First and foremost, what is causing this drop -- which recently hit 900 points on the DJIA -- in the markets? To paraphrase Tolstoy, all happy bull markets are alike, but every unhappy market plunge is unhappy in its own way. There are some similarities though.
No news. This is how it always happens. The market starts to correct in the absence of a single, identifiable piece of news flow. Today we have some buzz on bad behavior by global banks and the resignation of Nikola's (NKLA) executive chairman, Trevor Milton, but that is not enough to cause markets to correct. What is happening is a change in institutional investor mindset, and that is very hard to identify and will also never show up on the Robinhood message boards.
So, what has changed? Well, as I mentioned in my RM column last Thursday, Fed Chair Jerome Powell did nothing to stoke the flames of the market rally in his comments after the FOMC meeting last Wednesday. He also did nothing to put out these flames, but as my director of research at DLJ used to say, the most important factor in investing is the second derivative. Powell said nothing to indicate the Fed would do anything other than continue their current policy of showering the economy with (essentially) free money, and there is simply no news there. If you thought the U.S. economy was rapidly recovering from the Covid-19 crisis you were disappointed to have Powell and his FOMC cronies indicate that this is going to be a long slog. Rates are forecast to remain at 0% until 2023. Also, if you thought Powell and the FOMC would follow Japan and Continental Europe into the insane world of negative short-term interest rates, you were disappointed last week. Two strikes for the bulls.
How to play this? First and foremost, don't panic. Remember, though, that there is such a thing as "panic buying," and it is just as costly as panic selling. If you own shares in companies that are generating positive cash flow, returning cash to shareholders via dividends and buybacks, and have the balance sheet strength to continue to do so, I wouldn't sell today. Note that that is not just a love song to "old economy" companies. Apple (AAPL) and Microsoft (MSFT) neatly fit into all those categories, and while they may be re-rated (AAPL is now down nearly 25% from its early-September highs) that doesn't change the positive long-term prospects for their businesses, and by extension, their stocks.
These two stocks, AAPL and MSFT, meet the definition of investing, not speculating. Which ones don't? Well, look at Twitter (TWTR) and you will see thousands of examples of the other type of investing. Speculators get burned, while cash flow-focused investors never do. So, be careful, and know what you own. Was someone, either in person or on social media, telling you "you have to own it" or "it's going to keep going up", or using other such imbecilic come-ons. Ignore them. Stay away. Today's Nikola is tomorrow's Tesla (TSLA) -- literally in this case a Tesla's incredibly overhyped Battery Day is being held Tuesday -- and speculative stock moves are so easy to spot. To switch from Tolstoy and to paraphrase the former Associate Justice Potter Stewart, "I know it when I see it."
Come on, be honest. Does Moderna's (MRNA) chart, and associated $26.2 billion valuation, look like that of a stock that is being volleyed higher on hopes for a chance at a Covid-19 vaccine or that of a company that reported $66 million in revenues and $130 million in cash burn in the second quarter? You know it when you see it.
To be on the right side of one of those moves -- they happen for cyclical stocks at economic bottoms just as often as they happen to secular growth plays in bull markets, by the way -- is phenomenal, but to sell and lock in profits is even better. It takes a cool hand. Be that person. You will be happier and wealthier, as we move into the fourth quarter, by making that decision. Oh, and if you are not scared enough, just remember that we are facing a presidential election that will only become nastier with the news of Friday's passing of legendary Associate Justice Ruth Bader Ginsburg.
Being scared of a pullback isn't "expensive" or "stupid" or any of those moronic things you might read on Twitter. It's just good investing. Practice it. Now.