Hello, this is our weekly market alert video for the week ended May 8, 2020, and the continuation, it appears, of the rally that we’ve seen over the last month or so, which we’ve now coined it as scary good. And I’m going to go into a little bit more detail about that, but, yeah, this rally is almost as unprecedented as the drop that came before it.
As you guys know, the drop we saw in March in the S&P and the Dow was the fastest and steepest in history to happen in such a short period of time, and now this recovery is historic as well. And we have lots of data that shows that when you have these kinds of big swings, that usually means that you are in the middle of a really big, bad, bear market. And so, there’s an expression that says that those who do not learn from history are doomed to repeat it, and so, I want to give you a little bit of historical precedent. We talk about this in other videos, but normally in the big, bad bears, like the Great Depression, Y2K in 2008, what we’ve seen is, is that the initial news that comes out that something bad is about to happen — spooks the market; we get a big drop. And then as people absorb that news, and they start to get used to it and start seeing, “Well, maybe there’s a way out of this,” the government comes in and puts stimulus in — all that kind of stuff. People start to get complacent and think, “You know what? It’s probably over; it’s time to buy,” and so we see the market rise dramatically after that only to be then, what happens is or what has happened is, that there’s that second shoe to drop. There’s that second set of news that says, “No, it ain’t over, and it isn’t good,” and that’s when you have the market going down to its full bottom.
So, in Y2K, for example, we saw a rally in the S&P, the stock market, from September of 2001 until March of 2002 — so almost a 5-month period where the S&P, the stock market, rallied by 25%, and it was a long rally. It seemed like everything was over, but then the news of World Com collapsing, Enron collapsing, all of that was then the next catalyst descended down to the lows that it saw over the next few months. And then in 2008, the initial bad news was Leeman, which scared everybody, the market went way down — the TARP program, the $700 billion TARP program. (Oh my gosh, not $700 billion. Wow, that’s such a lot of money!) — and then we saw the rally from that. But then of course, we had the news that Merrill Lynch was going to go under and that all these other — Bear Stearns and all this other stuff — and it’s like, oh my gosh, that second shoe-to-drop news came, and we saw the S&P, the stock market fall to its lows after that.
So, we don’t believe we have heard the second shoe to drop, the news of something that’s going to say, “Okay, it ain’t over yet.” We’re not going to have this full recovery in September where everybody’s going to be back to work and everything’s going to be fine, and we just flip the switch and the economy goes. We think we’re going to start seeing more and more the effects of the hard stop of the economy — the bankruptcies, the unemployment, all these things. We think there’s going to be some news that’s going to confirm that it ain’t over yet, and when that happens, this rally, we believe, will go away.
So, therefore, we’re not buying into this one at this time. And the interesting thing is, if you look at legendary investors like Warren Buffet, hasn’t bought anything yet, and in Y2K and in 2008, that initial rally did not see Warren Buffet do any buying. He waited and bought later on when the true bottom showed itself, and that’s when he started getting involved. So, who are we to go against the Oracle of Omaha?
The concern we have, of course — we have not reached our buy signal yet, but that is our concern is that we do reach it with what we believe to be irrational exuberance that the market is showing. If that is the case, we’re not going to ignore our strategy because we are not smarter than the market. We’re not going to do that, but we are going to tippy toe in. As we’ve described, we will go in with 10% of your equity allocations. So, if you’re a 60 stock/40 bond client, we would go in with 10% of that 60, which would be 6%. So, that’s our plan right now. Of course, that’s subject to change when the time comes, but we don’t think we’ll get there. We think that the second shoe will drop probably towards the end of this month, if not in June, and that’s when we think we’ll see the lows in the market at that time.
So, we hope that you have peace of mind. We hope that you are not worried about all this stuff; you’re letting us do it for you. Our strategy got us out. We are back to where we sold at this point, so after all that’s happened. But you know, that’s happened before, and then we’ve seen the market drop after that. That, in fact, happened in 2008. So, we are on top of it. We’re watching it for you, and we hope that you have the peace of mind of knowing that we’re minding the stores so that you don’t have to, and that you are staying sane and that you are staying healthy. And by the way, do not let your guard down. Do not assume that because the curve has come down on the infections, that it’s safe. It is not. The virus is still out there, and it’s still very dangerous, and so, don’t let up on your precautions, okay? We love you. We want you to be around for a long, long time. So, we’ll talk soon.