The stock market’s huge bounce yesterday was its best performance in months. But by now, you know that a one-day rally isn’t something to hang your hat on in a bear market. Even with Tuesday’s surge, the Dow is off more than 50% since it peaked in October 2007.
Here is something to think about, however. This month, Jeremy Grantham, chief investment strategist at GMO, who has long been bearish on stocks, wrote that now is not the time to sit on the sidelines. He argues that the fair value for the S&P 500 is 900. After yesterday’s close, the blue-chip index sits at 720. “Global equities are even cheaper,” he says.
There’s no way to know if Grantham is correct. Even he is unsure of when stocks will hit bottom. Grantham, for example, shifted cash into stocks back in October, well before the market hit fresh lows this year. But he also didn’t bet everything at once. “We made one very large reinvestment move in October…and we have a schedule for further moves contingent on future market declines,” he says.
This kind of calculated, measured return to stocks is critical, Grantham says. Otherwise, “paralysis” can lead you to miss the true rallies that follow a bear’s bottom. And diving in all at once can send you into breathless shock.
You can’t risk money in stocks that you’ll need to cover short-term expenses, like an emergency savings fund or your son’s tuition next fall. But you’ll want a plan for the rest of your portfolio. As Grantham points out, stocks jumped 105% in six months in 1933–well before the layoffs subsided and bank failures stopped.