Market Context: Simplifying the Current Issues
There's a lot going on in the markets; I'm sure most of you would already be familiar with some of them. Allow me to simplify these issues down to the following:
The global economy was already exhibiting signs of a slowdown since early 2024, premeditated by concerns relating to inflationary pressures, and the subsequent rate hiking cycle globally between 2022 and 2024.
This would have been more evident in the performance of share markets if not for artificial intelligence. The AI revolution is a real thing—it will change the dynamics of the workplace, livelihood of people, maybe our lifestyle entirely. I think it is best not to underestimate how quickly, how abruptly, and how significant the changes that AI will drive in our lives.
Anyway, AI supported market valuations in spite of the economic headwinds; the market soared to new heights. The real economy was deteriorating, but financial markets became more euphoric. What could possibly go wrong, right?
This is a good example of how markets can remain irrational longer than you can be rational.
Market Behaviour and Timing
Just because a risk in the market is painstakingly obvious, doesn't mean the market will re-rate accordingly. Ironic, I know. Moreover, even if the market has now accepted the risk, it does not necessarily mean that stock prices have to re-rate to their "rightful" price levels in a day or week.
The point I am trying to make here is this: There is absolutely zero need to rush back into the market right now. The economic slowdown that is underway, the trade wars/tariffs—these themes play out across months, if not years.
And because volatility has really stepped up in the past decade, a glance at the stock prices dashboard could fool almost anyone on a green day at this point in time. A green day with 4-5% positive stock price movements across the board can quite easily influence even the most seasoned investors to abandon any strategy and logic, and suck them right back into the market, on the FOMO of missing the bottom.
The Personal Cost of Market Volatility
Performing well in markets is already a tough job on its own.
I know I found it extremely challenging myself when I participated in the COVID sell-off in March 2020. That would be the first and last time I will ever trade during extremely volatile conditions.
At the end of it, I was mentally exhausted and just a mess all-round. Took me about 3 months to properly get back on my feet to trade again, 6 months to recover part of my confidence in trading, probably 12 months to be able to trade a portfolio of similar value again, and 18 months to regain my confidence.
You see, it's not just the financial toll your portfolio's P&L might have to wear. The person managing the portfolio also has their personal P&L—a mental P&L. And like how an investor manages risks to protect their portfolio's P&L, they too must manage risks to protect their mental P&L.
Current View and Recommendations
So to conclude, my current view on the market—to no surprise—is to remain defensive.
This can mean different things to different people. One might think of 100% cash as defensive, another might consider 50% fixed income, 50% cash.
Just don't be like me during the COVID March 2020 sell-off: having a 150% exposure to equities, attempting to trade the futures market, attempting to trade crude, soybeans, orange juice, thinking that I could trade the volatility. The moves were huge, numbers were bigger than I was used to, emotions were thrown around. One heck of a roller coaster. I do not recommend this experience to anyone.
There will be an opportunity to get back into the market. It normally presents itself when volatility dies down. It is also highly unlikely that you will pick the absolute bottom in the market. We must be more realistic with ourselves. Instead, try and find the best risk-adjusted entry point.
And it definitely does not appear to be right now.
For Those Already Fully Invested
Well, what about those who are already fully invested? What shall they do?
Get your portfolio risk to a level where you feel comfortable.
At this stage, I'm leaning towards a fixed-income dominant portfolio, and most likely opt for one denominated in USD.
Here are several practical strategies to consider if you're currently fully invested:
- Gradual Position Reduction: Rather than selling everything at once, consider scaling down positions systematically, starting with your highest-risk holdings. This approach helps avoid emotional decision-making while reducing exposure.
- Implement Trailing Stop Losses: Set appropriate stop losses to protect gains and limit potential downside. In volatile markets, wider stops might be necessary to avoid being shaken out prematurely.
- Sector Rotation: Consider shifting some equity exposure from more cyclical sectors to defensive ones like consumer staples, healthcare, and utilities, which typically fare better during economic slowdowns.
- Increase Quality Focus: Within your equity allocation, prioritize companies with strong balance sheets, steady cash flows, and less debt. Quality businesses tend to weather economic storms better.
- Build a Fixed-Income Ladder: Create a ladder of bonds/fixed-income instruments with staggered maturities to provide both income and regular opportunities to reinvest at potentially higher rates.
Perhaps for those more seasoned investors, additional strategies like options-based hedging or geographical diversification across different economic cycles might be worth exploring—though these require more sophisticated knowledge and experience to implement effectively.
Picking bottoms gets you smelly fingers
I have found it very, very difficult to explain to myself, why stock valuations are so far detached from their current fundamentals, since early 2024. And prior to the recent market's tumble, I stopped trying.
When will the market bottom?
Who knows.
Perhaps, when the index hits a very "key" level... Or perhaps this horizontal line I've just drawn on the charts. Nah, it has to be, only once the moon crosses Jupiter's path on a weekday starting with "S".
That was fun.
Jokes aside, I do think technical analysis has its benefits when it comes to managing your portfolio risk. I do incorporate technical analysis as part of my own portfolio management strategy. Not so sure about Financial Astrology however...
Anyway, I want to repeat this once more. The forces at play in the current markets are not ones that would simply change for the better, overnight.
As with the case that only Time itself, can heal a broken heart, only Time too (or the Fed) can heal a broken market.
I suppose as well, if we had learnt a thing from COVID, is that unless we are faced with an existential crisis, the markets might not behave in a similar fashion to 2020's "blink and you miss it" of a bear market.
And instead, just have our standard, very typical, many decades long characteristic of an economical/credit risk driven bear market.
The GFC's peak-to-trough took over a year. The Internet bubble took just under 2 years. The 1987 crash was just over 6 months. The bear that was to be (2022), took 9 months before Nvidia took its crown for the world's largest increase in valuations in a 12-month period, adding about two, trillion, dollars to its market capitalisation (3x higher than its starting value).
Either way, nothing stands in the way of the Don himself.
In the meantime, I have found fixed-income assets to be relatively more attractive, when compared to the absurdity in equity markets (risk-adjusted basis). There are, of course, reasons behind how I have formulated that view, but given that I want to keep this initial write-up at a digestible length for readers, that's a story for another day.
Thanks for reading.
Ryan
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