There Is No Perfect Time to Invest
What happened last week?
- The S&P 500 gained 2.58%
- The Dow Jones added 1.25%
- The Nasdaq composite rose by 3.25%
This week, Fed Chair Powell makes his semiannual appearance before Congress on Wednesday-Thursday. In addition, investors will watch for any early signs of labor market cooling in the jobless claims data following a 0.3% increase in May’s unemployment rate to 3.7%.
Turning to stocks, the S&P 500 has roundtripped back to where it was when the Fed first raised rates.
3 Things to Know
Don’t wait for the ideal entry point
Many investors have waited for an ideal market entry point. That’s understandable given there has been a recession “on the horizon” for almost 18 months.
During the interval, they’ve been hoarding cash and shorting equities. Those who stay in cash will experience poor relative returns when markets recover — and 2023’s market action through mid-year demonstrates that a partial recovery is underway.
An “ideal entry point” would be a moment when all macro-economic risk is in the rear-view mirror.
But current circumstances aren’t like 2008 or 2020. We’re not experiencing a singular economic shutdown or a credit crisis that undermined the nation’s financial system.
We’re now in a rolling recession where some elements of the economy are contracting, others are expanding, and the Fed is committed to slowing the economy sharply to reverse stimulus-fueled inflation.
In 2023, investors who accepted the complexity and contradictions of this market and remained invested have earned solid bond market returns and an 11% rise in global equities.
Now that markets are up, investors on the sidelines wonder if they’ve missed “it.”
Such is the lament of the market timer. Missing the pivot points in markets can be quite costly. This is why waiting for the “perfect time” is a fool’s game.
What the Fed says vs. what it does
At its meeting last week, the Fed paused its rate hikes and also signaled it’s on track to raise rates further if inflation doesn’t cool fast enough. To confuse investors more, Fed Chair Powell spoke about hypothetical future rate cuts, while noting that core inflation measures have fallen much less than headline inflation.
Core CPI inflation was 5.3% over the past year, but excluding housing, it was 3.4%. In the period after the Great Financial Crisis and the COVID shock, central banks were promising “low rates forever” — exaggerating how long the Fed would stay easy.
This would tend to boost risk taking and economic activity. Promising a long period of tight policy would have the opposite impact. It would “yield more tightening” from the same interest rate level.
But what is clear is this: Inflation is slowing as rapidly as it ever has following a substantial global shock.
The Fed’s current estimate for inflation at the end of 2024 is 2.6%. But even if inflation is low, the Fed will respond to rising unemployment with lower rates.
Ironically, at the time unemployment rises and the Fed eases, we may be at the end of a rolling recession, presaging growth in markets in 2024. Remember, there is a history of inconsistency between Fed statements and actions.
Adopt an investment philosophy
We believe in the importance of having an investment philosophy, a set of principles that will inform investment decisions.
A thoughtful asset allocation that takes the entirety of a client’s wealth into account has the potential to deliver investment results over time. And we also believe in the idea of a “Core Portfolio” complemented by opportunistic investments.
The Core Portfolio is intended to be the majority of one’s investments and should be fully invested for the long term, diversified across asset classes and geographies, and regularly rebalanced to a set strategic asset allocation.
Opportunistic investments can be added, whether short or long term, based on ideas or themes that can broaden the return profile of the Core Portfolio as well as an investor’s risk tolerance and objectives.
Once you have a Core Portfolio that is suitable for you, the behavior one exhibits as the economy and markets zig and zag becomes highly relevant. When the world is abuzz with recession talk, for example, investment decisions can get postponed.
When cash yields appear “too high to ignore,” a disproportionate amount of cash can be set aside.
See our weekly CIO Strategy Bulletin for more details