Market Timing - Making Sense of the Noise

If you are a well-known investment analyst, can you make claims with little chance of hearing feedback? Perhaps the more contrarian your claim, the less pushback you receive.

Recently published, "Bear market rallies are fun to rent, but not to own". The claim is that this recent rally (S&P 500 up 26% since October 2022 lows) is just a short-term aberration. You had better be nimble if you want to participate, with the analyst declaring that "fundamental lows in the S&P 500 are simply not in". I would argue that no one knows if the lows are in, just as no one knows how far this rally could advance. It appears the analyst needs to justify his low exposure to equities due to his prediction of slower economic times ahead (not that anyone knows if a recession is around the corner....Tim).

But why label the current upward move to a Bear market rally? Isn't the definition of a Bull market, one that advances +20% from its recent low? Even if you don't like the economic backdrop, you do not get to change the definition of Bull to Bear!

The article goes on to argue that missing a 20% rally in stocks makes little difference in one's longer-term return... (the author reports) "emails that I have received these past few months that asked "How could we miss this rally??!! "

So is he correct that missing a +20% rally is of no consequence? How do you quantify his assumption? First, I need to know....

1. When were equities sold?

2. What is the plan for re-purchasing?

3. How is the cash invested, as you wait for a new entry point?

Let's pick two random dates to measure sample outcomes to date. Assume you had $100 to invest on January 1, 2022, and that you were bearish on stock markets. You invested instead in a widely diversified bond index. How would you rate your performance for the past 18 months as per the chart below relative to the S&P 500?

Over these eighteen months, the S&P 500 lost 3% and the Aggregate bond market lost 10%. Not an insurmountable differential. Perhaps bonds will start to outperform and the investor becomes indifferent to asset allocation.

But what if you went to bonds in the fall of 2022? Last year was especially difficult, with almost all asset classes doing poorly. Stocks sold off in June and then again in September. Some investors get fed up, underweight stocks and overweight bonds

Ouch!! Now that hurts. Bonds rally 4% and stocks rally 27%. Our famous analyst resorts to labelling the rally as insignificant and not a major setback to longer-term performance. In reality, his clients have a lot of catching up to do.

I am personally 60% in equity and 40% in bonds, so I experienced the highs and lows of both markets. Rather than predicting the future, I will rebalance back to 60/40 when my asset allocation moves significantly away from this goal post.

regards, Tim

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Tim Morton, CFA is a retired portfolio manager with 45 years of experience working with private clients and is the editor of mortonir.com and a contributor to Barron's. My comments are not to be taken as investment recommendations. They are purely for discussion purposes. Please see your registered advisor for investment advice.