During my years at Morgan Stanley, we had a good indicator of market tops and bottoms, based on client behavior patterns. Typically, when little old ladies would call to move all their money into the latest investment craze, or out of whichever investment had been plummeting, we knew that the investment trend had peaked, and was about to turn around. When a market was bottoming--stocks, bonds, gold, etc. we’d walk around the office asking each other, “Did the fat lady sing yet?”
And then one day, a client would call, all panicked, and liquidate their account because they couldn’t take it anymore. But it would always be something absurd, like a bond client who couldn’t handle the news about the stock market anymore, not realizing that they didn’t own any stocks. They’d be in such a frenzy from talking to their friends and watching financial news shows, that there was no talking them out of it. So we’d cash in their bond portfolio. No matter how stupid that decision was, we were obligated to fulfill it. (We had a lot more leeway on saying “no” to stupid purchases; as a matter of fact, we were rather obligated to say “no” to those.)
After finishing the transaction, we’d visit the other brokers in the office and say, “The fat lady just sang!” Several of us would have an outrageous client story of similar magnitude on the same day or two, and that’s when we knew we’d passed the bottom of the market. If you were brave, you’d start buying. I was always brave. But that’s a story for another day. (Ask me about the bond market crash of 1994. Even my fellow brokers thought I was nuts when I started buying Treasuries for all my clients.)
Fast forward to 2016. I just got a call from a friend. Her mom has a $34K nest egg. The mom’s financial advisor at Transamerica asked her to cash in all her mutual funds and move the capital into a money market fund, because of the stock market correction. There are several problems with that idea:
1. The lady mostly owns bond mutual funds.
2. The stock market already fell.
3. Selling those investments is going to cause a taxable event.
I told my friend that the financial advisor ought to be fired. As I hung up the phone, the fat lady came to mind, and I started to laugh.
I’ve lived through many extreme stock market ups and downs, usually driven by emotional behavior. The downturns are certainly painful, but they’re generally short-lived.
I see a lot of uncertainty over interest rates, worry about a possible economic recession, and fear over oil prices and their effect on the junk bond market. But uncertainty, worry and fear are nebulous emotions that blow around with the wind. We’re not experiencing anything resembling falling markets due to overvaluation, which we saw in 1987, 2000, and 2008. So there is hope.
Is the fat lady singing again? I’m listening carefully. Her voice is music to my ears!