As US stocks hit a 6 month low two weeks ago on October 15th, we wrote, "The CNN Fear and Greed Index hits "Extreme Fear" (but we're not selling...)" In hindsight that was a good call because US stocks, as represented by the S&P 500, rallied significantly over the next two weeks and closed at the 35th record high of the year on October 31st. The S&P 500 peaked September 18th at a record 2,011.18, but since fell 8.5%, which leaves the major average down 6.2% on the quarter and up just 1.6% on the year.
We commented specifically, "We don't fear the stock market, which goes haywire far more often than people remember. We fear our clients ordering us to do something stupid, like liquidate their portfolios. Fortunately, our clients have ridden through enough peaks and valleys at this point to be confident that this too shall pass. For any clients or prospects with cash on the sidelines, now would be a good time to invest, anyone who bought stocks October 16th would have gained 8.4% by month end, which is about what an investor would expect in a year. Or the investor could have earned 11.0% buying on January 1st.
The obvious question is: why didn't we jump out September 15th, at the previous market high, jump back in on the 16th. The answer: stock market movements in any time frame of less than a month are completely random. Any market timing strategy we have ever looked at, after subtracting commissions and taxes, yields substantially less than "buying and holding." So boring, and yet so true.
What does drive non-random stock market trends? Revenues, earnings, earnings expectations and interest rates. A helpful way to evaluate a world event is to ask, "how will this affect the earnings of General Electric, Pfizer and McDonalds." For example, how will a terror attack in the Canadian Parliament House affect the earnings of GE. Not at all? Then we should buy GE when some idiot attacks a government building, not sell. Two weeks ago, there was a bunch of bad news on world affairs, but earnings were fabulous (and that's why stocks are at a new high.)