As a pundit of sorts, I try not to pay too much heed to what other pundits say, lest I get caught up in the kind of groupthink that often prevails. Pundits can be persuasive, and I know all too well that those who get exposure do so largely because they can present a convincing argument. They usually have a way of sounding certain about their predictions and analysis, even in a market defined by uncertainty. That is why what we are seeing right now is so surprising, with a lot of talking heads coming on financial TV to say that they don’t know where stocks are going. They, who have made a living off of sounding certain, are cautioning us to beware of those who do sound certain.
As I said, I am in the predicting business and am therefore one of those people, so I am not being critical here. Far from it. Saying essentially “I have no idea where the market is going” is frustrating for someone who is paid to predict things, but right now, that is the only honest analysis that is possible to give. Admitting to uncertainty is better than picking a side, then advancing it as a definitive conclusion, indicating in the process that you are smarter than everyone else. And if you do an unbiased analysis, uncertainty is the only logical conclusion.
That is about to end, though.
Over the next few weeks, we will get some idea of what to expect for months, even to the end of this year. CPI data comes on Thursday, and earnings season gets underway on Friday. Tomorrow, investors will learn how effective the Fed’s actions to this point have been in controlling inflation, then earnings will tell us if the efforts have done much damage to corporate profits. That is the information we need to make an informed guess at what is to come. Until then, though, the best thing that we can do is to look at what the market is currently expecting. Market moves on data releases and news are always about how the numbers stack up to expectations, so it is important to understand the base case as it stands when going into a period of critical data.
In the stock market, the current mood is positive. There was significant selling to close out 2022, but with hindsight and given the upward trend so far this year, that looks more like tax-loss harvesting and portfolio adjustment than it does a move based on a long-term view of stocks. There is a feeling that inflation is moderating without too much recessionary pressure, and stocks are reflecting the possibility of a soft landing and a policy reversal before too long.
The major stock indices have all moved higher in the first week and a half of the year, but the fact that risk-oriented measures such as the Russell 2000 and the Nasdaq Composite are leading the way suggests that this is a reversal of the flight from risk we saw in the second half of last year, rather than just deployment of cash generated by sales on the way down. If that sounds like a good thing, though, think again.
The problem is that it means that expectations for both CPI tomorrow and earnings over the next few weeks are positive, but that the “good news” is priced in, to some extent. While that is not bad in itself, it means that if the collective data is positive, there will be little or no reaction, whereas any disappointment will see a rapid retracement.
From a trading perspective, therefore, I will be favoring a bearish tone, not because I think the news will be bad, but because that makes sense from a risk/reward perspective. However, from a long-term perspective, the one thing that is almost certain is that five or ten years from now, the stock market will be higher. The economy has grown significantly over the last few years, even with the pandemic, and will continue to do so. Even if we have an issue right now it will be temporary, almost by definition.
So, for investors, timing is the key. I would not make any major moves in front of the upcoming numbers and news but will be looking to buy once we are through it, almost no matter what. If we move lower, my purchases will be more conservative, if higher, more risk-oriented, but either way, the state of play as we go into this critical period makes it likely that buying on the other side of it will be a winning strategy.
* In addition to contributing here, Martin Tillier works as Head of Research at the crypto platformSmartFI.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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