last quarter, but the hoped-for growth outlooks might be disappointing.

Oct. 20 – “This Is Not A Stock Market Dip – It’s The Beginning Of Another Scary, October Selloff

  • Many companies now are extending work-from-home procedures to summer 2021 (i.e., “normality” is 8+ months away)
  • Many companies (e.g., in travel, entertainment and retail industries) are now discussing the coming need to take drastic, survival actions by year-end 2020
  • The financial system is showing signs of stress (e.g., the sizeable downside pressure on commercial mortgage loan credit quality and pricing)
  • The building realization that technology stocks’ outsized index weightings could be driven more by myopic over-valuations than by extraordinary growth opportunities
  • Finally, there is the seldom discussed, pivotal issue that could upset the apple cart: enormous global public debt

Today’s items add back the issues that worsened the March coronavirus selloff:

  • Oil price weakness – again! It hammered week #3 of the March coronavirus selloff. The recovery and stability since then have rebuilt positive expectations. This time, don’t expect speculators to hang around.
  • Overleverage exists throughout the investment world. Central banks’ abnormally low rates incentivized everyone. Worse are those large, illiquid funds (e.g., private equity, hedge, commodity, high income and real estate) that ramped up debt because the spread between expected returns and cost of debt was so favorable. Margin calls drove the coronavirus selloff to new depths in week #4. While the Fed’s curative actions saved the day, they also encouraged fund managers to return to their flawed, risky strategies.

The timing is terrible

This is where we are at:

With new “stimulus” (AKA “survival”) actions dead in the water (and the old ones ended or ending), lenders, lessors and landlords have no alternative but to act. Therefore, expect borrower, lessee and renter pain that leads to increased bankruptcies, write-offs and write-downs.

If that happens, a continuation of the recession is likely.

The bottom line – Get out and hide

Market timing gets a bad rap because so many investors buy at the top, when times feel great, and sell at the bottom, when times feel awful. Doing so clearly produces terrible returns.

However, there is no need to always be invested. Taking advantage of opportunities (e.g. when prices drop and headlines turn negative) not only can produce good returns, but also can reduce risk of loss.

Conversely, selling when prices are high and risks are growing has two important benefits:

  1. It can prevent being hit by so-called “unexpected” losses
  2. It produces a calmness from which good investment decisions come

Oh, and one more thing. Do not worry about missing out on a gain. A so-called “opportunity loss” is a fool’s loss. Woulda-coulda-shoulda thinking has no place in a wise investing strategy.

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