I sold my stocks. I’m an economist who usually doesn’t believe in market timing, but the market looks irrationally exuberant right now.

First let’s look at the economic fundamentals right now:

• GDP has crashed by more than it has since the Great Depression due to a pandemic with no end in sight.
• Unemployment is higher than it has ever been since the Great Depression.
• Both measures have crashed despite the biggest fiscal peacetime stimulus ever in the world. The US stimulus already spent this year makes all of Obama’s efforts to fight the Great Recession look like chump change and most countries spent much bigger stimuluses as a percent of GDP.
• The Fed almost immediately dropped the federal funds rate to zero and that is all that it can do with conventional monetary policy. The Fed couldn’t drop interest rates much because rates were already very low before the pandemic started, so the Fed’s abilities are weaker than usual.
• Inflation is low and all signs are that inflation will continue to be low. If inflation were to rise, that could be a reason to buy stocks, but there is so sign of it yet.
• The bond market was already warning of a weak economy last fall well before the pandemic hit so even without a pandemic we would likely still be in a recession now for unrelated reasons.
• Unlike the last recession which almost exclusively just hit developed nations, this recession is truly global and probably no nation will escape. Last time China and most developing nations still had robust demand for exports, but they won’t help us out so much this time.
• There have been riots and looting in major cities across the US unlike anything since the riots of the 1960s.
• The US government is mired in dysfunction. The president was just impeached for using taxpayer dollars to pressure a foreign power to dig up dirt on his political opponent. The Senate gave up on even trying to deal with the end of unemployment benefits that ran out at the end of July and disbanded for their August vacation. The Executive Branch is so incompetent that it faulty leadership caused the US to have the worst pandemic experience of any rich nation.  It is worse than most poor nations too. The House can’t come to any agreement with the other branches.
• There is a rancorous election coming up and prominent leaders on both sides are saying that it could be the end of our Democracy if the other side wins. Although the President has the most responsibility for the smooth execution of our elections, rather than working diligently to make our election great (again–like every other election), he is regularly saying that he is expecting massive voter fraud for the first time in American history and signaling that he won’t accept the results if the vote doesn’t go his way. He is likely to lose and cause a constitutional crisis because he has never had the approval of the majority of Americans in polls.  Ever.

Normally the stock market hates uncertainly. Normally you would expect the stock market to price in some of the fundamental problems we see and although many foreign nations are in better shape than the US right now, almost all foreign stock markets are down for the year, as you would expect. But we are living in a time when a significant percentage of Americans are irrationally optimistic and so the S&P 500 is UP for the year even though the US is having bigger problems than most nations. The only other stock markets that are up are Venezuela, Korea, and Shanghai. Venezuela is even more bizarre and mismanaged than the US so I won’t try to understand why their market is up, but it is easy to see why Korea and Shanghai have booming stock markets. Both nations stopped the Covid-19 pandemic more successfully than most of the world, so it isn’t so surprising that their markets are doing well. But there is nothing about the US situation that should give our stock market more optimism than Germany, France, Britain, Australia, Japan, etc…

So the question I asked myself is whether I thought that there is a bigger chance that the stock market would rise 10% in the next six months or fall 10% in the next six months. The fundamentals listed above give a lot of reasons why the market could fall 10% whereas I definitely think it is highly unlikely that it will rise 10%. That’s why I recently sold off most of my domestic stocks and bought bonds. I mostly kept my international stocks because they haven’t bounced back as irrationally as my US stocks and that seems more reasonable.

This is the first time in my life that I have attempted market timing to beat the market like this. I usually think that it is foolish to try to beat the market because the market usually seems extremely efficient at pricing in all available information about global risks, but this time seems completely different.

And the crazy thing is that I really, really hope I am wrong. I hope I lose out on a huge stock market boom in the next six months. That is because a 10% rise in the stock market will mean that the pandemic will already be under control and my job will be secure. It will mean that my students will have an easy time finding jobs when they graduate next spring because unemployment will already be low again and life will return to stability and prosperity. It will mean that we will have successfully run a peaceful election again. But if I’m unfortunately right and something does go wrong, I have bought myself a little bit of financial insurance by selling stocks and buying the safety of bonds at least for a while.

What have you got to lose?