Another purely technical upswing feels good, but does nothing to shake the market out of its recent stall. These are the periods that really test Wall Street’s nerve.
On one hand, every day without a plunge restores a little confidence. The world is not ending. There’s time to take a deep breath and plan for the best future you can realistically achieve in the environment that presents itself.
On the other, every day without a breakout surge is frustrating. A lot of us are sitting on paper losses after the last few months and nobody is getting any younger. Even the biggest bulls can run out of patience.
And in the middle, a sideways market can get boring. That’s where Wall Street has been in the last few weeks.
The Fed keeps talking tough. Inflation remains high. Early Q1 earnings are coming in roughly on track with expectations.
Day by day, the S&P 500 tests technical support while reaching at least a little toward short-term resistance. Every test helps to signal investors that the floor is fairly resilient here.
But if the floor holds, the market as a whole is unlikely to lurch much lower. And until we start tapping the ceiling, a return to record-breaking rally county is equally unlikely.
It’s going to take a decisive push in one direction or the other to get the S&P 500 moving again outside a narrow 1-2% range. The Dow is in slightly better position, testing resistance daily.
The NASDAQ, needless to say, remains more fragile, precariously teetering above 13,250 without much more in the way of technical support below it. Until we get a firmer floor, the big moves are more likely to take tech down than up.
Spectacular earnings later this month would be nice. But I’m not optimistic that even good numbers will be greeted with cheers. For now, the NASDAQ drifts.
In these lulls, the market tests our character. If you’re not optimistic about the future, that’s a valid response.
Successful investing for the long term requires long-term optimism. You have to truly believe that the economy is going to be bigger and brighter in the future.
Otherwise, there’s literally no point in owning companies that are priced for growth. If you don’t see them successfully changing the world, don’t buy them.
Instead, park your cash in mature companies that don’t move much quarter to quarter. They grow a little organically, but on the whole they’ve captured every customer dollar they can.
The goal with these companies is to buy the dip and let dividends do the heavy lifting, creating a kind of annuity. In that framework, returns are low . . . but steady.
And risk is minor. You aren’t aiming for a windfall or betting on an economic boom. All you need is business as usual to compound in your favor over time.
That’s basically where Wall Street is this year. That’s where “Goldilocks” is comfortable . . . not hoping the soup will be especially hot, but having some confidence that it won’t freeze over, either.
You might be more afraid of the cold. For example, people are obsessing over the likelihood of a recession emerging in mid-2023 or as far out as 2025.
Recessions happen. They’re a fact of every investment career.
But even the 2008 crash took its time to play out and flashed plenty of warning signs along the way. Investors had months to read the writing on the wall.
That’s what signals like the yield curve are. When the curve flattens, it takes months or even years to trigger a recession. In the meantime, growth stocks keep growing and dividend stocks keep paying dividends.
If the threat of a possible recession in 1-3 years makes you uncomfortable, you need to be either looking farther out into the future for rewards or staying out of the market altogether.
And in that scenario, “safety” is a sliding scale. As long as you have the resources to keep things together through the economic storm, you can reach toward the recovery on the other side.
Historically, that means about 10 months of patience. The longest recessions lately have needed no than 15 months to play out.
That’s all it takes. After that, on average, it’s another five years of boom where the world gets better and better . . . and investors who are in the market get richer and richer.
For a lot of people, that 10-15 month gap in the expansion stays closed because they don’t need that long to find a job if they get laid off. Maybe they never get laid off at all.
Either way, the cash keeps flowing. Retirees keep drawing down their accounts and collecting Social Security. Maybe they take on a little work or do whatever it takes to close the gap.
We all tend to tighten our budgets in a recession. If you’re worried, you can get ahead of the curve and save money by starting the process now.
And throughout, those dividend stocks help. In general, they rarely deliver more than 3-4% returns . . . but that’s almost what it takes to hit a 4% retirement target without selling a single share of stock in a depressed market.
Whatever it takes, if you can ride out a 10-15 month recession, what do you have to fear? There’s always a downturn around the corner . . . and usually an expansion in the here and now.
Missing the expansions because you’re afraid of the downturns is not how anyone makes a lot of money in the market. If you’re that type of person, it’s OK. But know who you are and plan your life accordingly.
A lot of so-called “investors” don’t have that much insight into their own character. They don’t know who they are or how they’ll respond when the economy really hits a lurch.
Sad to say, their mistakes create opportunities for the rest of us to make money throughout the cycle.
But say you’re feeling pretty good about the economy. You have cash on hand and cash coming in. Either you’re employed or your investments are already paying the bills.
I suspect your major problem with the market right now is not fear but frustration. You’re getting bored waiting for great companies to turn into great stocks.
In that scenario, you’ve got the long view covered, with a portfolio of stocks you like and the confidence that they’ll pay off in future economic cycles.
That’s where I tend to be. And when the market spends too much time going sideways, I concentrate on immediate opportunistic trades.
You don’t have to think in the long term. If some of your investment horizons are measured in days, hours or minutes, a recession needs to be extremely close to have any impact at all.
And recessions, like any other macroeconomic event, give us plenty of warning. We may not know the day they’ll hit . . . but we know they’re coming.
I tend to keep my subscriber trades tight, with at most a year between the entry and the exit. As the economy weakens, the exits get more frequent while the entries get scarce.
Then, in the boom, we reverse the cycle. We’ve been doing that over a decade and the results speak for themselves.
Throughout the process, short-term trades keep cash flowing. This is usually all about options, which can make real money in a matter of minutes.
In the time it took me to compose this update, the recession threat did not rise or fall appreciably. Market indexes that were stuck this morning remain roughly where they were.
Corporate fundamentals barely budged. But options prices ebbed and flowed. There’s never any reason to be bored in the market.
A little fear is healthy. Know what it takes to balance out the fear by feeding your confidence and optimism.
Boredom is never necessary. If you’re bored with the market right now, that’s a signal you need to change things up.