By Austin Root, portfolio manager, Stansberry Portfolio Solutions
Beware the phrase, “History doesn’t repeat itself, but it often rhymes.”
I bet you’ve read or heard this quote (generally attributed to Mark Twain) many times in recent weeks. Be prepared to hear it even more in the weeks to come.
When people cite this quote, they tend to draw upon historical data points for context about what’s going on in the current market and – if they’re bold enough – use these previous outcomes to predict where things will go in the future.
These types of predictions can be comforting. After all, if “we’ve seen this movie before,” we know how it ends. But there’s a problem with that framework…
The current situation in America has no precedent.
This calls for a uniquely careful investing approach, as I’ll show today. We’re in completely new territory. So we need to be cautious… and not assume we know what will happen next.
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Why is this moment in history so unprecedented? Well, of course, it all starts with a new strain of coronavirus for which we have no vaccines or proven treatments.
This virus is easily transmitted by infected people when they are not showing any symptoms. And that means the outbreak is particularly difficult to contain and difficult to accurately measure, in terms of how far and fast it’s spreading.
So the “disease” is the start of this chaos. But what’s truly unprecedented is the “cure”…
Never before has economic activity been deliberately halted on such a massive scale.
With no conventional way to contain the virus, governments around the globe have resorted to unconventional ones – like nationwide lockdowns.
The data already suggest that social-distancing mandates in the U.S. are successfully slowing the virus’s spread. But we’ve also seen the dreadful effect the “cure” is having on the economy.
Every Thursday, the U.S. Department of Labor releases data on new jobless claims. The former all-time record for weekly jobless claims was 700,000, set in 1982. That record was shattered in March when 3.3 million Americans filed for unemployment.
The following week’s data more than doubled that number to more than 6.6 million newly jobless. And we’re now quickly approaching 40 million Americans who have lost their jobs… more than 20% of our nation’s workforce.
Brace yourself for future data points to get even worse. In some industries – like travel, energy, hospitality, and retail – they already have. And scores of economists now predict gross domestic product (“GDP”) in the second quarter will drop by an unheard-of 25% or more.
The upshot is that our government recognizes the economic pain its mandated shutdowns are causing. And the response has been more monetary and fiscal stimulus efforts in two weeks than in the entire span of the Great Recession. Both the U.S. Federal Reserve and Congress have promised they’ll do plenty more if necessary.
But these governmental measures – and this lightning-quick shift from trying to promote prosperity to trying to prevent economic disaster – only add to the “never before have we seen this” environment.
This is truly unprecedented. Anyone who tells you they know – without doubt – what will happen next is overly confident, pushing their own agenda, or simply misinformed.
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We have not seen this movie before, and we don’t know what is going to happen next. So with that in mind, I want to urge you to do two things…
First, until we see definitive and sustained improvements in coronavirus (“COVID-19”) data or price trends in the market – or both – err on the side of caution.
We do think there are good investments to buy now, especially among world-class buy-and-hold assets trading at discount prices. But by and large, now is a good time to hold a lot of cash.
You can also manage your risk on new positions with careful position sizing. This simply means putting the right amount of money into your investments relative to your total portfolio size.
Losing $5,000 in a $25,000 portfolio would be devastating. It would cost you one-fifth of your savings. But a $5,000 loss in a $250,000 portfolio would only be 2%. So make sure you know how much you’re willing to risk on any individual position.
If markets push higher from here and don’t look back, the results of playing it safe will almost certainly trail those of someone who’s 100% invested today. But it all comes back to one thing… We’ve never experienced a market like this before.
So hold cash, and control your risk. In a market without precedent, taking the prudent road now will help you prosper over the long term.
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True “black swan” events are impossible to predict. But a small group of readers did get a surprising warning signal… giving them a chance to get out weeks before stocks crashed. And this same way of timing the markets could help you determine the exact moment to buy back into all your favorite stocks. To learn more, join Whitney Tilson’s Recovery Investing Event online tomorrow night at 8 p.m. Eastern time – you can sign up for free right here.