“Bad times have a scientific value. These are occasions a good learner would not miss.” – Ralph Waldo Emerson
Market Sentiment
“Markets make opinions,” is a phrase commonly heard from seasoned investors. But what types of opinions are being formed in this uncertain market climate? Are stocks poised for a major downturn or merely resting before making another upward leap?
No one can predict the future with complete certainty. However, opinions vary widely across the investment landscape. One headline proclaims, “Invest in a HUGE Bull Market,” while another warns, “Two Big Reasons to Worry About Stocks.”
A friend of mine recently shared his optimistic outlook on the market. Given the stock market’s substantial gains over the past two years, it’s clear his perspective has been influenced by recent trends. At the Economic Prism, we see this as a reason to adopt a more cautious stance. Markets fluctuate, and after an upward trajectory, a downturn is not only possible but likely.
This year, the saying “sell in May and go away” has proven insightful, as May wraps up with the S&P 500 experiencing a 2.6% decline—the steepest drop since last August. Although a single month’s performance doesn’t define a trend, it could signal a pivotal moment in the market. Only time will reveal the implications…
The fascinating aspect of the stock market is that hindsight always appears clear. When looking back, outcomes seem certain, while projecting into the future involves uncertainty. Yet, what would life—or indeed this newsletter—be like if we didn’t occasionally take a speculative glance into what lies ahead?
What insights can we glean from the signs on the horizon? What should your perspective on the market be? Today, we’ll explore these pressing questions.
Understanding When to Buy and Sell
There are optimal times for both buying and selling stocks. Ironically, the best time to purchase is often when others are selling, and vice versa. People have an uncanny tendency to buy stocks when they should be cashing out and to sell when they should be investing.
Historical events illustrate this pattern. In 1929, 1966, and 2000, many were confident that stocks would appreciate indefinitely. Back in 2000, countless financial advisers preached ‘buy and hold’ strategies, ignoring cautionary indicators. If these professionals had truly understood market dynamics, they might have recommended selling stocks in favor of cash or gold during that turbulent time.
While investing in stocks can be an excellent wealth-building strategy, its success is heavily influenced by timing. Just as in real estate or fine art, knowing when to invest can be even more vital than selecting the asset itself.
In the stock market, some companies consistently outperform others. However, predicting which individual stocks will excel is often more challenging than estimating the overall market’s trajectory. So, is it worth the effort?
Typically, stock prices and broader market indices move in unison. During bullish phases, standout stocks will rise more than the indices; conversely, they will fall together in downturns. For instance, investing in the NASDAQ in 1995 was beneficial, but purchasing Cisco shares proved even more lucrative. Conversely, holding either in 2000 could have resulted in significant losses.
Identifying Buy Opportunities
Consider the prolonged bull market from October 3, 1974, to March 24, 2000, when the S&P 500 surged from 62.28 to 1,527.46—a staggering increase of 24.5 times its value. By early 2000, it seemed as though anyone participating in the market would reap endless rewards, despite looming challenges on the horizon.
Remember the saying, “Markets make opinions.” After such a successful run, who could think otherwise?
However, following its peak in early 2000, the S&P 500 plummeted 49% to 776.76 by October 9, 2002. It made a recovery until peaking again on October 9, 2007, before crashing yet again to close at 676.53 on March 9, 2009—a 56% decline from the 2000 high.
In the era of paper currency, bear market trends often don’t reveal nominal losses. The market can often appear stagnant while experiencing significant real losses due to inflation. For instance, from 1966 to 1982, nominal losses were negligible, but inflation caused the dollar to lose 66% of its value.
Similarly, during the bear market since 2000, market performance seemed to recover briefly in 2007. Yet, when adjusted for inflation, real returns showed a downtrend, as the dollar lost 21% of its value during that time.
So, is now the right moment to invest in stocks again?
The truth is, we may not be sure. However, we at the Economic Prism aren’t inclined to take that risk right now. The last two extended bear markets in the U.S. lasted from 1929 to 1949 and from 1966 to 1982, spanning 16 to 20 years. This current bear market has entered its 11th year. Currently, the S&P 500 stands 13% lower than it did 11 years ago, and the losses become more severe when considering inflation.
Stocks could very well rise from here. Perhaps they will, at least for a while.
However, in our estimation, it may take another 5 to 10 years before investors can confidently allocate funds into an index fund without worry, expecting a substantial return over the next decade and a half. By the year 2016, the general sentiment may lean towards stocks being unwise investments. That would likely signal a favorable time to consider re-entering the market.
Best regards,
MN Gordon
from Economic Prism