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Where Do We Go From Here?

Friday, September 12, 2014

by Sheila & Rich Jamison         

Isn’t that the $64,000 question? The duration of the bull market brings out both the proponents for investing and those for stepping aside. Add some increased market volatility and both sides find more people listening. Who has the better argument? Is this time to get out of the market? Or are substantial profits still there to be made now?

Extremes vs. Fact & Logic vs. History & Weather:

Extremes

Financial market pundits and the media have been asking (and many of them answering) this question for years. As the market rose, so did the quantity of public commentary. The problem this creates is that their answers fall on both sides of the question and often range from the two extremes -

sell your house, car, stamp collections, etc. to raise money and invest it all into the markets

or

cash in all investments, bank accounts, etc. to buy food, guns and build a bunker in your backyard.

Most of us can identify and disregard the lunatic fringe (though each of us may define that a little differently) … but what about the others? Who makes sense?

The question has received increasing debate following 2013’s strong market performance. As the market rose, the height of a potential fall rose with it … as did the volume at which its proponents proclaimed it. Their point was the market was higher … and hence could fall farther. It is also pertinent to note that the S&P 500 set 33 new record closing highs since 2013 ended. Much would have been missed by stepping aside too soon.

Fact & Logic

Fact says that the bulls have been right over the last few years. Higher values for market indices are in the record books. And that long bull run makes it only human to feel the market will pull back substantially at some point. After all, hasn’t it always? It is that feeling we get internally that tells us “what goes up must come down” … sooner or later (though this is no longer universally true since the advent of space travel).

So it feels that the bears will certainly have their day. You know past performance cannot guarantee future results. Yet, I doubt anyone can imagine that financial markets will only rise. There is no law that forbids it, but that idea defies logical thought.

It has been a week since the last S&P 500 record. What happened to those new highs? Well, that thought brings the bears out again in force. It’s their turn to pontificate. So they point out reasons they believe we should get out of the market now (as they have done numerous times before).

So who makes sense? The disappointing answer is that all of them make some degree of sense. I am not selling possessions to raise money for either market investment or bunker construction costs. And though I am excluding the fringe crowd, even some of what they say can makes sense.

History & Weather

The direction of tomorrow’s market doesn’t depend on what either side believes or says. It depends on what is happening. Moreover, it depends on the totality of what is happening; not just on the factors we (all the experts combined) can identify and quantify.

Market forecasts are like weather forecasts – many of them turn out to be wrong. Why? In both cases, we put the known parameters into models. However we don’t fully understand the influence of some parameters. Additionally, there are unknown – hence, unconsidered – parameters. Either can lead to incorrect predictions.

Nobody can predict reliably where the market will go. Pretty much everyone will be right some of the time and wrong at others. The pundits arguing the issue of what will happen tomorrow fall into this same category.

Consider how our economic reports have been coming in; some up, then others down, then revisions changing them anyway. On which do you rely?

Models may say “up” or “down” for the next day’s market, only to be proven wrong on the very next day. When we look back to today from some point in the future, we can then tell who was right today. We can only know who was right by looking back once we have gotten there. We cannot know today who will be right about today when tomorrow comes.

Further, who has been right up until today can turn on a dime … or not. A winning track-record may end at any time … or not. In that respect, it parallels the current market.

Solution

Our answer to the question of where do we go from here relies on not predicting. You might like to think of that prediction aspect as similar to tossing a coin – generally not a good investment strategy.

Instead

1. Watch and listen to what is happening in the markets. The ‘rules’ then become easy.

2. While markets are going the right way, stay with them.

3. If parts of the market are going well and other parts not, stay with those that are going well and get out of those that are not.

4. When no market segments go well, step aside. Cash is a legitimate asset class too!

5. Above all, keep watching and listening … that way, you have current information to apply the appropriate rules.

References:
Happy Fifth Birthday Bull Market: Where Do We Go From Here? Charles Rotblut. Forbes.com. March 7, 2014.
How Low Do Stocks Go from Here? Robert McHugh. Safehaven.com. August 10, 2014.
Puff by puff, getting high on the S&P 500. Adam Shell.  Americasmarkets. USAToday.com. September 8, 2014.
The Bull at 5: Where Do Stocks Go From Here? Alex Dumortier. Fool.com. March 9, 2014.
What to watch: Where do stocks go from here? Adam Shell. USAToday.com. June 7, 2014.
Why the Stock Market is a Sucker’s Game Right Now (and What Stocks I Own). James Altucher. The Altucher Confidential: Ideas for a World Out of Balance. Spring, 2014.

Sources:
The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; BBC News; The Associated Press; Crain’s New York Business; MFS research; NYSE; NASDAQ; Dorsey-Wright Associates; NYMEX.com; CNBC’s Power Lunch & Squawk Box programs; Investing.com; Markit.com; the New York Times; Standardandpoors.com; Djindexes.com; 247wallstreet.com; MarketWatch.com; Morningstar.com; Thomsonreuters.com; the Financial Times.com; Briefing.com; BusinessWeek.com; Dol.gov; Fxstreet.com; Streetinsider.com; Ycharts.com
The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Interpretations of the data, views and/or opinions expressed are those of the Jamison Financial Group based on market and economic conditions as of September 12, 2014 and are subject to change. They do not necessarily reflect the opinions of any other individual, group or organization.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities whenever mentioned are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
The NASDAQ Composite is a market-weighted index of all the over-the-counter common stocks traded on the NASDAQ system.
The S&P 500® is a market-capitalization-weighted index of common stocks.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.

© 2014 Jamison Financial Group. Please feel free to distribute copies to individuals you feel may benefit from the information presented. Commercial use is prohibited.