November is upon us. In the month of October the broad market saw a sharp reversal from the minor market correction that began in August and fully took root in September. In a matter of a few months the pains from the sudden and swift correction have come and gone. Though we are not back to the market highs seen earlier this year, the market has retaken territory it held throughout the spring and summer.
Even with the market’s recent reversal, a general hesitancy can be felt within the hearts and minds of individual and professional investors. On the forefront of concerns is the action or non-action of the Federal Reserve. December’s next meeting is yet another opportunity for the Fed to increase the Federal Funds Rate. This causes a fear that increased lending rates will discourage economic expansion and trigger a contraction of economic activity.
Beyond the headline grabbing Fed, the fact remains that we are in a heavily aged bull market (Around 6.5 years). For a long-term investors, entering in a late stage bull market equates to a limited upside opportunity and the threat of a sizable downdraft. For those with a more short-term orientation, the quest of when to switch from a long to short market position is a question that longs to be answered. For both groups of investors, the dream of a crystal ball is a sought after goal.
Though a crystal ball isn’t going to fall in our laps, we do know that business and economic cycles exist and are as real a part of our society today as they have been in the past decade and previous century. We are not at ‘the end of history‘ as some were led to believe at the point of the most recent tech and housing bubbles. Just as weather forecasts often falter, the daily and weekly market movements may seem erratic and unpredictable. Yet, no matter how inaccurate our weather’s forecasts are, we still recognize seasonal trends that occur annually. The market’s general trends are akin to seasonal changes, without the certainty of an annual calendar.
For a great explanation of the topic discussed above, I would suggest hedge fund legend’s video putting in the most basic terms how the economy works.
How the Economic Machine Works – Ray Dalio
The bottom line is that we are some where in the latter innings of a bull market. The upside is limited compared to what was 2, 3, 4 or 5 years ago. This doesn’t mean that you should totally pull out of the market, but it is a directive to become more watchful of your portfolio’s positions. One good practice is to begin to set stop-loss orders. This would enable you to place a buffer from large losses that could be incurred within your portfolio.
Perpetual growth is a delusion. Remain watchful and stick to your game plan no matter what hype may say otherwise.