Having (with partners) founded and managed a mutual fund company, I can share some insights when it comes to timing markets. Some say it’s impossible, but the data (and experience) suggest otherwise.
For instance, just before the COVID-19 mayhem which ignited the mess we’re in, inflows into mutual funds were their highest in three years – in February. The propensity for retail investors to invest in funds is inversely related to the prospects for markets. In other words, when investors are most enthusiastic, something bad is about to happen.
You might argue that nobody saw the coronavirus coming and I’d not argue. In reality, we never see what’s coming. All I can say with gusto is that this works. It takes time for a crisis (whatever the cause) to influence behavior, and hopes for a rapid recovery are almost always disappointed. The best indicator of expectations and behavior is hard evidence, which fund flows provide. In a nutshell, money won’t begin to find it’s way back into markets (thereby driving valuations higher again) until all the money that can leave has left the markets. The following quote is from a BMO report called the Mutual Fund Observer about the last crisis:
For the most part, it took the asset managers between 7 and 11 quarters for retail AUM to return to pre-financial crisis levels. Retail net flows took even longer than AUM to rebound post-crisis, with some asset managers never reaching their pre-crisis flows high.
The first leg of a recovery begins at the bottom, and we’ve no idea yet when that bottom will occur. (I’m humming the tune “We’ve only just begun” in my head as I type this). This quarter and probably the next, we’re still on the down leg. Once redemptions accelerate, the providers of mutual funds (banks and larger fund companies) will begin to fire their sales reps, portfolio managers (insane but theirs no surplus of sanity in big organizations); consolidate funds and once again be unprepared for the recovery when it comes. You want to own stocks again when hopelessness is the new norm and talk of ‘recovery’ is no more.