Quick post here but an important one…
One of the hardest parts about being a capital allocator is reconciling how asset classes are responding to headlines and acting accordingly. The big error I see being made constantly (and I fall into this trap too sometimes) is confusing how the market “should” react versus how it is reacting or will react.
You can look at a guy like Bill Gross who’s basically blown his year (at Pimco Total Return) by mixing up the two. The policy wonk in him said that Treasurys should zig while the manager in him ignored the fact that they were zagging – he’s 80% through the year with a plus 1% return versus a benchmark return of 4% – in Bondland that’s a major no-no. Owing to his long-term track record and expertise, Gross will get a pass, but not many others could in the eyes of investors.
Turning to the stock market, we find ourselves at a moment where everyone needs a rally. Most managers were under-performing going into the fall and the game of catch-up usually engenders a high-beta melt-up and a general Race for the Roses into year-end. Last week many major indices and sectors snapped out of the three month downtrend, my friend Greg Harmon is calling it a Breakout Week. This week the naysayers that watched with their hands folded may come in to add even more fuel. This morning’s Merger Monday (three, count ‘em three deals!) certainly won’t hurt.
And so now, these nasty, persistent headlines out of Europe are starting to serve as buying opportunities and not Risk Off fire drills. The sellers are being cleaned up in the pre-market and stock players are looking at November with green lights and checkered flags in their lines of sight.
I’m not here to predict how long this will last. We’ve made our beds here for client accounts with some heavy buying last Tuesday/Wednesday. And now we shall see if seasonality and improving sentiment will keep those nasty headlines from turning into a rout.