Allocation question

Question for those who came into the year with a high equity allocation in the range of 90 percent or more. Are you still holding those equities? For those who entered the year with a high cash allocation in the range of 30 percent or more. Have you deployed any of your cash yet?

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For those who entered the year with a high cash allocation in the range of 30 percent or more. Have you deployed any of your cash yet?

100% cash. I dumped all my stock around autumn 2021, I assumed that delta covid was going to potentially mean lockdowns again since it spread more easily and was more dangerous than original covid. I didn’t realise that governments around the world were just going to shrug and let mortuaries handle the problem.

If the market will drop 5%-10% more, I’ll deploy 50-90% of my cash, mostly because I worry that eventually sellers will get fatigued, not because I think it’s especially great value.

I mean, consider, CAPE PER was well over 28x last week.

  • 28x is higher than the highest point of almost all historical bull markets, never mind the lows of bear markets.

  • 28x is higher than the entire history of the stock market from 1897 to 1997, excluding a few months in 1929.

Buffett ratio? Also awful. Price/sales of market? Awful. Yield? Awful. Price/book? Awful.

My viewpoint is that historically, as long as rates are going up, the market is going down. And rates are going up. Inflation is still very high, job market is strong, etc. And Jpow knows what happens if you go on/off with rates, in the 70s.


Earnings are going to be bad this quarter, next quarter and probably the quarter after that.

For a lot of people investing nowadays, this is literally the first time they’ve ever seen earnings disappoint. For a lot of people, this is their first time watching their wealth evaporate in a day (AMD for example -15% including aftermarket, yesterday).

For a lot of people, paying the bills is becoming a higher priority than adding to their stock account (and for some, withdrawing from the stock account is becoming a necessity).

Many of you on TMF are older, wealthy investors. From what I know of older folk and wealthy folk in my own life, they are mostly disconnected from what the cost & stress of living is like for younger working-class and even middle-class adults today. Childcare & housing particularly. I get that every generation faces its problems. This time is different, for everyone <40 and many <45. It just is. No gold plated pensions, no house & kids at 25-30, and certainly no hope of a stable and rewarding job market for us - except this year for the first time.

Anyway, talking about younger people. A lot of these people have made very foolish speculative investments out of pure desperation, since they can see they cannot possibly earn & save their way to a house and family and traditional life. Many of those bets were concentrated in particular popular stocks, as was the case in 2000. Many of those bets are going horribly wrong.

This morning I was talking to a guy in his 30s on a forum. He told me that he was down 50% on life savings/inheritance of about 200k USD. But it turns out, through continuing discussion, he is heavily using margin too and though he’s been topping it up as fast as he can, he’s almost at breaking point. So he’s actually at ~ 0%, and about to get popped by a margin call.

The guy had a friend who somehow had $3m in Tesla (presumably, bought Tesla early on, held it) which has dropped to $1.5m. That’s the only thing the guy owns. Just Tesla. No idea if any margin used there.

There are a lot of people like that, new investors, tens of millions of them, who have a favourite stock and have sunk everything into it as prices dropped. They’ve been trained for the last year or two that stocks go up at an incredible pace. Among the ‘older’ new investors, they have seen a 14 year neverending bull market and have been trained, Pavlov style, to buy every dip because ultimately ‘that can never go wrong’.

For some, it’s a ‘lucky’ stock that wouldn’t stop going up like a helium balloon - AMD, NVIDIA, TSMC, TSLA. These people are looking at losses of around 50% already. Here’s a link showing the drop of each stock in the market since January 1st (exact start of S&P 500 bear market).

Look at Nvidia, Tesla, AMD, Intel, Adobe, Micron, Adobe, Snowflake, Salesforce/CRM, AMAT, ASML etc.

For those who used broker margin to the limit, or near the limit, they will be under incredible pressure just now, even before you consider cost of living problems. For those using short-term options (surprisingly popular nowadays), many have already been wiped out.

I see an increasing number of stories by young adults saying their account has been zeroed in online forums.


There’s also a lot of put options in play just now, a historical amount, according to an FT article I read. That tends to exaggerate ups and downs. The peak of this effect (gamma) ought to drive us towards SP3300 reasonably quickly with luck.

https://www.ft.com/content/2cc86bde-c0a3-4018-8dff-06f7ce16d887


There will be some spectacular bad earnings from tech manufacturing and I suspect also banks soon, provisions being made etc. Here are some upcoming earnings dates: https://finviz.com/map.ashx?t=sec&st=earndate


From historical bear markets accompanied by recession, and starting from such high levels of CAPE (and the highest Buffett ratio in history), I think the market will drop to the range SP2700-3300 ultimately. But trying to guess the exact bottom is too difficult, likely impossible. I don’t need to invest at the bottom, investing at a fair level is quite acceptable.

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Cash here, no not interested in deploying any cash at this time. It is not burning a hole in my pocket.

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Still in 95% Cash. Not in a big hurry to deploy. S&P 500 to 2800??? Only another 20% to go!!!

'38Packard

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I came into the year short, a tad early, nearly blown up on 3rd Jan at the top.

Traded the ups and downs a bit but still short right now. I suspect the market is going to get a double whammy from the fed hiking into a recession and expect to close out 10% blow here, ie 3300 on the S+P 500.

I’d expect the market to hover around that level, probably spiking down another 10% at some point on serious pessimism and washed-out sentiment. That would be the time to get long.

Right now we have a number of factors making further losses likely short term, though I’m a patient guy if it takes more time …

  1. Fed have said they want to get the Jobs:applicants ratio down from 1.7:1 to 1:1. That’s a lot of work to do … and one Fed governor said doing that won’t necessarily add much to unemployment. Hmm … Anyway it suggests they have no fear of overdoing the hikes just now …

  2. See unemployment down to 3.5% on Friday. I’ve never seen it so low. Wage gains eat into profits.

  3. The YoY CPI is likely to be high this Thursday because of the Sep 2021 low monthly inflation number dropping out.

  4. I see this year as like 1974 after oil prices rose 4-fold with the Arab Israeli war. Central banks stayed anti-inflationary all year and stock prices halved. The Nasdaq looks likely to follow that exactly. It wasn’t until the turn of the year, in 1975, central banks eased as they couldn’t take the hit to the real economy and stock prices doubled back up. Don’t fight the Fed.

Plunger
(I miss the perspective of the old Fool system where it was easy to see posts in many threads at once on each board and what one had read and what one hadn’t.)

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That’s my guess as well. I’ve bought a couple things on opportunistic falls, but mostly I’m keeping my cash in, uh, cash. Another 10% and I’ll be ready to get back in.

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My estimate or guess whatever the future is called based on sheer opinions.

There is only a small recession in 2H23.

In 1H23 the market gets to a bottom, might be in 1Q23. Then the market does not bounce back at all for 2023. Not even a dead cat.

I think in 2024 we see in the US economic growth like we have not seen in decades. The market roars.

But some people say I have no crystal ball. Admittedly I do not have a crystal ball.

Just sitting here wasting time.

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I have a high cash allocation which I am placing in laddered short-term Treasuries. (Plus the maximum I-Bond.)

I am watching the signals for a market drop. I’m not arbitrarily selecting a percent drop (such as 10%). True revulsion is signaled by specific indicators, such as a VIX over 40 and possibly a financial crisis signaled by Financial Stress spiking.

With the Federal Reserve predicting a fed funds rate over 4%, zombie companies will begin to have serious problems. This will take time to manifest. Junk bond spreads over 15%.

Remember that the 2000 dot-com bubble burst resulted in a mild recession in 2001 but the stock market didn’t bottom until March 2002.

Be patient. Enjoy the high Treasury and GSE bond rates which are available on the secondary market. When the time comes, transfer from short-term bonds to stocks (carefully) and longer-term bonds.
Wendy

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Wendy, I believe you are likely to be successful with this approach. However, the future isn’t the past; it is possible that times have changed and the desperation of new investors to ‘buy every dip’ will make future VIX lower and crashes shallower. I don’t think that’s true, of course. In fact I think the opposite, if anything, people are more geared and foolish than ever, it seems.

Or perhaps some random quirk of events. Inflation, improbably, drops? Perhaps we hit some threshold that changes public behaviour. Putin passes away. A one-off magical cure for covid. The Fed has a change of heart. The winter is ridiculously milder than forecast and energy costs dump.

Instead of a ending with a glorious capitulation that pronounces the time to buy has finally arrived, the bear simply passes away quietly. Is it likely? No. Is it possible? Yes.

I’m keeping my mind open to surprises, in the market, in the metrics, in the behaviour of all types of market participants and influencers. I’ve been surprised so many times in my investment life by things that had simply never happened before - black swans, out of model events.

I mean, look at that rally in June. I was just getting ready to begin my victory lap when suddenly, the RUMOUR that the Fed could maybe possibly pivot on rates drove the market from SP364 → SP430 in weeks. No news behind it - in fact, if anything, the ‘news’ was the Fed lining up for 2 months and saying NO PIVOT over and over!

July’s rally was absolutely nauseating for me. And then the mania nearly kicked off again this week! A 7% rally only halted by speech after speech from Fed bankers saying NO PIVOT!

There is some strange mental illness in the market currently, where people are so desperate for a rally to take place, that they will dive head first into any hint or gossip that suggests inflation might dip a little or the Fed might soften a little. And - irritatingly - the mental illness seems to keep being triggered around the current level.

Another interesting issue to consider is: what does it mean to be in cash? Just now the dollar is extremely, historically strong. To stay in dollars is to turn down foreign currencies and markets which might also be appealing. One might argue that to ‘stay in cash/cash-like things’ currently is to bet on a 40-year extrema in the currency markets remaining as it is rather than mean-reverting. Is that a great bet? I’m not sure.

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Just now the dollar is extremely, historically strong.

Consider this chart of what happened the last time the USD was this strong.

Wendy,

Early November I will be maxing an I-Bond purchase.

I wrote family this morning about all of this. Thank you.

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You might want to consider buying your I-Bond in October instead of in November. The October purchase would lock in the high inflation rate for the next 6 months. The rate resets in November. If inflation declines as the Fed intends you would get a lower rate.
Wendy

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what he said…

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Thanks Wendy noted

Now drop and give me 20 characters

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I agree with most that is being discussed on this thread. I would however point out that even the inexperienced recently minted investors who could do no wrong, after their heads are repeatedly bashed against the financial wall, will capitulate (and some may never return).

Jeff

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Oddly enough sometimes values are determined by the actual market trading but really values lay in the profits and losses, regardless of the totally crazy tech stories.

We are waiting on dividend cuts.

The other thing to note relative to all the back testers historical return buffs on the BRK and mechanical investment boards … is that for the last 40 years we have been in a bull market. Maybe no more. maybe that scenario is no longer relevant to the present and near future (a few years?) …

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1947 to 1949

Enjoy 1949/2024

So far I have heard only from the overweight cash crowd. The consensus so far seems to be that we are still at risk of more downturns and maybe even a sustained downturn unlike the V shaped recoveries of the last 40 years. Does that sound fair?

In my case I am still overweight cash because I do not know what the future holds and feel like a large cash position will help me weather a long, sustained downturn at this stage of my life (66 years old and retired).

That being said, I may start averaging some of my excess cash back in early next year on the theory that the long term returns will be better in equities than anywhere else.

I wish we had heard from some of the 95 percent equity crowd. Are they still riding this out with almost all of their money in equities?

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I’m part of the 95% equity crowd. Still riding it out with no plans to sell.

At this point it would be a mistake to get out. The time was late 2021 or early 2022.
Don’t plan on using any of the money for 4.5 years so I believe it will be fine by then, if not we’ll survive.

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