There Is Always Enough Time To Panic, Redux

Photo Credit: Gopal Vijayaraghavan || A stampede of wildebeest! Panic! Panic! MIndless panic!

Before I get started, dare I mention that Aleph Blog is a teenager now? 13 years old. Who knew it would last this long? Maybe it will outlast TheStreet.com where I got my start in business and investment writing.

Looking back at some of the posts from February and March of 2007, I find it interesting to see at least two posts about panicking. I think there were more.

• In Large, Red, Friendly Letters, It Reads “Don’t Panic!”
• There Is Always Enough Time To Panic

The market was not as highly valued as it is now, but had structural deficiencies in the finance sector, which we don’t have now. Debt levels at nonfinancial firms were lower than what we have now, but for the most part, investment grade corporations have laddered their debt, and interest rates are indeed low, leaving ratios like EBITDA/Interest usually in good condition.

The main event at that point in 2007 was a sharp move down in the Shanghai stock market that gave many the jitters. Like the coronavirus, the effects on the markets are indirect, and not likely to be long lasting.

But what other similarities and differences are there? In early 2007, the Fed was tightening, en route to overtightening. Today, they are probably more likely to loosen than to stand pat, but they won’t tell you that openly now.

Areas of debt that are troublesome — margin debt, student loans, low end consumer credit, nonfinancial junk-rated corporate bonds and loans, and sovereign debts. Each of these have grown rapidly, while credit related to the housing markets is in decent shape.

Six business days ago, my estimate of future stock returns over the next ten years was 2.21%/year, the lowest I have ever seen it (and a new all-time high for the stock market). Today it is 4.40%/year. Quite a move. Also in the quite a move department is the 10-year Treasury note, whose yield went from 1.56% to 1.23%, a new all-time low.

Six business days ago, I would rather have owned investment grade corporates versus stocks. That has flipped. For some of my clients, near the end of the day, I did some small buying, moving from 79% stock to 81%. Nothing major, just some rebalancing trades.

I said two weeks ago: “As such, lighten up on risk assets, and prepare for the next drop in the stock market.” Now I don’t deserve any credit for that statement… I’ve been saying it for too long.

That said, the second-best strategy that you have the courage to follow is better than the best strategy that you are too scared to follow. As for me, if the market keeps falling, I will be buying *very slowly.* But if the current drop has you scared, well, maybe sell down to a level where you sleep well at night. I think mixes of risky assets to safe assets of between 80/20 and 50/50 are suitable for almost everyone, unless you are saving for a short-term need.

Best to do risk control when the market is not jumpy, slumpy, lumpy, or bumpy. Tell you what, if you are worried now, if the market retraces half the loss, take something off the table, and sleep well at night.

That said, there are no guarantees. Now is the only time you can act. Act wisely.