S&P 500: Even if you know the future, you don’t

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What happened?

I’ve been around a very long time when it comes to investing. I made my first stock market investment in 1994 after graduating from college and starting my professional career at Ernst & Young, a public CPA firm. I have hooked since. I successfully navigated the bubbles of 2000 and 2008, and one of the few financial experts quoted in a published article warning market participants of the upcoming 2020 COVID crash. Below is an excerpt from the article on yahoo finance:

“David Alton Clark, founder of Clark Capital, with 25 years of experience managing his own portfolio, clearly understands the full cycle that the market can follow. It successfully weathered the bubbles of 2000 and 2008 and the crashes that followed. Additionally, Clark was one of the few financial experts to call the COVID-19 crash advising investors to raise funds in late January when President Trump restricted travel from China. According to TipRanks, an investment platform that tracks and measures the performance of financial experts, Clark’s investment ideas have earned an average annual return of 25.3% with a success rate of 70%. Therefore, it’s no surprise that Clark held the No. 1 spot on TipRank’s Top 25 Financial Bloggers list for the majority of the previous decade.

Now please excuse me for being so wordy in detailing my credentials, but I wanted you to know that I am not a rookie. I have been here many times before and have some knowledge to pass on to you.

The macro-market narrative takes precedence

There are times in the market where macro and geopolitical issues tend to take a back seat to micro market achievements, misses/best wins, etc. lack.

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CNBC

We just went through a long period where the Fed supported the market with the ubiquitous “Fed put” in place. It seemed like nothing could bring the market down. Now, with the removal of the Fed put, macro indicators have taken over. Moreover, when the Fed went on the warpath of raising rates, many of the high-flyers fell back to earth.

Bear markets and recessions are necessary

Bear markets and recessions are a necessary evil. They serve to “take out the trash” so to speak. In an age of free money and zero interest rates, many risky, nonprofit business ventures are greenlit. Yet when the tide goes out, as Warren Buffett says, “It’s not until the tide goes out that you learn who swam naked.” The tide is definitely low and many companies have been caught swimming naked. This is why the S&P 500 index (SP500) (TO SPY) has been down substantially since the start of the year.

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S&P 500 Chart (Looking for Alpha)

I would now like to lay out a few lessons that I have learned over the years when I have attempted to invest successfully during times of market stress. As Huggy Bear would say, “I’m here to lay it out for you to play.” Let’s start.

Don’t fight the Fed

If you’ve been around for a decade, you’ve obviously heard the phrase, “Don’t fight the Fed.” Well, market participants need to realize that the “Don’t fight the Fed” mantra works both ways.

When the Fed supports markets with zero interest rate policy and endless liquidity via quantitative easing, high-growth speculative stocks soar to sky-high valuations. Yet when the Fed shifts gears and starts raising rates, those same stocks fall back to earth with astonishing speed. As the saying goes, “stocks go up the stairs and down the elevator”. Many are caught in the “sunk cost” fallacy syndrome. They overstay their welcome hoping for a turnaround and unfortunately end up as bag holders. I had to learn myself the hard way.

Ultimately, when you hear the Fed start talking about raising rates and unwinding the balance sheet, it’s time to lighten the high speculative stocks multiple. Take these recipes and save most of them in dry powder form to redeploy once the way is clear. The seeds of the coming boom are inevitably being sewn during the current recession. Next lesson learned; the pendulum always swings too far.

The pendulum always swings too far

Just as markets rally to unwarranted stratospheric valuations that seem irrational today, but seemed entirely appropriate at the time, they also fall well below their intrinsic values ​​during periods of market stress, such as today. today. The most often-quoted line on this was the colloquialism of Fed Chairman Greenspan, describing the market of the late 1990s as a time of “irrational exuberance.”

What makes things even worse now is algorithmic computer trading that pushes the markets to the limit in both directions. Many times this causes the market to overshoot and undershoot large amounts these days. The next lesson learned is to not try to be a fortune teller.

Don’t try to be Carnac the Magnificent

Carnac the Magnificent always knew exactly what was going to happen before he did. He was a character played by Johnny Carson on the Tonight Show! It was a bit very funny. For those of you who aren’t familiar, I suggest googling it and watching some skits.

When I invest in markets where the levels of uncertainty or volatility are extremely high, as is currently the case, I always wait for the end of the information or the event before making a decision on this What to do. The bottom line is that you’ll have plenty of time to catch the wave anyway. You’ll hear a lot of elders say, “I’m fine missing the first 10% upside for the increased safety margin of missing the potential 20% downside.” This is generally a good idea. Investing is a marathon, not a sprint. Which brings me to my final and most important lesson learned from my years of navigating these treacherous markets, even if you know the future, you don’t know the future. Let me explain.

Even if you know the future, you don’t know the future

There’s no shortage of ordinary fortune tellers, soothsayers and stock pickers who have no problem telling you what’s to come next, heck I’m one of them! Yet at the end of the day, even if you were able to see the future and know, for example, that the CPI figure was coming, you have no idea how the markets will react. We had a great example of this a few weeks ago when the September issue of the CPI was released on October 13 and came in full force. Before the October 12 release, there were an endless number of experts repeating the same line:

“If the next CPI figure is timely, it will cause the market to drop very sharply.”

To be completely honest, I totally agreed with them. Still, I haven’t made any bets before one way or the other, even though the odds were extremely high it was going to be hot.

There was a plethora of participants positioned lower due to the fact that the PCE number came in hot and there is a high level of correlation between the PCE numbers and the CPI. Thus, everyone was charged with benefiting from a downward move. Nevertheless, the market has a way of sniffing this out and that’s when a “heartbreaking” rally occurs. Catching the shorts with his pants down, so to speak. Every time everyone presses to one side of the boat, it capsizes. The market initially fell, but then rose 800 points in one of the biggest rallies in history.

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CNBC

So at the end of the day, even if you’re lucky enough to have advance warning of what’s to come, you still don’t know how the market will react. It’s quite an art to invest in markets as volatile as these. This involves layering new positions over time to reduce risk. You’ll want to have plenty of dry powder if the stock you’re interested in continues to fall, hence my investing motto “patience equals profit”. Take your time and build new positions slowly, averaging the dollar cost. Don’t try to time the market based on certain events. I am a maverick at heart. With the market down 20%, I am selectively and slowly building positions in stocks that I believe are trading below their intrinsic values ​​and offer buying opportunities. We are in a period of great uncertainty and volatility. This is why I take my time to slowly build positions and buy as much as possible on down days. Now, let’s sum this up.

The conclusion

Let me start by saying that no one can predict the future. The best we can do is assess the current state of affairs and use our experience, intuition and due diligence to make the best decision for ourselves. The market is at a point where it could just be an “ordinary” 20% correction, or the start of a major bear market. Only time will tell.

Additionally, there are some very important dates and events that I want everyone to be aware of before Q3 that could cause a lot of volatility. Below is a quick calendar reminder of important dates for upcoming events:

  • November 2 – Fed Decision
  • November 4 – Jobs Report
  • November 8 – Midterm
  • November 10 – CPI data
  • December 2 – Jobs Report
  • December 13 – CPI data
  • December 14 – Fed Decision

Personally, I think the Fed will “stop” and not “pivot” before the end of the year, because I see many signs that inflation is coming down and just hasn’t shown up in the numbers yet, because they are mostly retrospective. This will cause the market to rally on the news.

Final remark

Use articles like these as a starting point for your own due diligence before putting your hard-earned money at risk. These are my thoughts on the subject, I look forward to reading yours.

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The true value of my articles is provided by the prescient remarks of Seeking Alpha members in the comments section below. Do you think we will end the year in the red or the black? Why or why not? Thank you in advance for your participation.

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