(This was written in January 2023 but has been held up in compliance...with a few tweaks we publish this blog today. Late but the ideas are sound.)
Every few years there is a new cycle in the stock and bond markets. The guys in the media like to define these cycles as Bears and or Bulls. Its easier on them to use these words than to explain whats going on in the world. They like to trapse out, on TV and print, the guys who made a 'call' earlier in the cycle and have them tell you what IS GOING TO HAPPEN NEXT. They are rarely correct, but it makes for good viewing. When I started my career, it was Robert Prechtor. You see back in the early 80s Prechtor came up with a way to apply a theory: The Elliott Wave theory, to the markets at that time.
Some background: according to Investopedia, The Elliott Wave Theory is a theory in technical analysis used to describe price movements in the financial market. The theory was developed by Ralph Nelson Elliott in the 1930s after he observed and identified recurring, fractal wave patterns. Waves can, according to Elliott, be identified in stock price movements and in consumer behavior. In short, an investor trying to profit from a market trend could be described as riding a wave.
The theory gained popularity when Elliott made a prediction in 1935 of a stock market bottom. Of course Elliott made it clear that patterns do not provide certainty but today there are thousands of devotes that follow his methodology.
So, Prechtor was one of these guys and in 1984 he won the US Trading Championship (yes...an award and an award show exists for every industry that has egotistical people in it) and in October of 1987 he had predicted that the waves were calling for an end to what he had called a "super bull market". The market dropped approximately 22% in one day. Black Monday as this event was called cemented Prechtor in the minds of investors on Wall Street...he was a rock star!..for a few moments...
You see, the reason I gave you the background on the theory and Prechtor himself is that I am betting you have never heard of him. And yes, he still writes a news letter! Monthly! You have never heard of him because he really hasn't been correct in his predictions since the 80s. You see he predicted that the market would rally in the 80s but then predicted in 1987 that the market would drop to 3600. It ultimately did, but as the August 1993 headline in the WSJ stated "Robert Prechter sees his 3600 on the Dow – But 6 years late".
Today we stand at the start of a new year. The S&P500 dropped double digits last year. The NASDAQ was far worse and the FAANG stocks were down over 50%. The US bond market had its worst year EVER. The media, in order to sell advertising and the market pundits in order to attempt to make a name for themselves, are all chiming in with their predictions for the markets in 2023. Up 20%, down 20%...down 20% then finishing up 40%. Deutsche Bank Binky Chaduh sees the S&P500 rally in the first quarter then drop 33% in the third quarter. Morgan Stanleys Chief Strategist, Mike Wilson, is calling for the markets to fall another 30 percent by yearend based on US company profits dropping to 2008 levels. He expects the worst year for the US markets since the global financial crisis.
Now Mike is a little like Prechtor. Mike made a call earlier this cycle where he thought the market would drop. Yes, Mike was correctly negative earlier this year but up until mid December thought the market would go up. Now its going to drop 30%... One might call him a trader and I would be in that camp if my head wasn't so whipsawed following these guys 'advice'.
Where does that take us? I think it leads to the concept of investing versus trading. Yes, the media needs to sell its wares, but we do not have to be willing buyers. Yes, the market will fluctuate, but we don't have to be scared. Yes, there are problems in the economy/politics/environment/life BUT...when haven't there been? Yes, there are intelligent people who will get lucky and call the top and or bottom of the stock market. And yes, you will not remember any of these people's names in five years.
Information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information.
A professional adviser should be consulted before implementing any of the strategies or options presented.