Stock markets had a horror week last week. The S&P had its biggest down and up days for the year and Friday’s close was right on the lows of trade for the day and the week.
The Aussie dollar fell below 87 cents again and USDJPY, which just a week or so ago was trading above 110 cents, and today is back at 107.13. With investors running into the Yen, a usual safe haven in times of trouble, this reversal in USDJPY is in and of itself a big sign that something is amiss in markets at the moment.
But even as volatility on the local and US markets have increased to the highest levels in over a year, many traders, strategists and other pundits are warning investors not to get caught in the “noise”.
Indeed on Friday Robert Shiller told the Wall Street Journal that he’s still invested. “The market has gone up for five years now and has gotten quite high, but I’m not selling yet,” he said.
And of course Shiller is taking the correct approach to stay alert but not alarmed. Shiller suggests people stay in the market unless or until they see a consensus about economic stagnation forming. This could be a dangerous “turning point,” he said
But, as I wrote back in April I switched my Super to 100% cash largely to avoid this type of volatility and sleep easy.
At the time the market hadn’t broken down, indeed US stocks are only really just broken through support even now, but I went to cash anyway. The reason was that I was simply exercising an option of capital preservation for the next few months.
Almost exactly six months later the arguments that convinced me to seek capital preservation over capital gain remain in place. Sure the market went up and many friends and colleagues reminded me that I was 100% cash while stocks were rallying.
But, this strategy was and remains one about uncertainty, uncertainty about the impact of the end of QE3 this month. Uncertainty about valuations of companies as rates start to rise, uncertainty about the hyperbolic discounting needed to keep valuations up while revenues are pressured from global growth rates already past their post GFC sweet spot. Add to that the uncertainty about how deep the correction in stocks when it comes will truly be and you have a recipe for weakness.
Indeed as John Hussman wrote in his weekly commentary there is a growing risk that the market hits an “air pocket” sometime soon. US stocks are already trading under the important trend line highlighted last week and nervousness is growing.
So I am staying in cash for the moment until this uncertainty is resolved. Until the outlook for US and global growth is resolved and until we know how the market is going to react to the end of quantitative easing. The last two times the Fed stopped buying, bonds stocks fell – will this time really be any different?
But to reiterate I’m only 45. My super has to last me into my 80s, god willing, and stocks will make up a large part of the return on that portfolio in the years ahead. For the moment however I can sleep easier in cash and when the time comes to buy stocks – either higher or lower I will.