Timing the Stock Market
Perfectly timing the stock market is a losing proposition and will likely result in failure. However, there are investors who feel that market timing is helpful and therefore hedge their bets based on their forecasting models. If those bets are correct, then there is a lot of money that can be made. But on the other side, if those bets are wrong then lots of money can be lost. The key is to have an idea of how likely it is for an event to take place and how it might impact market direction. This form of investing should not be undertaken by amateur investors, but professional investors should also proceed with caution. The reality is that no one can perfectly time the market. So, what methods can be used to gauge whether or not market conditions are signaling strength or weakness?
From our perspective, in order to have some idea about market direction in the near or long term you must have a deep understanding of stock market cycles. Of course, investing in the stock market at the very beginning of a cheap market cycle is best but knowing where you are in the cycle is more important given that market cycles are long. For instance, where you are in the current market cycle gives you an idea of what you can expect in terms of investment returns over the next 10 years or more. It also signals the likelihood of market corrections for the coming calendar year. We feel that we are a few years past the start of one of the cheapest long-term market cycles which began at the start of 2019 by our estimation. So, from a long-term perspective it is still a wonderful time to buy as the cycle that began at the beginning of 2019 was probably one of the cheapest markets in history dating back to 1926.
What is our analysis saying about the near-term market? Given where we are in the current market cycle, we expect the market to stabilize by year-end with 2022 total returns not likely to be below 10% for the S&P 500. Further, we do not see conditions that will lead to market returns below 10% for a calendar year over the next few years. In order for us to conclude that the current market is flashing major trouble ahead, we would have to see extremely high total returns over multiple long-term market cycles leading up to the start of a particular calendar year which is not the case for the calendar year that started in 2022. Although markets might continue their roller coaster ride at points during the current calendar year, much of the market loss experienced during this calendar year should be recovered by year-end.
Investors relying on top-down investment approaches could benefit from our data driven methods which are designed to predict conditions for market strength or weakness that can result in above or below average returns over the near or long term. Fortunately, our investment strategy is purely a bottom-up approach which has done extremely well through good and bad market cycles with investment performance significantly higher than any other index while maintaining a lower risk profile. If you are interested in knowing more about our approach or research, please contact us.
