They say, don't try to catch a falling knife. Unfortunately there is no rule of thumb of measurement for the duration or magnitude of a falling knife - just don't catch one.
Financial markets are one of those things that move fast and slow at the same time. Not much happens in the short-term, yet so much happens over longer periods of time. We get so caught up in and sweat the small stuff that we miss the forest for the trees.
I distinctly recall the bull market rally of March, 2020. It was probably one of the most hated rallies for the last decade - come to think of it, most market rallies are hated. Markets fell over -30% in 6 weeks, and had rallied +20% in 3 weeks. From the bottom of the COVID crisis to the end of 2021/beginning of 2022, markets rallied over +100%. It was all downhill from then. Inflation, interest rates, recession, it was all over...apparently.
Here's how the stock market declined from their highs.
The US stock market was well and truly in bear market territory, with the Aussie market not too far behind.
Since then, the US stock market has rallied pretty hard, +20.70% for the Nasdaq and +14.15% for the S&P 500, with the Aussie market not too far behind (as usual), +5.92%.
So was that the bottom? Did the stock market price in peak inflation? Did the stock market get the recession call wrong? Did it price one in and now it's looking further ahead? Is this a dead-cat bounce? Has the market got it wrong again?
What I know for sure is that no one knows for sure. There are so many conflicting data points in the market and economy right now. Consumer sentiment and business confidence are at all time lows, corporate earnings are at all time highs, inflation is at a multi decade high, consumer savings are are record levels, consumers are spending at record speed, employers are hiring like never before, and a recession is around the corner. The playbook is so obvious that it hasn't been more difficult to read the tea leaves.
This stock market rally could be a dead cat bounce and we may see new lows being tested in the months ahead. This stock market rally could stick and we may see all time highs in the months ahead too. Either won't surprise me. The optimist in me says we're climbing higher from here, but what does the market care what I think? It's nothing more than a gut feeling and confirmation bias looking back into history.
The trouble with investing is that it's counter intuitive. In other words, the time to act is when we feel crippled and paralysed, and the time to be cautious is when the stars have fully aligned. We're just not wired to think or act this way.
Whether the market rises or falls from here, in the long-run, it shouldn't matter. If it does, you may need to reassess the way you are allocating your capital. Investors don't get paid for not taking risk. They say don't try to catch a falling knife, yet no one tells you when the knife has hit the floor. Markets move slow and markets move fast.
My colleague Matt Rigby and I talk more about this and more in last week's The Wide Lens podcast.
You can also listen to the podcast on Spotify or wherever else you listen to your podcasts.
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