I took a break because I didn't know what was going on. Now I'm back. Did I miss anything?

Manage
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Last year the yield curve inverted, a clear sign that risk for a recession was higher over the next year. However the market kept going up and none of the traditional systems developed on this platform were doing well. Instead quality factors that hadn’t previously indicated much seemed to be the only ones with any predictive power. I had no idea why. I thought if my knowledge of the markets was good though that my hunch that the downturn would come in the fall would bear itself out. It didn’t move quickly the way I thought it would and I made peace with the fact I had no clue what was going on and have been on the sidelines since.

Did you guys have an idea of what was happening the past year? Or did you have the feeling you were flying blind the way I thought I was? I’m back now because even though the market is crashing I at least have the feeling I can make sense of what is going on. The anticipated downturn came and my spidey senses are tingling. Still I’m not inclined to buy much. Maybe nibble a little. According to my way of interpreting the rhythms of the market, my current read is that it will be safer to buy near the start of the next year. Do any of you have a big picture viewpoint or narrative of what’s going on or what will happen?

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Sterling,

I generally agree with you… I sold 90% of equities in 2017 or so… and missed those rallies. I no longer got the markets at that point. I stopped using p123 for most of that time except for some etf timer systems.

Big picture world view… a lot of rich people and investors I spoke with over last five years felt like so long as interest rates were near zero, growth stocks and stock etfs were the place to be. A lot of money flooded into risk assets and passive strategies and volatility targeted ‘risk parity’ and similar systems.

Etfs more than 50% of the market now. So, as stocks get more expensive, and as market cap rises… the etf has to hold more of it. These become defacto momentum traders.

The epidemic came. Impacts on earnings and duration are both very uncertain. With huge range of possible outcomes. Drawdowns led to forced selling and cash raising by automated systems. On retail side, Baby boomers can’t afford losses now, and younger investors experiencing first DD event. Likely, we’ll have multiple rounds of containment and isolation… with disease numbers possibly larger in round two and/or three. At least, this is what happened with Spanish flu. Hopefully not. Hopefully existing treatments can be repurposed and death rate lower than current projections.

Central banks and govts stepping in around world with lower interest rates, cash injections.

If disease course changes fast for the good, markets will race backs. But… if this drags on, will not be enough. And will spread through demand and falling productivity, wages, growth and money velocity into other spaces and pose, potentially large shock that take years to unwind.

Bonds may not be repaid. Debt, including asset backed debt, may not be collectible.

Valuations still high on historic basis.

So… what to do depends on risk appetite and time horizon and earning power. For older people at or near retirement with close to enough to live on, capital preservation against lower probability downside events is key. So, cash… short term bonds… very low equity allocations…

For people early In career or with high earnings power… may start expanding equity allocations now and investing over next 4-12 months in equal chunks if cash on the sidelines to do it.

Volatility will likely remain high, off and on, for 2-6 months…

I don’t know when to buy…
Likely any time from april to January… easiest thing is to dollar cost average in for the timing piece… and have some static ‘core’ allocation at about half of total risk budget they’d stays fixed and invested.

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Good to know I wasn’t the only one confounded by what was going on the last couple of years although some of the current actions have me if not scratching my head at least wondering what the consensus opinion is. For example the expected fallout with the coronavirus is understandable but I am still surprised with how quickly the stimulus bill to combat it has passed. Obama’s TARP to provide relief during the late 2000s financial crisis was less than what was just approved. Central banks are printing money like crazy. Is anyone concerned about possible consequences anymore? Or are there no real arguments against MMT? I’m still trying to figure out why inflation hasn’t been more of a problem. Are the billionaires of the world sucking all that money up and acting as big glaciers? What are the consequences for the markets?

Your ETF explanation is interesting. Quants and algorithms making up the majority of the market are probably influencing movements in a way that can make some of the strategies here unwieldy. But how things shape up after this crash might give insight into how strong an influence they have. I noticed yesterday the Russell small caps leading the way on the bounce—looks like quant thinking at work.

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Falling money velocity in times of fear and uncertainty mean even if you give everyone $2k, it doesn’t circulate or have a multiplier effect. Here’s a chart of us stock market around 1918 Spanish flu.

First wave of flu in spring of 2018…took market until 1922 to recover

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Deflation and huge demand shocks are the killer of economies… and what govts trying to head off.

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Economic growth also kicked off a few years later.

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My understanding of the 1918 flu is that the markets actually went up while it was making the rounds. Of course WWI just ended too so hard to compartmentalize the effects.

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I attached the market charts, you can see them there.

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Here’s a good paper looking at Spanish flus economic impacts. I read three of these type of papers. It’s not clear how bad it was economically, but it was generally bad.
http://conference.iza.org/conference_files/SUMS_2013/pichler_s6888.pdf

Poverty rates went up, growth went down.

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Here’s a paper trying to find us effects… but no real clear findings.
https://poseidon01.ssrn.com/delivery.php?ID=753074071124064067010117111120092006010045004048003005075122091087089069095001087029126119017036023013055086069067020070070093045045047076049107089096088030066085024021089087126004071067069076031102002107093004094029029076001109004093116001&EXT=pdf

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Thanks for the links. My impressions is the market movements are too dramatically different to really compare these two epidemics. I’ll probably treat covid-19 as distinctly different. As a virus that came out of nowhere there is the possibility it can disappear just as quickly or people’s feelings about it can change after recovering from the initial shock. I suppose there’s a chance for a V or U shaped recovery but I was skeptical about the distorted market even before the virus struck so I’ll probably wait to see how things play out. I notice in many crashes there is an initial bottom then a pronounced bounce lasting something like 4 months before another secondary low before the sustained recovery. I’ll be looking for that.

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From what I have read Spanish flu is not listed in the reasons of the 1920-21 recession. Black swans are unique events and we can’t extrapolate.

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Here is an interesting timeline on what happened globally and then here in the US on the WSJ site. What strikes me is that Apple announced revenue problems on Feb 17. Then China was seen to have disruptions and it went to Italy, Korea and others:

https://www.wsj.com/graphics/how-the-bull-market-unraveled-coronavirus/?mod=djem10point

We could have been more aware of the impact on US earnings if we had international EPS data, on a country basis, like we do for the SP500 here in the US. With globalization, this is what we will be seeing moving forward. The P123 supplied spepscny only gives us a keyhole wide view of the world. As of today, it has still not moved that much. Certainly not in line with the dire warnings from Goldman and others.

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Not a subscriber to WSJ so cannot read it. Were there really any warning signs in terms of earnings or fundamentals? Aside from common sense logical deductions from the impact of a pandemic threat I don’t see why earnings estimates would be expected to give timely or better information. Those senators knew enough to sell before February 17.

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Thanks Tom that is very good information,

In my opinion when volatility is this high stay in cash. I Liquidated early March. I was running risk parity models If I stayed in I would be down 15% since all the models went to bonds and gold. Instead I am break even for the year. Some people say that’s half the drawdown of SPY and the models are doing exactly what they are suppose to. I don’t think there is enough data to tell anyone what to do in a black swan event. Gold and bonds could easily go down another 15%. It’s so tempting to short spy but again that would be speculation not systematic trading. My only question now is when to get back in the market? The answer for me is when volatility decreases below 20. That could be a long time coming since their is very little positive news and the number of cases is growing exponentially world wide except for China.