The Difficulty in Market Timing
We live in uncertain times. Domestically, we are confronted with a divided Congress, impeachment of our President, an annual deficit that is now greater than $1 trillion and a national debt that has topped $23 trillion. Overseas, we are engaged in a trade war with China, we are under a constant nuclear threat with Russia, Iran and North Korea, and the list goes on from here. And yet, a majority of U.S. corporations are thriving, posting record earnings, strong cash flows, rising dividends. These strong fundamentals have resulted in a stock market that is trading at an all-time high.
Politics are also taking center stage as 2020 is a presidential election year. Sadly, our two major parties are much divided and it remains to be seen which party will control the House and the Senate, and who will occupy the Oval office. Trying to handicap the outcome is impossible and thus, we have even more uncertainty in the year ahead.
As asset managers, we recognize that the equity market fluctuates during good times and bad. Case in point, the S&P 500 posted a dramatic decline in the fourth quarter of 2018, wiping out all of the gains reported earlier in the year. The market bottom in late December, fully recovered its loss by mid-April of 2019 and YTD, the S&P is hitting an all-time high.
The key to successful market timing is to consistently know when to sell high and buy low. Yet, there are no triggering events that can alert us to the timing of these inflection points. By employing a buy and hold strategy, investors can recover “losses”. It is much more difficult to recover from a “lost opportunity”. If an investor is still waiting on the sidelines with a large amount of cash that was earmarked for equities, they missed the 20% to 30% returns that the market has provided this year.
We recommend, therefore, that investors develop and stick to an asset allocation strategy. This generally results in selling a small portion of equities when the market is strong and buying an equally small portion of equities when the market is weak. We also insure that there is sufficient cash and fixed income to provide many years of anticipated future cash flow needs. We resist the temptation to focus on changes in one’s market value from peak to trough market environments and instead, embrace a timeframe that encompasses multiple market cycles.
All comments and suggestions are welcome.
Christopher J. Kress, CFA