Retest

Published On: September 26, 2022

Written by: Ben Atwater and Matt Malick

We have an old Wall Street Journal comic that a client gave us. It depicts a middle-aged man in a pinstripe suit on the ledge of a building. Through the closest office window, a chart shows a crashing stock market. Through the same window, the man’s assistant says “Don’t jump, Mr. Kulkin. The market just went back up 500 points.”

Right now, the market is retesting the June lows, which is ​a painful yet normal occurrence during market declines. Of course, there is significant concern that the market takes another leg lower. But it is impossible to know.

At the risk of sounding like a broken record, we cannot time markets​. ​And even if we got lucky with the timing once, ​we ​would ​need to time them right at least twice. First, to reduce exposure, then ​later to get back in the market. ​Market timers who plan to wait until the market calms down always miss the rebound.

​As we suggested in our note on Friday called Recessions, market timing is all the more difficult ​because markets anticipate recessions and normally recover long before the recession is over. Sometimes they even recover before The National Bureau of Economic Research officially declares a recession. In other words, even if you could time the economy, which ​you cannot, timing the market is a separate problem altogether.

Although more ​near-term declines are a serious fear, we can also point to two scenarios where we could someday see a new bull market begin.

One would be a Fed pause. ​The Fed may soon see strong evidence of a slowed economy​. If so, they could pause ​from ​raising rates to better gauge the effects of the lag in monetary policy on inflation. Many economists ​believe the lag between monetary policy actions and the effects on the economy can be 18 months.

Another would simply be a fall in the rate of inflation, particularly relative to economists’ estimates. This would be especially true if inflation readings improve for several months consecutively.

It is going to take some patience in the environment we are now experiencing. The Fed needs to stop inflation ​but cannot stop inflation with asset prices increasing. Even though we are all experiencing a significant financial setback, ​waiting it out​ and sticking to a long-term plan is always prudent​. It is hard to see any other rational course of action.