There is a well-known saying in the investing world that says "don't fight the Federal Reserve." This concise saying implies that interest rates and central bank interest rate policy are the dominant influences on short-term stock and bond market trends, and when trying to construct an investment strategy it is unwise to assume that it knows more than the Federal Reserve about the factors that drive its own decision making.
I strive to take advantage of this saying and apply a version of it to the stock market. While it's easier said than done, I strive to invest for the stock market we've been given, not the stock market I think we should have, or even wish we had. Like many investors, I spent too much time in my early days thinking that the market was wrong, I was smarter and knew what I “should” be doing rather than how it was actually acting. This “I'm smarter than the market” perspective can be very costly over time, and this lesson is only learned the hard way.
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With experience I have come to value a certain wisdom inherent in the markets. In the short term, can the markets go crazy? Absolutely. Are markets mostly unpredictable? No doubt. Does the stock market accurately reflect economic reality? Only occasionally, so basically “no.” However, markets (the stock market in particular) are made up of millions and millions of simultaneous individual decisions, all made by investors with competing interests, sometimes misaligned, clouded by the noise of computer algorithms, and all using information incomplete to form biases and strategies. implement disparate agendas.
Somehow, through all this hubbub, a certain “collective wisdom” emerges, giving us normal humans access to the greatest wealth creation mechanism ever conceived. Yes, there is a certain wisdom and beauty in this madness and I, for one, greatly appreciate it. But it is, however, difficult and dangerous. Some market periods are more dangerous than others. It is very possible that this is one of them.
Now, if you roll your eyes and think “Dangerous? Marc, you should have seen my December investment statement. “I'm making money hand over fist,” the answer is, “I know.” Over the last 12 weeks or so, since the end of October, the overall gains in all the major stock indices have been nothing short of spectacular. Go a little further and look under the rug at some of the most held and traded stocks in these indices and it gets even better. There are widely held stocks, sparked by the opaque opportunity of artificial intelligence, that are up 30%, 40% and more in just a few months. It has been nothing less than easy to invest money in the stock market over the past few months and make money. The returns being generated are actually starting to change the way I think and feel about investing, and maybe even my own personal planning. And this is what scares me.
What motivates investors to generate such profits? The loudest voices seem to be eagerly anticipating that interest rates will drop soon, and the idea of cheaper money is drawing investors toward stocks. But why would interest rates drop soon? Well, the conventional wisdom is that the Federal Reserve would lower rates to offset the weaker economic conditions caused by the current high interest rates, which could perhaps result in increased unemployment, slower economic growth and perhaps even a recession. But wait a minute, would a recession actually be positive for stock prices? Don't they tell us that stock prices are supposed to reflect corporate profits? How could corporate profits strengthen in a weaker economy? It's all so confusing.
So what are we supposed to do with this confusing stock market that makes us so happy? I would say that the only thing I want to do is actually the only thing I can't afford to do. Unfortunately, all you have to do is sit back and enjoy it. In my opinion, certain market conditions actually encourage both buying and selling of stocks. This is one of them. Am I defending day trading? Absolutely not, it is a difficult and losing proposition for most. However, this is a time when markets are generating profits and, as another axiom says, “new highs beget new highs.” It is possible to deploy money into the markets during a peak period and make money, but in my experience the key is that profits must be made through regular and consistent selling or rebalancing. In short, both buying and selling.
As long as this stock market continues to make me happy, I will work very hard to remember not to confuse a raging bull market with my own personal brilliance. In the end, the music always stops and the markets fall, and the smartest investors are the ones who are able to hold on to what the market provided on its way up.
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing in stocks involves risks, including price fluctuation and loss of capital. No investment strategy can guarantee a profit or protect against loss. Past performance is not a guarantee of future results. This material may contain forward-looking statements; There are no guarantees that these results will be achieved.
Marc Ruiz is a wealth advisor and partner at Oak Partners and a registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
