April Fools! S&P continues bounceback for a 17% gain

Posted on May 1st, 2020

March was the longest year, but April seemed like a quick week.  The S&P’s 17% gain for April made it the best April in several decades, continuing its 30% bounceback from the thrashing it bounced back from since late March. 

The long March and short April brought a few points home.

Emotions are not an Investor’s Friend

During tumultuous times like this, it can be very tempting to attempt to time the market.  It certainly tempts me.  We’re not wired to be able to withstand the pain of losing money without trying to do something.  Clients who call to discuss whether it’s a good time to exit the market always get some variation of “I have no crystal ball and can’t foresee the market; but let’s balance short term needs (safety) with long term goals.” 

Market Timing

But why not just get out of the market?  As we stated in last month’s newsletter, it simply takes driving down empty roads to know we’re in a recession.  Several clients called wanting to reduce risk for that very same reason.  If we’re in a recession, let’s get out!  I don’t blame them, my gut tugs at me the same way.  To further add to the feeling, we still have not experienced any of the bankruptcies that are likely to occur in the directly impacted industries (i.e. travel, restaurant, entertainment, oil, etc.). 

To properly time the market, you need to:

  1. Have a variant viewpoint from the market,
  2. Be correct, and
  3. Know when to re-enter the market (the toughest part).

In this case, we knew we were in a recession, yet so did everybody else.  That gives us no edge.  The question is how deep this recession will be.  On Wednesday, the Bureau of Economic Analysis announced their estimate for Q1 GDP; a drop of 4.8%[1] and the market…went up.  

The Market is a discounting mechanism

The market had already digested that GDP would be negative for the quarter and was focused on potential vaccine information and how that will impact GDP and profits in the back half of this year and into 2021.  How far out is the market discounting- and what factors is it using to discount; frankly no one really knows what is impacting the aggregate of all market participants!

Market Timing: Do it again

To properly time the market since our last update, we would have had to added risk to portfolios- which is the exact opposite of our instincts and the calls we have been fielding from clients.  But, assuming we would have done that (we did not) we then need to make another decision: when should we reduce the risk?  Reducing the risk is difficult to time, but increasing the risk is both difficult to time and emotionally difficult.  I’ve witnessed many investors reduce their risks, only to be unable to stomach buying in to the market at a higher rate.

Our solution is the boring one.  We don’t believe ourselves particularly skilled at timing the market so we don’t.  Over time, volatility and risk in the markets is what provides the risk premium that, over the long term, provides holders of equity higher returns. The majority of our research produces no actionable result, but it is valuable nonetheless in our asset allocation and security selection decisions. 

[1] “Gross Domestic Product, 1st Quarter 2020 (Advance Estimate),” Bureau of Economic Analysis, April 29, 2020, (Source)