Recently, an investor asked us if it was possible to use one of the leading economic indicators, or other indicators, for sector timing, “even if it’s only 70 percent accurate and only for a couple of weeks,” he said. We responded that it’s time in the market, not market timing, that will most likely lead to success.
Timing the market involves waiting until stocks are at their lowest point to buy, riding the success on the rebound, and then selling when the stocks are at all-time highs. This strategy requires you to be right twice: buying at the bottom and selling at the peak. Investments often drop, level out, and then drop again. So, when do you buy? Likewise, some stocks just continue going up. Timing is impossible—you will never be exactly right every time.
As for looking toward leading economic indicators, consider that the market is currently hitting all-time highs, but the yield curve has been inverted since July 2022. When short-term bonds pay higher yields than long-term bonds—specifically, the two-year Treasury and 10-year Treasury bonds—a recession typically follows within two years. An inverted yield curve has preceded each of the last eight recessions. Your guess is as good as ours as to when the market will turn.
We’ve seen investors try to use the moving average convergence/divergence (MACD), which shows the relationship between two moving averages in a security’s price, as an indicator to identify points to buy or sell. However, that also depends on which moving averages you use—daily, nine- or 14-day data. Did your eyes glaze over? Do you want to monitor price movements daily, hoping to find a trend? And then do this for all 20 to 50 stocks in your portfolio?
Furthermore, not all stocks or sectors can be accurately evaluated by MACD. There are many fundamental factors to consider, like financial strength, growth prospects, market capitalization, price-to-earnings ratio, dividend yield, book value, risk valuations, etc. Portfolio design can be more of an art than a science because not every investment can be measured using the same metric.
That’s not to say you can’t take advantage of the current environment. Consumer Staples companies can generally weather inflation, while Technology tends to do well in expansionary economic environments. However, look for companies that meet your fundamental criteria for investment, i.e., strong companies that could be long-term investments. These should be tactical moves for a portion of your overall portfolio, keeping in mind that by the time you see the trend in the economy, you may have missed the initial rise and end up paying a premium for those companies.
Investors are generally better served by dollar cost averaging investable assets into the market, investing a fixed amount at regular intervals over a period, thereby gaining the benefit of multiple points of entry into the market. You’ll buy fewer shares when the market is high and more when the market is low.
Your overall portfolio should be strategically designed based on your time horizon, risk tolerance, and financial goals. Investments should be chosen based on set criteria, such as financial strength, growth, and valuation.
If you have questions on the investments in your portfolio, the experts at Henssler Financial will be glad to help:
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- Email: experts@henssler.com
- Phone: 770-429-9166