We are in a bear market.
The next question is, “When will it end?” I’ll offer an answer, but, first, some history… in the form of a list.
Officially, we hit “bear market territory” in mid-December. In particular, small company stocks have been crushed.
Bear markets are not any fun.
We haven’t had one in a while, either, which makes it even more painful.
But it reminds me of my days back in high school. It was 1989. I went to the library and pulled a book from the shelves. The book was called The Science of Hitting, and it was written by Ted Williams.
Williams was one of the greatest hitters in the history of baseball. There’s a really cool chart in the book that shows Williams’ batting average based on where a pitch was located. Anything over the plate and he was hitting over .400!
Williams practiced hitting until his hands bled. He became really good at training his eye to only swing when pitches were over the fat part of the plate.
Investing is like hitting a baseball. You don’t have to swing at everything. Wait for nice pitches in the middle of the strike zone and take a whack when the odds in your favor…
Now, there have been four great trades that I could see coming down the middle of the plate in my career. And I think the fifth one is coming.
The first four were “no-brainers” – huge returns without a lot of risk. Indeed, No. 1 fell into my lap. I had just started my career on Wall Street.
I could see the collapse of internet stocks coming a mile away because people acted very irrationally. Companies would IPO and see their stocks go up 1,000% in a day. It was a frenzy to get stock allocations for new issues.
Trade No. 2 was shorting the market again in 2007 and 2008. I managed a short-selling hedge fund. By 2007, I could see that Joe Sixpack had pulled a ton of money from his home to finance stupid stuff like a flat-panel Samsung or a Cadillac Escalade.
This was easy to track, and, when mortgage equity withdrawals flat-lined, the end of the housing bubble was close by.
Trade No. 3 was going long Japanese yen in 2008. A lot of hedge funds had been short the yen because it yielded nothing back then. So, they levered up the wazoo and made money by being short Japan’s currency and long a higher-yielding currency from a different country.
These types of trades work until they don’t. Then, you’re broke. So, it wasn’t hard to see the sequence of events if the stock market imploded: Investors would pull their money, and funds would be forced to cover their yen shorts.
Trade No. 4 was another currency trade. I visited my cousins in Australia in 2012. The U.S. dollar traded at “parity” with the Australian dollar – one buck got you one Aussie. That was simply nuts.
Even more nuts is how expensive real estate was in Australia back then. Everything was expensive. Not soon after, the Aussie dollar fell sharply. It really hasn’t recovered.
Trade No. 5 is coming.
I don’t know when. But the trade will be to be massively long stocks. After this bear market ends – and it won’t end until there’s blood in the streets – it will be the buying opportunity of a lifetime.
That’s because two groups of people will have no interest in the market. The first are folks like my mom who are retired and living off their savings. She couldn’t care less about the stock market.
The second are the Millennials. Ten years ago, they saw their folks nearly go bankrupt and lose their houses. They’re about to see another ass-kicking again. I don’t think the stock market will be on the top of their lists of things to get involved with.
So, I’m in wait-and-see mode.
Since we’re at the end of the year, I’ll make a prediction. Most people think the Federal Reserve will continue to raise interest rates in 2019. Two times is the consensus.
But what if they actually cut rates instead? In the market, most of the people are wrong most of the time.
So, maybe things get so bad that the Fed is forced to actually cut rates. That could be the signal the fat pitch is about to be delivered!