Do we stay in the stock market, or do we fold?

The market trading this year has been a heck of a whipsaw. We dropped precipitously 20% from April to June, whipped back half of that in an almost straight line from June to August, only to see 2022's lows again in recent weeks. Last Thursday, the market got nipped in the butt when yet another hotter-than-expected inflation report came out. However, just 30 minutes into the trading day, the market reversed a >2% loss and by the end of the trading day, turned into a >2% gain.  

The numbers out Thursday morning are telling the Federal Reserve that they have more work to do to control inflated prices. Expectations are set for a fourth back-to-back 75-basis-point interest rate hike when the Fed meets in November. Expectations for a fifth 75-basis-point hike are even starting to bubble up for the December meeting. This will bring interest rates to a moderately restrictive stance, coupled with the largest quantitative tightening campaign in history, altogether will amount to a high degree of volatility not seen for a few years.

But we once again come out to say that we are not folding. We’re going to stay invested, hunkered down through this tough period, looking forward to the light at the end of the tunnel. We will not try to be heros, calling bottoms or tops, trading in and out, because it is impossible. Don't let anyone tell you they can do it, because if they can, they wouldn't be talking to you. Market timing is a fool’s game because you have to be right twice: knowing when to get out and when to get back in.

Let me remind you the story of the Covid-19 induced market crash in 2020. In order to time the market right, you would have to first had it right in early February, which was when the S&P500 topped $3400. But how would you know that everything would turn out that bad? Even public health officials around the world did not know, else they would have been more prepared. There have just been not that many pandemics.

And then when would you know to get back in? The S&P500 bottomed at $2200 at the end of March, after a 34% drop in a straight line. Let me tell you the facts at that time, and you decide if you could go back to that time, not having known what happened next, whether you would think that was the bottom. On March 11, the World Health Organization declared Covid-19 a pandemic. On March 13, President Trump declared Covid-19 a national emergency. On the same day, the administration blocked foreigners from entering the country. On March 19, California became the first state to issue a statewide stay-at-home order, mandating all residents to stay at home except to go to an essential job or shop for essential needs. The rest of the country soon followed. By April 10th, there were 18600 deaths, and essentially no economic activity could occur. Would you have guessed that was the bottom for the stock market? I wouldn't. 

But indeed, it was in the worst of times that the stock market bottomed and went on to rally 110% in a straight line, until November 2021 when the S&P500 peaked at $4800. 

The story now is not dissimilar.

Everything now centers around the risk of inflation, which stems from the Federal Reserve's fight against inflation. However, we don’t know when the Fed is going to win its battle against inflation. When we get even the slightest inclination that inflation is dropping, such as one cooler than expected inflation report, the market will gap up by hundreds of points that will not allow you to get in. By the time the Federal Reserve declares that they have won the battle against inflation, all of the gains in the market would have already happened.

In the worst of the Covid pandemic, the stock market dropped 35%. There is not a pandemic in the picture, nor do we have a 2008 financial-crisis situation, yet the stock market has already given up 25% from the peak. Logically, it is not the time to sell. The time to sell would have been in November 2021, if you could catch that top. It’s far better to just run a diversified portfolio, with some cash, try to sell when you can take some profits and try to buy when you see opportunities. Don't try to time the market, because you must be right twice, and that’s twice has hard as buy and hold.