Entry points after crash in 2009

25th March 2020

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As we speak to our clients and discuss the state of the markets it is hard not to be swayed by the daily gyrations in risk sentiment. Those of us with a few grey hairs often draw parallels with bear markets of the past. None of these comparisons really do the current downturn justice though. This is not a Federal Reserve induced end to the party. If anything, the global central banks have reacted quickly with the full range of tools in their armoury. This isn’t a supply side shock, like the one in the 70’s, although it appeared to start off as one. This crisis is a shock to global demand on an unprecedented scale. The problem with such a shock is that any policy response will arrive too late to prevent the downturn.

The markets have clearly discounted said downturn, but when will we begin to see light at the end of the tunnel. There is never a single trigger to a market bottom. It is a process and not a single day. The last crisis was built on the frailties of the banking system and corporate bond market. When those problems were finally resolved we started to discount the future. This crisis is built on the spread of a deadly disease, which could stifle economic activity into next year.

So how will we know when we have turned the proverbial corner. The markets themselves are the most effective arbitrators of the future. Using this insight in our investment process provides us with valuable clues to when we should become more constructive of equities.

Entry points after the crash in 2008/09

After what appeared to be the final leg down, we had two retests – see red arrows – and then we made a new low in March 2009.

The 50 /200 day moving average crossover – 50 moves above a rising 200 day didn’t occur until much later and yes it was 1000 points higher but look where it went after that.

Clients will forgive you for missing the early part of the move but not if you go in early and then it goes lower. That’s when they say sell everything and NEVER come back!

Similar in 2016 but we are a long way off that now. History never repeats itself exactly, but dry powder works best.

Using 50 and 100 day the re-entry point is earlier but there is a small drawdown before the market finally takes off.

Worked very well in 2003.

In 2016 the first signal was early, but we were in before the surge upwards in June.

You can see from the charts above that the use of moving averages can be informative when deciding on the market’s overall direction. When using these tools however, as with anything, one has to swap speed with accuracy. The 50 day and 100 day moving averages tend to get you back into equities sooner but present more false signals. The 50 day and 200 day moving average can take an eternity to provide a signal and the opportunity cost of this approach is substantial.

At Albemarle Street Partners we are fortunate enough to have lots of experience and a dash on intellectual humility. We realise market timing is a fool’s errand, but also understand that our rebalance date will impact the go forward risk of our portfolios. As always, our decision will be well thought through, thoroughly discussed and clearly communicated.

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