What the magic 8 ball has to say about today’s market
One of my fondest childhood memories was receiving a Magic 8 Ball as a birthday gift. I would spend hours (admittedly, too many) asking questions to the large majestic ball then turning it over to reveal its answers. Those times felt simpler. Recently, as I was moving some of my daughter’s toys to the basement, I came across my trusted childhood treasure. I thought to myself, “Could the Magic 8 Ball help us answer questions relating to today’s market?”
Since the end of last year, global equity markets have rallied over 10%. Perhaps it doesn’t feel like it, but we have gained over half of the losses experienced in the correction. With that in mind, here’s a look at the questions I’ve received most often from clients recently, and what the Magic 8 Ball has to say about them.
2. Will the stock markets retest their lows before breaking higher?
The Magic 8 Ball says, “Cannot predict now.”
I have come across several sell-side reports that are calling for a retesting of the lows set in December. These forecasts are through the lens of technical analysis. While my team has healthy internal debates within regarding the merits of technical analyses, we all agree that for every “retest” thesis, we have seen a “no retest” from other technical analysts. Who do you listen to? At this time based on fundamentals and valuations, markets are attractive. They could dip lower, but in each example, highlighted in sell-side reports of a retest (1998, 2011 and 2016) and as seen on the market’s historical chart, the markets ultimately marched higher. Will investors ever have the ability to time it perfectly? Absolutely not. Could the markets move lower? Absolutely. But I believe that does not dampen today’s attractiveness.
3. Even if this is correct, will investors take advantage of it?
The Magic 8 Ball says, “My sources say no.”
Recency bias is a powerful cognitive error that tricks you into believing that what has happened will continue to happen. I believe that it’s one of the single greatest cognitive biases that help explain the difference between the market return and that of a typical retail investor. It is this dynamic that makes me challenge those investors who want to wait for the “potential” retest before investing. If markets were to retest the lows, what are the odds of investors actually investing? Sure, some investors will follow their investment plan, but the majority of investors become paralyzed with doubt during severe sell-offs and practice recency bias by sitting on their hands. Quite often, the market rallies quickly and investors are stuck sitting with cash only to invest later at higher levels making them worse off than if they had stayed invested. Investors’ decisions are based on prior market conditions and not on future prospects. This leads them to sell when they should buy, and buy when they should sell. I believe those who fear negative short-term market moves might be better off allocating capital using a dollar-cost averaging strategy. History would show that despite potential short-term pullbacks, more often than not the markets are at a positive one-year later (paywall). As experts will tell you, staying in the market helps investors in the long run.
At this point, I continue to remain positive for the remainder of 2019. After a tough 2018 for both equities and fixed income, I think the prospects for the current environment remain favorable for a global balanced asset mix.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.