3 Days Does Not Make a Recovery
It is amazing to see how investor sentiment has apparently changed, despite the efforts of the often “fear selling” mass media, in the past three trading sessions. For the period, March 10 – March 12, the Dow Jones Industrial Average (“DJIA”) rose from its closing level of 6,547.05 on March 9 to a closing level of 7,170.06 on March 12. This amounts to an increase of 9.52% in just three trading sessions. I believe that a large part of this short-term turnaround can be attributed to the following factors:
- Likelihood of the reinstatement of the “Up-Tick Rule”, which was a former rule established by the SEC that required every short sale transaction to be executed at a price that is higher than the price of the previous trade (this rule was abolished in July of 2007)
- Belief that there will be some compromised changes with respect to mark-to-market accounting
- Reduced fear of bank nationalizations
- Growing confidence in a toxic mortgage relief program which should be announced shortly (likely to be similar conceptually to Paulson’s original TARP proposal)
- Positive 1st quarter revenue statement from Citigroup’s CEO Vikram Pandit in addition to positive business climate sentiment expressed by JP Morgan’s CEO Jamie Dimon recently
All of these factors are certainly positive but likely have been perceived by an investment world, all too anxious to begin the recovery process, as being the catalysts that they have been waiting for. While they may turn out to be just that, I believe that there is still a great deal of uncertainty ahead of us with more potential mortgage-related problems waiting in the wings.
This should remind us of the importance of diversification within our portfolios. For growth-oriented portfolios, this level of diversification should including positioning in the appropriate asset classes for the eventual recovery while still allowing for downside protection if the recovery takes longer than expected or additional negative surprises surface.
More importantly, it should also remind us of how human emotions can deter a long-term investment strategy. Just as an investor should not make a change to their investment strategy due to a short-term period of market losses, they also shouldn’t make a change based on a short-term period of market gains. Perhaps, both scenarios should help reinforce an investor’s true tolerance for risk.