As an investment advisor, I’m often asked my opinion on what I think will happen to the market on any given time frame. It’s one of those things like talking about sports or the weather. People just ask you what you think will happen so they can confirm their pre-existing bias, size you up, or argue with your opinion.
The other day I had a surprisingly common conversation with a casual acquaintance that went something like this:
Friend: What do you think about the market this year? Going to keep heading higher?
Me: The trend has been so strong that it’s difficult to bet against the herd, but I wouldn’t be surprised if we see a pickup in volatility at some point.
Friend: Yeah, But the economy is fantastic right now! How could it possibly go down?
Me: The stock market is not the economy.
Friend: *shakes head, squints*
This dichotomous relationship is one that many people have a hard time understanding. Stocks can move independent of what happens with employment, trade, economic output, and other fiscal factors. The market could begin a 10 or 20% correction tomorrow for some unknown and unforeseen reason that doesn’t even marginally touch the broad economic landscape.
2011 showed us that we could see a 20% drop from high to low without derailing the economic freight train. Early-2016 demonstrated more of the same. Energy stocks were crushed, small caps were in the toilet, and the “average” individual stock was more than 20% off its high. But we didn’t enter into any type of recession or prolonged bear market. The system shook itself off and proceeded to run higher even in the face of fear and adversity.
The same can be said in reverse as well. Continued growth in economic productivity doesn’t mean it will automatically translate into more gains in the stock market. Those forces may ultimately put pressure on raising wages, commodity prices, and interest rates to the detriment of many companies that are directly affected by those inputs.
My argument is not to prognosticate the direction of stocks or make spurious correlations to recent economic data. It’s to impart the idea that rigid adherence to an investment process you have come to trust is more important than pinpointing where we are at in the cycle. Avoiding the temptation to take on more risk when everything looks perfect and sidestepping the impulse to sell everything when the outlook appears bleak.
Any shifts that you do make to your portfolio allocation or risk profile should be done in incremental steps and with a carefully thought-out plan. This is especially true for money in long-term retirement accounts like a 401(k) or 403(b) where your investment options are limited, and you could potentially be penalized for over trading.
Always keep a level head when it comes to market sentiment and smile anytime someone gives you a “yeah, but the economy” response.
Disclosure : FMD Capital Management, its executives, and/or its clients June hold positions in the ETFs, mutual funds or any investment asset mentioned in this article. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.