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How to be an optimist in the markets

How to be an optimist in the markets

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If investors are to learn anything from the bleak experiences of 2022 in the markets, it should be How To Be An Optimist.

It’s not easy, especially when over the past year one has had to endure repeated negative news on, well, everything that matters to asset prices, including inflation, central bank policy and geopolitics, to name three of the more important factors. But it’s not worth being unhappy. Unfortunately, as we are often reminded, life is just too short. So, here is my non-scientific guide.

First of all, the boldness of hope is for fools. One of the most consistent features of 2022 has been repeated attempts to see a break in the clouds where none existed. Time and again — March, June, and October — those in an inexplicably cheerful mood thought they might see signs that the Federal Reserve might do the polar opposite of what it’s been consistently saying for all of the last year, and dissipate interest rate increases.

The result was a series of ill-fated bear market rallies – rises in risky assets embedded in broader markets falling, and quite large ones at that. Analysis from Goldman Sachs over the past year shows that these three rallies were each among the largest of their kind in global equities since 1981 and among the longest-lasting. There are some tricky technical details here; The jump over the summer was due much more to short-term investors unwinding negative bets than to bizarrely optimistic investors deciding it was time to buy. Nevertheless, the pattern stands.

Why? “People have been super depressed for 10 months. They can’t take it anymore, so try to be more optimistic. It’s that simple,” says Greg Peters, co-chief investment officer at PGIM Fixed Income. “It’s always a false hope. Hope springs forth forever.” That feels like a waste of energy. Don’t be super depressed.

Of course, it’s easy to be wise in hindsight, but some market participants say they never fell for false hope in the first place. “In my opinion, markets are unpredictable most of the time,” said Andrew Pease, head of investment strategy at Russell Investments. The rare times they’re predictable, he says, are when they’re in so much pain that it’s time to snap up some bargains. “We need to identify times when people are hurting. The last time this clearly happened was in March 2020,” he says, as credit spreads and the Vix index, a proxy for stress levels in stocks, soared.

“The debate is always about whether we saw surrender points. The answer [last year] has always been no. We’ve seen some big market moves, but not the panic indicators that really matter.”

So that’s option one. Waiting for real pain Option two is to embrace the pain, especially when you have virtually no choice. Alex Umansky, a portfolio manager at $48 billion investment firm Baron Capital, belongs to this camp. One of his funds is the tech-stock-focused Baron Global Advantage Fund, which fell 50 percent last year.

“We certainly expected a pullback, but the scale, speed and intensity of it was a bit surprising,” he says, with a degree of understatement but no self-pity. He says bluntly: “We are who we are”. It’s a growth fund. In a bear market. Of course, it’s been through a rough patch, but he says the scarier time for him in the massive upleg was 2020. “There was just so much money coming in” that he had to expand the number of companies in his portfolio from the standard 40s to 50s into the high 60s – uncomfortable territory.

“In late 2020, early 2021 I was losing sleep because the money was coming in and I couldn’t buy anything at a good price, so we had to compromise on either quality or price,” he says. Now, on the other hand, “everything is on offer. It’s like walking into a Louis Vuitton store and there’s a 50 percent sale.” That discount could go as high as 70 percent, he admits. However, believing in your process represents some value and a way to weather the storm.

The final option is to just keep telling yourself you’re in it for the long haul. John Bilton, head of global multi-asset strategy at JPMorgan Asset Management, freely admits that 2022 was a stinker as stocks fell and the typical bond safety net failed. But, he says, “if you stay in the bunker too long, you’ll miss out when the dust settles . . . It’s really, really important to seize opportunities to enter the market.” Bilton says this might sound like advice to catch a falling knife. “But that’s only the case if it’s an impaired asset,” he says.

Finding the right time to enter and exit the market is difficult and impossible to do consistently, but it helps catch the bounce. A lot. Sticking with the S&P 500 over the past two decades would have resulted in an annualized return of 9.76 percent, JPMorgan’s investment team noted in a long-term asset allocation presentation. But if you miss the 10 best days, the annualized return is 5.6 percent. The lack of the 30 best days cuts it off close to zero.

“We’re not saying ‘ring the bell for the bottom of the market,'” says Bilton. “But we’re saying, think about how you can rebuild portfolios.” Unfortunately, I can’t guarantee a sunnier 2023. But with a bit of luck, such a view should at least help.

katie.martin@ft.com

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