Here is a graphical look at how much fear is showing up in the numbers.
I’m as concerned as anyone about where this market is headed. Maybe even more than most. But I have a plan for dealing with market turbulence, and so should everyone who has exposure to risk assets like equities. And I stick to my plan no matter how anxious I feel about what’s happening in real time.
The market is down about 8% from it’s high-water mark on January 26th. Anyone who thinks that the sky is falling and the end is near has not studied history. A decline of 8% does not even qualify as a correction. The market looks like it wants to re-test the most recent low of 2581 (S&P 500).
If you bail out now, you’re making a bet. You’re betting that 2581 will not hold, and that the market is headed for a decline that will be severe enough to reward you for bailing out now. You might very well win that bet, but the odds are not very favorable.
On any given day, the odds of a 20% decline are roughly 18%. What happens to those odds when the market is already down by 8%? They go up, but only to roughly 21%. Does that surprise you? It surprised me, but I believe in my Bayesian analysis.
Here’s the point. If you bail now, your’re making a bet that you will save money by making that trade. But there are two problems. First, you still must decide when to get back into the market. Even if you are correct about the downside, that doesn’t guarantee that you’ll make money. That will depend on your buy decision down the road.
The second problem is that the odds on your bet are terrible. There’s a 21% chance you will be right, and a 79% chance you will be wrong. Why would anyone make that bet? I guess someone in retirement who can’t afford to take any chances would be justified in bailing out now. But that’s about it.
The market, and the economic data will tell us when it’s time to bail. It will show up in the probabilities. Until then, just try to chill as much as you can.