How should you think about the stock markets unpredictable future?

There are a few things that are so obviously true, and true for everyone, that no one argues about them. But most stuff isn’t black or white. Most of the stuff we argue about usually have many truths – several “right” answers depending on the person and situation

The continued trade war between the US and China is cited as the main culprit behind the recent market jitters, though there are plenty of additional geopolitical events vying for investors attention. Is the defensive market action seen last month justified? Are we headed for a recession, and perhaps more importantly for investors, does the bull market see a bear market staring back at it? These are just a few of the many thoughts running through the minds of investors.

Hedgeye Cartoon of the day Aug 26, 2019

A recent article from the Globe and Mail provides a simple (yet unwanted) answer to the question, "

where are the stock markets going

Published September 16, 2019 - Investor New

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The most accurate answer to most investing questions is the one investors least want to hear: ‘it depends.’

“Is this asset cheap? I don’t know. It depends how much time you have and what your stomach for risk is and what factors the broader market considers cheap and what factor future markets will want to bid up for and whether you’ve staked your career on cheap being a good thing. Ask different people and you’ll get different answers because there’s no right answer.”

People want answers and so they hate this. Investors specifically want to know where the markets are going, even if they know at the same time that accurate timing of asset price gyrations is impossible.

Confronted with this unpredictability, the best strategy for investors is to reduce questions on future market performance to a format of “If [X] happens, then [Y] will probably rise/fall.”

Market trends in 2019 have provided a great example of this. From December 24, 2018 to September 3, 2019, the yield on the five-year government of Canada bond declined from 1.93 to 1.14 per cent. The rapidly declining bond yields made dividend streams from defensive market sectors like utilities far more attractive to investors. As a result, the S&P/TSX Utilities Index appreciated almost 40 per cent (38.5 per cent) including dividends for the same period.

These trends shifted during the rest of September. The bond yield has changed direction and moved higher by about 0.35 per cent and the utilities index has dropped more than 0.5 per cent.

Using the formulation above then, the question as to where utility stocks are headed can be answered by linking them to bond yields. If bond yields continue heading higher, utilities stock prices are likely to lose some ground and the reverse case should also be true.

There are numerous examples where this If/then format has been working. The loonie has been tracking relative bond yields (government of Canada two-year bond yields minus U.S. two-year yields), metals prices have followed global manufacturing activity.

Importantly, this method is not foolproof. Relationships between asset prices can break even after years of close association. But as a thought process, it encourages investors to identify the main drivers behind the performance of their portfolio holdings and makes the effects of market volatility more intelligible.By, Scott Barlow, Globe and Mail market strategistThis is common in finance. You can count the number of things that are certain on one hand, so the “right” answer to most finance questions is just however much uncertainty you want to accept, which is not only different for everyone but constantly changing for everyone. People don’t agree on a lot of big investing points because they shouldn’t.

Does this strategy work? I don’t know. It depends what you consider “working” and how quickly your performance will be judged by your boss/client/investors/spouse. Again, there’s no right answer.

Should you care about this forecast? I don’t know. Depends how you’re already invested and how it’ll influence your decisions.

Should you save more? I don’t know. It depends how deeply you want to sleep at night.

Should we cut taxes? I don’t know. It’ll affect different people in different ways.

You can do this for almost every investment topic. The biggest things we argue about have risks, and risk just means the odds of success are less than 100% – either because something might not work for the intended person, or it’ll never work for an unrelated person. That’s why we’re arguing and debating. There are no right answers. I do things with my money that might make you cringe, and vice versa. But if it works for me and what you do works for you, so be it. Life is inconsistent.

We could stop there and it’d be enough. But the most important point here is acknowledging the risk that during your research you’ll be persuaded by the analysis and opinions of people who have different investment objectives and risk tolerance than you.

Maybe they have different timelines, or different needs, incentives, client demands, career/promotion quirks, sales targets, family matters, risk appetites, life experiences, cultural persuasions … on and on. I would never assume a champion bodybuilder’s diet and exercise routine would be appropriate for me. But for some reason the same thing doesn’t translate to finance, and yet we continue to watch CNBC to gain insight into a billionaire hedge fund manager’s latest moves.