Iknow that, like me, a lot of investors are feeling uneasy these days. No matter how much logical analysis tells you that U.S. stocks can keep moving higher based on capital flows, no matter how many times attempted corrections stall after a day or so and the buying resumes, and no matter how many times the current market demonstrates that old-fashioned concepts like valuation don’t matter right now, something just doesn’t feel right.
Thousands of Americans are dying every day as coronavirus surges again. And yet there are still many who have somehow been convinced that it is all some kind of hoax, and who refuse to take the most basic, simple precautions against its spread. Unemployment is still elevated and now once again trending in the wrong direction, which means growth will almost certainly stall too. The government is well over $27 trillion in debt and set to borrow a lot more, even with inflation, or maybe even stagflation, being talked of in hushed tones and hinted at in the forex market.
And yet, here we are. With stocks around record highs.
When the bad news is that obvious, but traders seem so oblivious, it is hard to just sell and wait for stocks to adjust to reality. The indices could easily gain another twenty percent before the ten or fifteen percent correction you are scared of comes. It is even possible that eventually it will be reality that adjusts to the market rather than the other way around, and there may never be a significant decline.
So, what should investors be doing?
The obvious answer, nothing, may make the most sense in the long-term, but it denies human nature and psychology. Fear begets action, so at some point, those who are scared by the untethering of the market from fundamentals will do something. The trick is to avoid doing something that be a big mistake. For example, selling everything and going to cash may seem like a good idea at times, but that has been true several times over the last nine months or so and if you had done so on any of those occasions, you would have missed out on a spectacular move up.
Far better to satisfy that urge to act by shifting some capital into other areas where at least equity strength makes sense. Ironically, one of those would be somewhere that is traditionally seen as far more risky than domestic stocks: China.
Sure, if you look at the chart for the iShares MSCI China ETF (MCHI) above, it looks like more of the same problem, but what is different is that the giddy heights there can easily be justified by actual economic conditions, not just hope.
That was reemphasized overnight as the Chinese released some spectacular trade data. Exports grew by over 18% from a year ago, following a 21% increase last month, but imports also grew, suggesting that the export income is still translating into domestic growth. China was the only country in the world that recorded positive GDP growth in 2020, and the evidence so far suggests that growth rates are accelerating. The rest of the world is trying to play catch-up, but their efforts seem to involve buying a lot of Chinese goods.
That may seem unfair given that the virus that is doing so much damage seems to have originated there, but, when it comes to investing, fairness doesn’t matter. If anything, that just makes China further along the road to recovery. You might also be put off by the unpredictability of a one-party state and a totalitarian government, but at least harmful non-compliance with measures such as mask mandates are just not a thing there. And do you really think that U.S. politics are more stable, predictable and transparent than in any other country, even China, right now?
Things don’t look likely to get any worse for China any time soon either. Sanctions and tariffs will likely be reversed under Biden, if for no other reason than that they were signature Trump policies, and a less adversarial relationship between the two massive trading partners than in the recent past looks certain in 2021.
If you feel right now that all the hope and the good news is priced into U.S. equities and that we are heading for a nasty correction, you may feel the need to act, even though there is no sign yet of a reversal. Trimming domestic holdings and putting the money to work in the already strong Chinese economy may be the best way to handle that, given that the strength there is based on economic reality, not just expectation, extrapolation, and speculation.