The Mushy Middle

This is the hard part. The shock of being in a bear market wears off quickly. Some stuff blows up and the losses are not evenly distributed. Some stuff looks okay – defensive stocks, utilities, etc. Down but not down and out. Some stuff looks horrendous – the drawdowns in the hardest hit sectors (tech, this time) have always been underway for awhile by the time the bear market is truly established for the broader averages. Check. The tech sector ex-megacaps began its decline in February 2021 even if it only became really apparent as recently as February 2022. And now they’ve gotten to the megacaps too. Amazon is cut in half. So is Facebook. Tesla. Nothing is immune. There are energy stocks in massive drawdowns. We are doing the work of repricing and it’s not fun.

The good news is we’re already well underway into this process. The bad news is we’re not quite at the end, despite the damage that has already been done. Barry phrases it as “Too late to sell, too soon to buy.” Of course, with a twenty year time horizon, it’s never too soon to buy, but we’re talking about the present not the future.

In the present, the news is getting worse. So is the data.

People are pulling back on the spending they had been doing for a variety of reasons, all of which seem to be feeding on each other. We’ve lapped the last stimulus checks from March of 2021. It’s been over a year. The Federal Reserve is aggressively raising the cost of capital and this is throwing a blanket of caution on top of the spending decisions of business owners. A few notable speculative bubbles have burst. Lots of money has been lost. About $11 trillion if you total up the US stock market’s capitalization and the trillion or so that’s come out of crypto. There are billions in losses you haven’t even read about yet. Especially in bonds, where money is not supposed to have been lost. The housing market is slowing. There have been over 100,000 layoffs in tech / media and shadow layoffs in the form of rescinded job offers. There is a land war in Europe. Prices for the essentials have gone way up, despite the recent pullback in the costs of many commodities. Rents are stubbornly high and staying high.

These are dominos. They’re not done falling. We’re still in the middle of it.

We cannot know for sure how far it will have to go before it ends. Or how much deeper the declines can get. This is the uncertainty part. Things are always uncertain, of course, but there are times during which the uncertainty feels amplified. This is one of those times. You can hear it in every conversation, you can see it in every television news segment. It’s impossible not to be affected by it. The investor class is also the business class. Owners, executives, shareholders, employees, consultants. The obstacles and challenges of their careers do not fade away when the meeting is over. They seep into the consciousness and affect all of the decisions they are making throughout the course of the day – spending decisions, asset allocation decisions. “Maybe we ought to slow down a bit…”

And this is where we live now. PE ratios don’t enter into it. Only on a spreadsheet.

Someday things will start looking up. Some of the cautious or panicked behavior of today will end up looking silly through the perfect lens of hindsight. “I could have bought Starbucks at 70! I could have bought Home Depot in a 40% drawdown!” It’ll happen. But you have to find a way to get from here to there. Here being the mushy middle, where decision making is hard and abstinence from further risk-taking just feels right.

Identifying and accepting this as our present location is a big part of the battle. Congratulations if you have already done so. It’s not nothing.

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