Bears and Bulls Make Money — Pigs Get Slaughtered
I learned to trade in the aftermath of the dot-com collapse.
It was one of the most brutal bear markets in history. The Nasdaq Composite Index dropped 78% over two years from its peak in 2000.
Many traders lost their livelihood, while most investors lost their retirement savings.
But that hair-raising 78% drop doesn’t tell the whole story.
When you hear of a big drop in the stock market, it’s easy to assume that making money is simple.
All you need to do is just short the indexes and the Big Tech names and hold on as they fall lower, right?
Sounds easy. But the reality isn’t so simple…
Even though stocks sunk over two years following the dot-com crash, there were eight short squeezes where the Nasdaq bounced 20% or more.
That’s an average of one 20%-plus rally or more every three months.
Those countertrend rallies were vicious. Learning to trade post-dot-com was like learning to swim in choppy, stormy seas.
It weeded out the weaker swimmers and made the survivors even better traders.
I remember days when the head of the trading firm I worked at would walk around the floor to remind us about the importance of staying disciplined.
I still hear his gruff voice with the Long Island accent repeating the old Wall Street saying: “Bulls make money. Bears make money. Pigs get slaughtered.”
This lesson — to not get excessively greedy — couldn’t be more apparent today.
That’s because with more than 30 million Americans unemployed, it’s hard to find certainty anywhere.
Not All Bear Markets Are the Same
I don’t want to mince words here. I still believe the coronavirus shutdown will eventually end.
And I still believe that we’re headed for the “mother of all bubbles” in the next few years, given the unprecedented amount of fiscal and monetary stimulus that’s been thrown at the current health crisis.
However, there’s no denying that we’re in a bear market.
It won’t be a prolonged bear market like the one in 2000-2002, though, or even the 1.3-year bear market of 2008-2009.
Those bear markets differed in that they washed away speculative manias in dot-com and housing.
Today’s bear market doesn’t face the same challenges.
The S&P 500 Index, at around 22 times earnings, was within its average historical range before the crash. That means stocks were priced fairly based on how much profits they were bringing in.
The S&P 500 yield, at 2.04%, is a full percent higher than the 30-year U.S. Treasury yield. That’s the highest since 2009, and a signal that stocks are cheap on a relative basis.
Compared to Bonds, Stocks Are Incredibly Cheap Right Now
So, stocks look attractive right now … but the economic data is set to get worse.
The Future Is Completely Unknown
Wednesday’s first-quarter gross domestic product (GDP) growth came in at -4.8%. But the shutdown, which started in mid-March, only encapsulated one-sixth of the first quarter.
That means the first quarter will look like a nice breeze compared to the F5 tornado we’re currently facing.
In the last six weeks, 30.3 million American workers applied for unemployment insurance. That’s more than 1 in 6 workers.
For the second quarter, consensus estimates for GDP are at a 26% drop.
Yes, that’s -26%. (No, I didn’t forget the decimal place.)
Wall Street’s estimates vary widely, meaning there’s no clarity or certainty to these predictions.
It’s a complete unknown.
Goldman Sachs thinks GDP will drop 24%, while JPMorgan Chase estimates a 40% plunge.
The situation is causing Americans to shift from consumption to saving.
The personal savings rate hit 13.1% last month, the highest level since 1981. Americans fear what’s ahead and also have nowhere to spend their money.
This will take a toll on future economic growth. But don’t tell that to stock investors…
Don’t Let Excessive Greed Take Over
Right now, the bulls are rubbernecking past a car crash.
The prevailing narrative is that the market has already bottomed, and all of this economic uncertainty is already priced into stocks.
After all, the S&P 500 has risen over 30% from its lows and is within 15% of a new all-time high.
I agree: It’s likely that the market has bottomed. However, be careful of excessive optimism.
There’s still an unbelievable amount of economic and health uncertainty down the road.
And don’t forget that bears and bulls make money, while pigs get slaughtered.
Editor, Automatic Fortunes
My career on Wall Street started while I was in college. I spent a summer interning for Merrill Lynch in the middle of the ‘90s bull market. I was fascinated with trading, and as a result, after college, I joined Salomon Brothers in the famed mortgage bond trading department. Later, I spent time at Citigroup working with credit derivatives