16 newyork| march30–april12, 2020
becausei don’t wanttoenduplike
Larry Kudlow,I don’t make claimsabout
whetherthestockmarketis goingtogo up
ordown.I mean,sure,I expectstockprices
totendtogoupoverthelongrun,asthey
roughlytrackthegrowthoftheeconomy.
ButI don’t make claimsaboutwhetherthe
stockmarketiscurrently“overvalued”or
“undervalued,”oraboutwhethernowis an
especiallygoodtimetobuy—notontelevi-
sion,nottomyfriends,andnotevento
myself. If I knew inadvancewhat
thestockmarket wasgoingtodo,
I wouldn’t bewritingthisarticle;
I wouldbeself-quarantiningon
myprivateisland.
SinceI don’t thinkI canout-smart the market, my usual
investingstrategyis just totake
themoneyI don’t needtouse
rightnowandparkit inlow-fee,
broad-market equity index funds;
setit andforgetit,knowingthe
equitymarketsare likelytobea
lothigherwhenI re tirethanthey
arenow. Atleast that wasmy
approachuntiltheFriday before
last,whenI soldabouta third of
mystockfunds.
Hereis my thinking.I amstillunwillingtomake claimsabout
thefutureleveloftheS&P500,
butI amwillingtomakeclaims
aboutthestandard deviationof
itslikelyfuture levels.Thecoronaviruscrisis
meanstremendousuncertaintyfortheU.S.
economy, withpossibleoutcomesranging
fromrelativelybenigntocalamitous,and
thoseoutcomesallhaveimplicationsforthe
financialmarkets.Atthispoint,I caneasily
envisiontheDowabove25,000ina year
andalsobelow15,000,andsocanother
market participants.Thisuncertaintyis why
stockshavebeensovolatileoflate.Like
essentiallyallAmericans,myfinancialposi-
tio for
rea an
capital—thewageandsalary incomeI can
expect toearninthefuture—iscloselycor-
relatedwithU.S.economicperformance,
andmyearningoutlook has therefore gotten
moreuncertainin recent weeks just as the
outlookforstocksand the human condition
havegottenmore uncertain. And like most
Americansnotat or near retirement age, my
abilitytoearnmoney in the future is my pri-
marystoreofwealth, exceeding my current
financialinvestments. There areways to
insurefuture labor income against idiosyn-
craticrisks(disability insurance, life insur-
ance),butthereis no good way for me tohedgeit against broadeconomicrisk.This
makesme feeloverexposedto U.S.eco-
nomicgrowth,andI wantedto rebalance
awayfromthatriskin theonlyplacesI
can: my investmentaccount and my
retirementaccounts.
Bysellingsomeofmystockholdings,
I havegivenupsomeoftheupsideI might
enjoyif thestockmarket bouncesrightback.
Butif thathappens,it probablymeansthe
damagefromthecoronavirushasbeenless
d andmy future profes-
thereforelessimpaired.
Conversely,if the stock market continues to
crater,I will have preserved assets at a time
whenI most need them.I used the money I took out of the stock
funds and bought bond funds. The idea was
to diversify my risks by buying something
that would not move in line with the stock
market. But on some of the worst days
before the Senate passed the $2 trillion
stimulus package, pretty much every kind of
investment fell in value simultaneously:
stocks, corporate bonds, munis, even Trea-
sury bonds. This can happen when investors
are desperate for cash, and it limited the
usefulness of my diversification strategy,
at least initially.i was surprised as i researched this
column: Most of the experts I spoke with
offered the view that the stock market has
gone down too much. Usually, this view
came unsolicited. Mark Dow, an investment
manager who writes the Behavioral Macro
blog, told me he sold equities back in Febru-
ary, because he thought markets were pric-
ing in “zero risk” from the coronavirus when
there was at least some risk (he was right),
but now that prices have crashed, he thinks
they have gone down too much and he is
buying again. Allison Schrager—
who describes herself as a “militant
efficient-markets person” and
therefore should not really have a
view on whether stocks are too high
or too low—also told me she thinks
stocks are too low. Andrew Biggs, a
pensions expert at the conservative
American Enterprise Institute, told
me he’d moved a small amount of
money out of Treasury bonds into
stocks in an effort to “buy the dip.”
But Michael Strain, also of AEI,
seemed to consider stocks to
be oversold and undersold at the
same time. He told me he thought
stocks had fallen more than was
reasonable—but then admitted to
me that he was holding cash out of
the market that he’d previously
intended to invest in stocks because
he thought he would be able to buy
later at a lower price.
Which all made me realize, several days
after I sold stocks, why I had done so with-
out any particular conviction that their price
was too high. It wasn’t a hardheaded calcu-
lation about portfolio allocation. After all, as
Schrager pointed out to me, it was kind of
dumb to think I’d be able to rely on bonds
moving independently from stocks in a cri-
sis. But the trade worked as a psychological
mechanism: I wanted to feel myself assert-
ing control over some kind of risk in a world
that has become much scarier than it was a
few weeks ago, and I found an opportunity
to do so in my brokerage account. It made
me feel a little better. At least until bond
prices started falling. ■Illustration by Eugenia LoliHedgeYo u rBets