Risk/Reward Vol. 330
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The Trump Rally continues. In the three weeks since the election, the Dow Jones Industrial Average has gained 4.5% and is up nearly 10% year to date. The S&P 500 is up over 3% this month and over 8% year to date. And of course EVERYONE predicted this should Trump win. NOT. Google the following phrase: "what will stock market do if Trump wins" and read the pre-election predictions from Market Watch, CNBC, CNN, Goldman Sachs and any number of market gurus. Can you say Armageddon? Now browse the reports after the election and find me one cogent article on why Mr. Market is go giddy? You won't find one. So what lesson is an investor to take from this? Most would say: "See, you cannot time the market." and/or "Buy the index because history tells us it delivers on average a 7+% annual return." These shibboleths are not explanations. They are articles of faith. And faith is not a sufficient rationale for me--not when it comes to investing. Remember, the world was flat---until it wasn't. And all swans were white---until Australia was discovered.
To reiterate, I am not troubled by their failure to predict the intensity of the move, but I am bothered that virtually all market prognosticators were directionally wrong. Am I the only one of us who is? And as for the index buyers and the "buy and hold" crowd, I direct your attention to the time period 1929-1954. It took the Dow Jones Industrial Average more than 25 years to reach the level it achieved before "The Crash of 1929". So where can one find predictability? Although nothing is foolproof, I believe predictability can be found in the bond market; more particularly in the market for the 10Year US Treasury. The election notwithstanding, all indications were that interest rates would increase, and they have (although no one saw the intensity of the increase). Given this level of certainty, one could prepare by selling interest rate sensitive securities, raising cash and awaiting a signal to re-enter.
I believe the signal to re-enter will come after next month's Federal Reserve meeting. I am looking for indications as to the number and size of the rate increases for 2017 with a rate increase in December of this year now a foregone conclusion. I have my list of purchases lined up, and I am ready to execute. Again patience is my greatest challenge. Having jumped the gun in the past, hopefully I can resist even as those holding index funds prosper. And prosper they have---predictability be damned.
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