Market's disconnect

The word "disconnect" to describe the link between the market and the economy has been quite common nowadays. The stock market had ran in the opposite direction of the economy. It is an obvious conflict for any investor reading the current situation. On one hand, the world's greatest shutdown is still in progress. On the other hand, the market continues a vertical climb out of a hole it fell into.

As most people believe, the market leads the economy. Meaning that if we translate the market action into a prediction of the future economy, we will be out of the woods within the next few months? Frankly, I am clueless. I'm not sure if anyone can answer this question confidently, given that there is no precedent of a virus like COVID-19 in the modern era.

I always like to understand the market sentiment. Market sentiment is important because it gives us a perspective of the crowd's behavior, and how the crowd is moving is quite critical to investment decisions of successful contrarians. The market moves like a pendulum as expressed before by Warren Buffett. Prices swings between extremities of pessimism and optimism. When it goes too far one way, there is a high probability that it might reverse and go the other way. As investors, a good reading of the current market sentiments could be a tool to help us to make better decisions.

Based on the current readings of the investor's sentiments, we are crossing into the greed zone. As most investors know, it's hard to predict what might come next. It's very possible that the world opens up for business very soon and customers flock back to stores for revenge buying, justifying the market's right pricing of such optimistic scenario. It's also possible that the investment community had got ahead of itself, failing to price in fairly how long the effects of the pandemic will last or how the new normal will be like in future.

As investors, we need discipline to stay the course. As importantly, we also need a certain patience to wait. It's a difficult balance of taking how much risk owning stocks and how much safety waiting in cash. Currently, I'm 81% invested in stocks and retail bonds with the rest in cash and SSB. My plan is to continue to add into equity positions at a much reduced pace.


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