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Which Way is the Market Heading From Here?

Do you feel a bit crazy when you read headlines for the stock market?  Yesterday “experts” were claiming that we are on pace for a 30,000 Dow and that this bull run still has a lot of gas in the tank, and today they are warning us that this looks eerily like 1987 all over again and we’re beyond overdue for a huge correction.  Who are we to believe, and how can we make sense of all the noise out there?

For starters, let’s be clear – no one knows what’s going to happen tomorrow.  James 4:13-15 warns us:

“Now listen, you who say, ‘Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money.’ Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes.  Instead, you ought to say, ‘If it is the Lord’s will, we will live and do this or that.’” 

As common sense would tell us, no one has a crystal ball, and trying to predict the future of the stock market is essentially me trying to guess how you’re going to be feeling tomorrow or next week.  At the end of the day, the stock market is a big voting machine and is driven by supply and demand.  Yes, there are fundamental prices and values to the companies, but those have little to nothing to do with the daily ups and downs of the markets.  

Does that mean that all of the information and statistics out there are useless?  No, of course not.  We can learn from history and rely on both the numbers and human tendencies to help us make informed and wise decisions.

Leading Indicators

There are many leading indicators, things that point ahead of time (which is why they’re “leading”) to changes in the wind for the stock market.  These include hours worked by manufacturing workers, unemployment claims, new building permits and many others.  There’s no “silver bullet” indicator that is always correct or predictive and that will prevent you from participating in market corrections, but in general these indicators can give us some warnings before we enter into major corrections or recessions.  As of now, most of these indicators would say that we’re not approaching a recession and volatility and growth should be somewhat normal for the time being.

How High Can This Go?

Stocks continue to reach record highs, and the current bull market has reached the second longest streak without a 20%+ correction behind only the 4,494 days between December 1987 and March 2000.  Does that mean we’re at the end?  No, but common sense (and history) would say that all good things must come to an end, that cycles are inevitable and seasons are part of how God established the world.  Everyone will acknowledge that a correction or recession must come again, but no one knows when.  Logically, each day that passes brings us one day closer to when it will happen.  But it’s felt this way for about two years now, and if you were to have timed the market and been on the sidelines for the past two years to try to avoid the inevitable, you would have missed out on 30%+ gain in the Dow.

We’re Mostly Dumb Sheep

No, of course not you.  I’m talking about your brother-in-law.  Seriously though, we know that we as humans tend to make bad investment decisions because we make them based on the emotions of fear and greed.  We also tend to follow the herd and do as we see others doing, blind to the dangers ahead.  We’d like to think that our current decisions aren’t being made on emotions but are instead based on sound research (Google), intuition (read “emotions”), and prudence (again, “emotions”).  Instead of a disciplined process, we react to the headlines and our fears and hopes for the future.

It’s All About the Money

The ultimate reason for the conflicting headlines?  Money.  Not to try to help you make more money, but to help the news channels make more money.  No one wants to read about a boring market, wealth accumulated slowly, or sound principles of stewardship.  Rather, we live in an era of sensationalism, sound bites and social media that is never turned off.  The way that these companies make money is by you clicking on their headlines, and the only way they think you’ll click on their headlines is to bait you by either promising wealth or helping you avoid disaster (which will lead to more wealth).  Of course they know they can’t do this.  If they could, they would be running a hedge fund instead of writing seductive articles.  But they know we’ll keep falling for it, so they’ll just keep on writing blatantly contradictory articles.

Turn it off

The best thing you can do is to laugh at it all.  When you see a headline forecasting a sudden drop or increase (by sudden I mean anything in the next year or shorter), recognize the bait for what it is, and find something more worthwhile to read.  Instead, say to yourself “If it is the Lord’s will, the markets will do this or that.”  He is in control, He is not asleep at the wheel, and He is not wringing his hands over the latest housing numbers or earnings reports.

Be Honest with Yourself

Finally, take an assessment of how much risk you are taking on right now.  There is certainly danger in taking on too much risk right now because at some point this bull market will end.  But there is danger in trying to time the markets as well.  Instead, make sure that you have enough in conservative investments to last you for 5-10 years, long enough to ride out any corrections that will come along.  If you don’t have this much in things like bonds, you may be setting yourself up for more anxiety than is needed when we do have the pullback.  While bonds likely won’t be a great place to make a killing in the decade to come, they can certainly keep you from getting killed.