What’s the Market Going to Do? Who Knows?

Here we are in June, and the market was doing really well until the first week in May. Since then, it has been down for five straight weeks. Although the market was up nicely Thursday, it was looking poorly Friday morning and, as I write this, is down more than 150 points on the Dow Jones Industrial Average.

Since we often compare notes on our respective views of the markets, Judy (my boss) walked into my office this morning with a cup of hot tea and sat down to discuss what I thought the stock market was going to do for the balance of the year.

My career is investment market research and portfolio management, so the subject matter concerns my expertise. I sat quietly as she sipped on her tea and awaited my input. My mind considered the possibilities. Finally, in a burst of brilliance, I said I had no idea what it was going to do for the balance of the year. I could build a case for arguing for higher prices and just as compelling a case for a decline in stock prices.

The truth is, no one knows what the stock market or other investment markets are going to do for the balance of the year.

You might then wonder why anyone would choose our firm to manage their investments. I have searched for nearly half a century for the firm or person who was the real investment guru but have come up dry. Whoever has a hot hand on calling the turns in the markets and has made a lot of money is almost always humbled when the market changes. Recently, those who thought home prices would rise forever have seemed to be completely humbled. A decade ago, the decline in the ‘sky is the limit’ tech sector showed many market gurus, who often presented their brilliance on CNBC, the cruel, cold world of reality. Some of these gurus are even spending a few years at the taxpayers’ expense in the hoosegow. Others who seemed brilliant were not, as it turned out, investment advisers but crooks who could cover their Ponzi-scheme tracks in a constantly rising market. It was the falling markets that exposed a lot of such schemes.

So, if you don’t know what this market is going to do, how do you invest your money and the money of your clients? The answer is: very carefully.

Lots of folks have derived seemingly foolproof investment schemes that you can plug your money into and then go about the rest of your life.

In the 1990s, a couple Nobel Prize winners devised a neat computer-driven investment program that seemed to limit the risk of loss and provide for handsome annual returns. It worked for a while, then crashed and became the collapse of Long Term Capital Management in 1998. Investors lost billions.

Others entrusted Bernie Madoff with tens of billions, and he made them seemingly handsome returns for years until his Ponzi scheme failed in the decline of the investment markets in 2007-08. When asked how he made money for his clients, he told them they wouldn’t understand. Nevertheless, thousands of people were duped by someone who appeared to know what the markets were going to do and could guarantee great returns.

Many people don’t understand that making a good return in one year is independent from making good returns (or avoiding losses) in ensuing years. In other words, you cannot tell what future performance is going to be based on past returns.

So how do you solve this knotty question of how you should invest your money in a system in which no one knows what is going to happen? The only system I have found that comes close is our ‘pay attention’ strategy. Pay attention every day the market is open and over the weekends and holidays, too. Take your computer with you on vacation and check in how things are going on Wall Street and in the other world markets. If you have money invested, either you or your investment adviser needs to be on top of things at all times. There are no vacations.

So as I stand vigil in the current market and economic situation, I am ready to sell everything at any time and move to cash as circumstances dictate. I do not like what is going on in Washington, D.C., our economy in general, Europe, China and other places of import to investors. I see a lot of issues that many are ignoring that might cause serious problems ahead.

Still, the markets have been great for the past two years, and I have grudgingly stayed invested as prices rose.

Now what? I don’t know. I am continuing to pay attention and adjusting portfolios a little each week. I am sure, however, that stock prices will rise, fall or stay the same.