By now you know that Jeremy Grantham’s latest missive says the fair value for the S&P 500 is 900 but that there is a 50% chance of “crossing 600.” The main focus, though, is that now that the market is down a lot — and realizing that buying at the bottom is problematic for several reasons (including emotional paralysis and just not knowing where the bottom is) — we should have a game plan in place for reequitizing.
I think this is akin to what I have been saying for a while. It is a good bet that when the bear becomes a bull, there will be a big rally in a short period of time that will be easily missed for fear of it not lasting. This is pretty much what happened in January 1991 and 2003, could have been the case with the rally that started in November 2008 but turned out to be a headfake, and could be the case with the rally that started at SPX 666. I don’t know if last week was the bottom or not. While I have opinions, I prefer to not be in a position of having to be right. I told clients ahead of time that we would try to miss a chunk of the bear market decline and that if successful we would lag, but not miss, the initial snapback.
A small meme hopping around the webnets this week has been Nouriel Roubini’s portfolio. Eddy Elfenbein and Felix Salmon each weigh in on this. Apparently Roubini’s 401k is fully invested in index funds, but outside of his 401k he is all cash.
The thread then goes into a discussion about working and saving, which I think is a great topic. Last April I wrote how important saving is versus performance. The obvious counter-argument here is the compounding effect that is captured in your older money, so to speak, but it has been a while since investors have benefitted from compounding, and may be a little while longer. A theory I have been working with (and written about a few times) for a long time now is that longer averaged annual returns will come down some from the 9-10% area. This makes a higher savings rate crucial — the paradox of thrift notwithstanding.
This chart is the handiwork of the crew over at Bespoke Investment Group. I find it striking how much longer the declines last versus the rallies. This has obviously been a horrendous bear market but I find the numbers to be stark.
Bespoke also noted that even after this recent rally the S&P 500 is still 4.33% below its 50 DMA and only 27% of the SPX components are above their respective 50 DMAs. Good stuff.
In a related note, John Serrapere makes the case for the rally to run up to SPX 850-950 in the next couple of months.