For those who are waiting to get back into the market...

[Markola]

The OP thinks he can outsmart Wall Street. OK. Thanks to staying diversified and fully invested, we both semi-retired at 54.

 

[MichaelB]

<mod note>
A reminder, this forum is specifically to discuss market timing and related concepts.

Discussions about market timing, individual stocks, commodities, bitcoin, precious metals and all other alternative asset classes. How to select and evaluate a financial advisor. This is NOT the forum to debate passive vs active or if the use of advisors is appropriate.

If you don’t agree, fine, just move on and let interested members have their say.

 

[BrianB]

I'm starting to slowly buy more S&P500 index in our deferred accounts. Dividends & CG's have been accumulating and are above our targets, so we're buying $1k / month of FXAIX.

So far, our purchases are under water, but only a few %. I'm trying to be optimistic (long view) while pessimism (short view) runs wild. I guess that makes me a contrarian?

BrianB

 

[Markola]

<mod note>

A reminder, this forum is specifically to discuss market timing and related concepts.





If you don’t agree, fine, just move on and let interested members have their say.

My bad. I didn’t notice which forum this one is.

 

[cyber888]

Since I'm retiring next year, I took a big chunk of my 401K equity out when S&P hit around 4,000, and that cash is earning 4.06% in a fixed asset, 90% of which I can transfer back to equities anytime. It lets me sleep well at night. I'm starting to nibbled back into the S&P at 3,700 level, just a little nibble. I believe S&P500 can dip to 3000-3200, since there is no Fed Put until 2023; interest rates will continue to go up - we still have 5 - 6 more rate hikes all the way to 2023; I don't think inflation will slow down in a few more months; the Ukraine-Russia war will continue to take a toll on gas prices and world inflation, and supply shortage. We're not in a recession yet, but with 4-5 more rate hikes, the Fed could force a recession to put a stop to inflation. But will it stop? Well, inflation is a supply-side issue, and how far will the Feds go to create a Demand Destruction .. We could still have inflation and slower growth with high rates, leading to Stagflation. And yeah, Stagflation is bad - that's a double whammy.

 

[NW-Bound]

To have demand destruction, some workers need to be laid off. For well-to-do people, you shrink their portfolio.

It's too bad nobody tries or figures out how to grow supply. But this is not new. Destruction of anything is easier than contruction.

 

[RobLJ]

Personally, when my stock allocation goes down 3-5% I usually rebalance. I've added stock funds twice already this year, so I'll probably allow it to drift down towards the down 5% mark before I allocate more cash. I built up cash the last 5 years, to an almost ridiculous point, since other than the COVID crash, I viewed the S&P and Nasdaq PEs as just as ridiculous and indefensible as my cash allocation (over 20%), although not as bad as 2000 (when I also sold the S&P gains).
I am not taking SS yet, so the cash allocation isn't quite as ridiculous as it might seem, although when the S&P was going to the moon, of course it would be sneered at, by some. After I and DW take SS, then betting on the market will be more, I hate to say prudent, but SS will pay for most of our expenses, so the stock piece won't matter, as much. I realize this is anathema to OldShooter and others, but having to withdraw money by selling stocks that have just dropped 20-40% in a very very very down market reminds you that the theoretical gains in the market and your portfolio over 30 years is great, but right now, you're not withdrawing over 30 years, you're withdrawing right now in the present, before SS comes in, while the market is dropping 20% or more. I get a little annoyed at the 100% stock pounders here but realize that most of them don't even need to withdraw from their 401ks, for a variety of reasons.

And the very worse thing is to sell in a panic, so assessing your own market risk and withdrawal plan is more important than what people will tell you you might have 30 years from now, if the market goes as planned and you invest a theoretical 100% in the market over 30 years. In withdrawal stage, 30 years matters, but not if you have to sell your NASDAQ fund after it is down 30% to fund this year's expenses. I don't mind trimming some gains when the market runs up, even if it means I will die with 500k or 2 million left in my portfolio 40 years from now when I'm 105.

I'm just keeping it real. The psychology of investing is as real as your theoretical gains over 30-40 years, if you can avoid selling in a big downturn. If you're comfortable with 100% stocks and won't be ravaged while you are withdrawing 5% with a 40% downturn, power to you, and perhaps your heirs will be very happy, more happy than you!
Investing is really easy when stocks are going up, is the main lesson I have learned in 30 years of investing.

 

[luckydude]

I am in the process (finally) of liquidating some inherited RE and expect to net an amount equal to 25x my HH expense. I will DCA into the market once Fed stops raising rate and inflation rate shows a multi-month downward trend. I don't think the market will bottom out until that happens. Until then, it's cash & CDs for me for this little stash.

 

[jm67]

On several threads I’ve seen the argument that inflation won’t decrease until the Fed rate exceeds the inflation rate, and thus we have years of economic pain ahead. Can someone explain in basic terms why this is? I would have thought there would be a non-linear impact of increasing interest rates & inflation would start falling quickly as the Fed ratchets up rates.

 

[pb4uski]

+1 I can fully understand that higher interest rates dampen demand which in turn reduces inflation, but I don't understand why the interest rate would have to exceed the inflation rate for it to dampen demand enough to reduce inflation.

 

[MichaelB]

It’s conceptual. If the inflation rate is higher than the interest rate, people will borrow, buy assets, sell them in the future at the higher inflated price, pay the debt and have money left over. This will lead to increased current demand, making inflation worse. For example, real estate.

If the expectation of future inflation is higher than current interest rates people will also pull forward future purchases of durables and capital goods and borrow to pay for them, concluding it is less expensive than waiting.

The only way to break his cycle is to force interest rates up until they discourage demand, which happens when people conclude they are better off waiting to purchase.

 

[daylatedollarshort]

+1 I can fully understand that higher interest rates dampen demand which in turn reduces inflation, but I don't understand why the interest rate would have to exceed the inflation rate for it to dampen demand enough to reduce inflation.

Interest rates higher than inflation provide real returns for savers, encourage saving over spending, and reduce demand. If inflation is running 10% and you can only get 5% on your investments, it makes more sense to buy a car this year instead of saving your money. Next year the car will be 10% more expensive, and your invested money will be worth 5% less than it was this year. But if those numbers are reversed, then you might decide to hold off buying the car and earn some real interest on your money for a year or two.

Related links: Even after Wednesday's Fed hike, experts say interest rates remain far too low - The 'real' rate after subtracting inflation makes borrowing a bargain. https://www.cbc.ca/news/business/fed-neutral-real-interest-rates-column-don-pittis-1.6489433

Surging Wages Are a ‘Super Core’ Push to Inflation, Summers Says - “In order to reduce inflation, you need to raise real interest rates above their neutral level ,” Summers said. So if inflation is running at 3% to 4% and the neutral real rate is 0.5 percentage point, “then you're going to have to be up in the 4.5 to 5 range to get inflation meaningfully down,” he said." - https://www.bloomberg.com/news/arti...ging-wages-are-a-super-core-push-to-inflation

".. if the Fed wishes to avoid a replay of the stagflation of the late 1970s and early 1980s, it needs to recognize the extraordinary gulf between Volcker’s 4.4% real interest rate and Powell’s -2.25%. It is delusional to believe that such a wildly accommodative policy trajectory can solve America’s worst inflation problem in a generation." - Jerome Powell’s Volcker Deficit by Stephen S. Roach - Project Syndicate (project-syndicate.org)

 

[copyright1997reloaded]

Interest rates higher than inflation provide real returns for savers, encourage saving over spending, and reduce demand. If inflation is running 10% and you can only get 5% on your investments, it makes more sense to buy a car this year instead of saving your money. Next year the car will be 10% more expensive, and your invested money will be worth 5% less than it was this year. But if those numbers are reversed, then you might decide to hold off buying the car and earn some real interest on your money for a year or two.

This. This. This. (Saying it three times.)

Once consumers have inflation expectations, they will BUY NOW instead of waiting. From the Federal Reserve G9 report: (https://www.federalreserve.gov/releases/g19/current/)

In April, consumer credit increased at a seasonally adjusted annual rate of 10.1 percent. Revolving credit increased at an annual rate of 19.6 percent.

We have had 10+ years of declining money velocity which helped to cap inflation even with an accommodative fed, then super accommodative starting Spring 2020 due to the pandemic.

I *personally* bought TWO new vehicles in the last 7 months because I expected prices to continue rising and locked in 0% financing in doing so. While one of those you could maybe consider necessary to replace an old car, the second one was primarily fueled by the above reasoning. (I have four vehicles for two people in total.)

 

[jm67]

This. This. This. (Saying it three times.)

Once consumers have inflation expectations, they will BUY NOW instead of waiting. From the Federal Reserve G9 report: (https://www.federalreserve.gov/releases/g19/current/)

We have had 10+ years of declining money velocity which helped to cap inflation even with an accommodative fed, then super accommodative starting Spring 2020 due to the pandemic.

I *personally* bought TWO new vehicles in the last 7 months because I expected prices to continue rising and locked in 0% financing in doing so. While one of those you could maybe consider necessary to replace an old car, the second one was primarily fueled by the above reasoning. (I have four vehicles for two people in total.)

Except this logic assumes that consumers have infinite resources - the only issue is when they’ll make a purchase. For a lot of consumers the reality is that they can afford a $400 car payment, but not a $500 payment, so rising rates will preclude the purchase even if it is theoretically advantageous to purchase now vs later. I.E not everyone can afford to buy four cars they don’t need right now to stockpile for later.

 

[copyright1997reloaded]

Except this logic assumes that consumers have infinite resources - the only issue is when they’ll make a purchase. For a lot of consumers the reality is that they can afford a $400 car payment, but not a $500 payment, so rising rates will preclude the purchase even if it is theoretically advantageous to purchase now vs later. I.E not everyone can afford to buy four cars they don’t need right now to stockpile for later.

re: Infinite resources - very true and an excellent point.

I bought two new ones, I already had the other two.

However, consumer expectations causing demand pull is a real thing. For example, it is discussed in this 2007 Bernanke speech:
https://www.federalreserve.gov/newsevents/speech/bernanke20070710a.htm

Quote:

[T]the extent to which [inflation expectations] are anchored can change, depending on economic developments and (most important) the current and past conduct of monetary policy. In this context, I use the term ‘anchored’ to mean relatively insensitive to incoming data. So, for example, if the public experiences a spell of inflation higher than their long-run expectation, but their long-run expectation of inflation changes little as a result, then inflation expectations are well anchored. If, on the other hand, the public reacts to a short period of higher-than-expected inflation by marking up their long-run expectation considerably, then expectations are poorly anchored.”

We are now there....the reason that the Federal Reserve (and the markets?) are getting so spooked is that consumer inflation expectations are rising. This is more of a factor than the 8.6% CPI print, and Powell even referenced (a couple times) the surprising (to them ha ha) increase in the latest survey.

 

[daylatedollarshort]

Except this logic assumes that consumers have infinite resources - the only issue is when they’ll make a purchase. For a lot of consumers the reality is that they can afford a $400 car payment, but not a $500 payment, so rising rates will preclude the purchase even if it is theoretically advantageous to purchase now vs later. I.E not everyone can afford to buy four cars they don’t need right now to stockpile for later.

Most people understand inflation. They see it at the grocery store and gas pump. Do they follow what The Fed is going to do with interest rates? Probably not. Interest rates don't always go up with inflation which is why we had stagflation for so many years, and why it is a concern now because the Fed hasn't jumped on inflation soon enough. Inflation expectations are setting in. Now they might be doing too little, too late or else they have to do some pretty dramatic rate increases. They've got a ways to go to even get to 0% real returns, let alone the over 4% real returns that Volker instituted to finally end stagflation.

 

[mcbraemer]

Not really planning to get back in cause I never got out.

Not really planning to get out cause I never got in ?

 

[Out of Steam]

Except this logic assumes that consumers have infinite resources - the only issue is when they’ll make a purchase. For a lot of consumers the reality is that they can afford a $400 car payment, but not a $500 payment, so rising rates will preclude the purchase even if it is theoretically advantageous to purchase now vs later. I.E not everyone can afford to buy four cars they don’t need right now to stockpile for later.

Another factor is that, beyond a few months, little-used or unused cars store quite poorly. When I was a child, my father was burned twice by buying older used cars with low mileage. It made enough of an impression that I've been a new car buyer.

 

[copyright1997reloaded]

Another factor is that, beyond a few months, little-used or unused cars store quite poorly. When I was a child, my father was burned twice by buying older used cars with low mileage. It made enough of an impression that I've been a new car buyer.

Very true, but I use them. Consider it part of that "Blow that Dough" kind of thing for me.

 

[RetiredAt49]

The JP Morgan analysis had a similar finding: Someone who invested $10,000 in the S&P 500 on Jan. 1, 2002, would have a balance of $61,685 if they remained invested through Dec. 31, 2021. By missing the market's 10 best days over that 20-year period, they would have $28,260.

 

[Dtail]

Just don't see the Fed raising rates anywhere near the 1980's type of yields irrespective of the inflation rate, even though many of us would jump on those rates as substitute fixed income investing over stocks at least partially.

 

[Unpaintedhuffhines]

The JP Morgan analysis had a similar finding: Someone who invested $10,000 in the S&P 500 on Jan. 1, 2002, would have a balance of $61,685 if they remained invested through Dec. 31, 2021. By missing the market's 10 best days over that 20-year period, they would have $28,260.

Interesting. Had not seen this analysis, but it supports my theory that one should not try and time the market. If you get in and out you have to be right twice. Set it and forget it!

 

[HarryHawk]

The JP Morgan analysis had a similar finding: Someone who invested $10,000 in the S&P 500 on Jan. 1, 2002, would have a balance of $61,685 if they remained invested through Dec. 31, 2021. By missing the market's 10 best days over that 20-year period, they would have $28,260.

For this to be a meaningful analysis, it seems like the calculation should also be reported on the value if one was out of the market for the 10 worst days.

It's somewhat meaningless to assume one was in the market for all the down days, and missed all the up days. The conclusion may certainly be the same with a more complete set of data, but it's hard to draw any conclusions when data is cherry picked to support a point.

 

[copyright1997reloaded]

The JP Morgan analysis had a similar finding: Someone who invested $10,000 in the S&P 500 on Jan. 1, 2002, would have a balance of $61,685 if they remained invested through Dec. 31, 2021. By missing the market's 10 best days over that 20-year period, they would have $28,260.

Interesting choice of dates...which miss the big downturns between March 2000 and Dec 2001 and between Dec 2021 to today.

On 3/19/2000, SPY was at 153.56 dropping to 117.62 at year end 2001, a 23.4% loss.

Looking at 3/19/2000 to now, (395.09/153.56 = 2.573X. So, that $10,000 if invested 3/19/2000 would be $25,728.

An interesting analysis would be one that looks at each 20 year period (across every day not cherry picked dates) and compared results w/missing the 10 best days AND 10 worst days.

If I weren't so busy doing "outdoor" projects in 95+ degree heat, I might just do the analysis for fun.

 

[COcheesehead]

The (very date selective) stay in the market statistics are always from firms with a vested interest in keeping you in the market. LOL.
One has to have their own strategy which may include rebalancing, changing your allocation as you age, your risk tolerance changes or other life factors come into play.