Here we go again. A downturn that scares the heck out of people. It's got people worried, as any downturn should, but I want to describe why a day like today may not be the worst thing that ever happened to the stock market.
Let's unpack it and I think I can help you understand why you have every reason to be concerned -- we must always stay close to our stocks, they aren't like cash, you know -- but there are some benign forces that may be at work, not malignant ones that can cause fortunes to be lost all at once.
First, it's tough to pin the decline on anything in particular. That's perhaps what's most disconcerting because for many that means there's something lurking and we just haven't figured out what it is yet. It's almost as if we know that someone knows something we don't and they are selling all kinds of stocks from retail to transports to oil and gas to banks.
Could it be, for example, the low volatility we are having that's disconcerting? A very smart money manager, David Swenson, chief investment officer for Yale, gave a talk today where, according to Bloomberg, he finds the moment "profoundly troubling" given the geopolitical tensions and talked about a possible crash.
Now, Swenson's a senior statesman of the business with an excellent track record. He cannot be dismissed. Plus, it is easy to find the moment troubling. President Trump just spent the last few days bashing a lot of world leaders for their trade imbalances with our country, a point of view I share but they obviously don't. There's also the accident waiting to happen that is North Korea. So perhaps the market should be gyrating more.
But as I have said countless times, it's not like there's a lot of money flowing into the market, and that could end. There's more money flowing out, consistently flowing out, and that's actually a decent situation for those who stay. Moreover, investing styles have changed. Much of the country seems to have adopted a Warren Buffett outlook to stocks: Buy them and hold them but stay close to them to be sure nothing's happening out of the ordinary. That's not a prescription for a crash. Suffice it to say I think that's behind the lack of volatility and I have regarded it for some time as being a positive. Not to second-guess Swenson, but there is something to be said for a longer-term lack of volatility that has not yet produced a crash, although we know if there is some sort of thermonuclear war next week, it will prove to be wrong to buy the dip.
Second reason why it is right to be concerned about the downturn? Washington. Specifically the possibility of no tax reform. A little less than a month ago, Treasury Secretary Steve Mnuchin told us the market will crash without tax cuts. Now we are all hearing about how tax reform is right on the horizon, but the definition of tax reform is all over the place. The president, for example, wants a 20% corporate tax rate come hell or high water, and he won't negotiate the point. But some in Congress are skeptical of that rate while others are concerned about busting the budget. We keep hearing that there is agreement but then we hear that the House doesn't want to deep-six state and local tax breaks, which seems to be a non-starter in the Senate.
There are differences over brackets. There are differences over carried interest, or favorable treatment for hedge funds. There are differences over certain pass-through rates.
And you know what this is all starting to sound like? The repeal and replace of Obamacare, which occupied so much time in Congress before the talks utterly failed.
If tax reform does fail, we know that one of the smartest people in the Cabinet, Mnuchin, has warned us of the consequences. I don't believe him, but who am I? He's the Treasury secretary.
Third reason to worry: Stocks have moved up a great deal. There was a profound move after earnings that jacked up many equities. But now there's nothing other than a handful of retailers reporting. It's almost like we have a perpetual-motion machine going with the market headed higher as long as good earnings are being produced, but then, without a catalyst, they have to fall. Stocks are not historically cheap either. We have had substantial declines when they have gotten to these levels before.
But now let me give you the flip side, five reasons why I think you have to buy some of the dip here and more if it keeps going down.
First, apropos of earnings season, the vast majority of earnings were real good and stocks took off. Now sellers are coming in to lock in profits, knowing there will be no real news for ages since their companies just reported. That's a silly reason to sell and I don't think it is right.
Second, it's not like the scenario has changed all that dramatically. Longer rates aren't going higher as they should, but I get that. Unless it really is the calm before the storm, as Yale's Swensen is suggesting -- and again, it always could be -- I don't see how we can just crash on the fact that stocks are going to fall on their own weight.
Third, General Electric (GE) , a big conglomerate, is getting clobbered and I can see why that's worrisome to people. But GE has its own set of self-inflicted problems. I don't think GE is Tyco or Cendant, two notorious debacles. However, I can see the precipitous decline is pretty appalling. Is it calling all stocks into question? I don't know, but it shouldn't.
Fourth, while Washington is profoundly dysfunctional, I do think in the end that something small gets done just so Congress people can say got done. It would be loathsome for their careers to come back home and say, "Oh well, we did nothing." So look for a fig leaf of tax reform and something bigger down the road.
Finally, let's not forget that when stocks really break down, we have seen takeover bids and insurgents flock to the rescue. Huge semiconductor company Qualcomm (QCOM) sees its stock get blasted and along comes Broadcom (AVGO) with a bid. Buffalo Wild Wings (BWLD) delivers subpar performance and a buy appears out of nowhere. We even have an insurgent at GE, Ed Garden of Trian, who must be so distraught at how GE is doing but will be in there fighting for value creation that so far hasn't panned out.
Is this enough to make you want to buy the dip? Remember that when buy-the-dippers come out and the market goes down some more, they become scarce, leaving you to your own devices. In fact, buying the dip, while it might be time pick up some Apple (AAPL) here or some Facebook (FB) and it goes down again tomorrow, you might panic, which is always why I say do things small and not at once because humility is a very positive trait for investors. I did a monthly call for members of the Action Alerts PLUS club today where I actually suggested doing some buying and I was concerned that people won't have the gumption to do so. (GE, Broadcom, Apple and Facebook are part of TheStreet's Action Alerts PLUS portfolio.)
Nevertheless, I feel that when you hear the phrase from me that "I wouldn't buy that on a pullback," in many cases this is the pullback so I would, indeed, do some buying.