On June 20, the Dow Jones Industrial Average fell 354 points on a double whammy of Fed speculation and specters of an oncoming Chinese banking crisis. Investors were worried about the sudden market collapse, and talking heads on CNBC were equally pessimistic, commenting of an impending bear market.
So… what’s a person to do? The next day I started hedging my positions and incorporated a partial short S&P position in my portfolio. The thinking at the time was that, while I wasn’t going to sell anything, I was going to profit a little off the (consensus) bear market that was suddenly upon us.
Welp. Since that day, the Dow has been up 7 sessions in the last 10. And my short position obviously has been stifling gains.
The moral of the story is that one should stick to one’s convictions. In fact, the US economy has been on a solid recovery. The real estate market has steadily recovered, unemployment has subsided (today the US economy announced 195,000 job additions), and other economic indicators such as consumer sentiment are also on the rebound.
Given that, there’s very little real reason why the US market tanked (and Bernanke has since tempered expectations of a rate rise). Prudence should have won out against knee-jerk reaction on that one.