Michael Burry (The Big Short hedge fund manager) deleted his Twitter profile after tweeting “Sell”, implying a stock market crash. Do I agree with him?
The short answer is yes, I do agree with him. I’ll elaborate.
I’m expecting an inflation resurgence, a stock market crash, and a multi-year recession.
Since the US market bottomed last October, the S&P 500 index has risen more than 14%. In my eyes, this is only a short-term bounce.
There are obvious reasons Americans have had this short-term market rally and why these conditions might not last.
One of the reasons is the ‘buy the dip mentality’. Data over the last 20 years shows that investors tend to be more optimistic following a bearish day in the market. The S&P 500’s average return, following down days, was 0.30% last year. This means there’s a lot of money flowing into the market after it falls.
However, inflows in 2023 have been diminishing rapidly and are back at levels from 2019. Americans have had one of the weakest starts to the year ever.
With interest rates continuing to rise, people have less cash lying around. Debt becomes more expensive, and with inflation in double figures in the UK, this leaves a diminutive amount of money left over for anything else.
Bank lending standards are expected to tighten further, too, as banks adjust to higher interest rates and a weaker macro-outlook.
As a result, I do believe these cash inflows will start turning into cash outflows.
It’s not all doom and gloom!
There are all sorts of investing styles, one being dollar-cost averaging, where investors just send it for 30 years straight without batting an eyelid at a recession, because over the long run the S&P 500 averages a return of just under 12% a year.
Frankly, as an investor I stick to my roots. I look at individual companies that offer a fair price and are an in demand product/service, such as Apple, Netflix, Alphabet, Amazon and Nvidia, to name a few. I’m currently spending time looking into AI technology and seeking fair value companies in that sector to invest in, because I don’t think these companies will be affected as much by the broader market crash.
And if to my surprise they’re strongly affected by the US recession, you bet I’ll be buying the dip.
I plan to stick to looking at individual businesses that fall into my circle of competence and buy them at fair prices. That strategy doesn’t need broader market analysis. Is it helpful to be in touch with macro and geopolitical situations? Of course, but it’s not a necessity in my opinion. I might get analysis paralysis, which is something I don’t want if I’d like to make sound investments.
The economy is going to go up and down; interest rates and inflation will go up and down; recessions and bubbles are inevitable. So, yes, I do believe the broader market will crash further. However, I will still be actively investing in companies.
