The stock market is in a state of turmoil, with prices fluctuating wildly. Just last week, the DOW oscillated by several hundred points, ultimately settling close to where it started. This unpredictable volatility raises significant questions about the market’s direction.
Down. Up. Up. Down. Up. The stock market resembles two boxers locked in a fierce bout. Thus far, the judge’s scorecards indicate a draw.
What is the current state of affairs? Is the bull market dead, or is the market merely searching for a new foothold to ascend?
At Economic Prism, we lean toward the bear. We perceive a sluggish economy that has yet to fully recover from the Great Recession, coupled with a stock market inflated by aggressive monetary policies.
These extreme interventions have driven asset prices up, enriching the wealthy while leaving the average wage earner behind—as median income still lags behind its 2007 levels.
A Losing Proposition
Eventually, the disparity between inflated asset prices and the real economy will have to realign. We doubt that incomes will see a substantial rise. Instead, a more plausible scenario for rebalancing is a significant drop in stock prices.
If you are an investor, the best advice we offer is to avoid unnecessary risks. Traders may find that the market’s swings either benefit or hinder them, depending on their ability to make sound decisions. Regardless of your stock market goals, the upcoming period promises to be particularly challenging.
“Determining when the stock market has peaked and it’s time to exit can be difficult,” says market expert Mark Hulbert. “It may even be harder to recognize when the damage has subsided and it’s time to re-enter.”
“Successfully executing both actions back-to-back is incredibly rare,” he continues. “This is particularly relevant now as the bull market that began in March 2009 enters its 54th month.”
“Since reaching its peak on July 24, the broad stock market, as represented by the Wilshire 5000 index, has decreased by 3.7 percent. Even if you manage to sidestep a downturn by exiting your positions now, the long-term odds remain stacked against you.”
“Attempting to time the market is largely a losing game, even for professionals.”
Knockdown Drag Out Slugfest
Clearly, the market is caught in a brutal confrontation. We understand the futility of attempting to predict its outcome. If experts struggle to do so, why should we expect better results?
However, that doesn’t mean you must be fully invested at all times. Balancing your portfolio by reducing stock holdings to a core group, while maintaining some cash reserves, could be a wise approach. This strategy not only allows for a good night’s sleep but also positions you to take advantage of potential bargains if stock prices drop. If stocks continue to rise, you can still benefit from some degree of upward movement. While this may not yield the maximum profit of timing the market perfectly, it is a far more realistic approach given Hulbert’s observations about market timing.
Interestingly, something relatively rare occurred yesterday: the DOW didn’t decline, but it also failed to show significant gains, closing up by just 16 points.
In essence, the bull and the bear are currently catching their breath. The contrasting forces of extreme monetary policy and economic stagnation are gearing up for the next round in this prolonged bout. Ultimately, it will be a fierce contest, and few will emerge from it with their capital unscathed.
Sincerely,
MN Gordon
for Economic Prism
