Market Timing Backfires on $7 Trillion Rally as Stock Faithful Ride It Out

In the face of numerous challenges confronting Wall Street, it appears to be a rewarding year for those stock enthusiasts who opted for a patient approach, resisting the urge to outsmart the market. Contrary to 22 technical strategies employed by traders to navigate market fluctuations, the strategy of buying and holding equities has significantly outperformed, especially since the S&P 500 hit its 2023 low on January 5, steadily climbing to its peak on a recent Friday.

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Amidst a backdrop of Federal Reserve uncertainty, economic concerns, and geopolitical tensions, the stock market has exhibited an unusual level of calmness. This year, judging by the range between the extremes in the S&P 500, is on track to witness the smallest move since 2017.

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While technical tools are seldom used in isolation, their subpar performance underscores the challenges faced by those who heeded selling signals, whether based on technical or fundamental factors. Despite the Fed's most aggressive tightening cycle in decades, a three-quarters contraction in profits, and a collapse in multiple regional banks, those who exited the market have missed out on a remarkable $7 trillion stock rally.

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Dylan Kremer, Chief Investment Officer at Certuity, acknowledges the noise and reasons for nervousness in the past year but emphasizes the difficulty for long-term investors to resist the urge to take action. The S&P 500, up 0.2% over five days, has witnessed a six-week consecutive rise, the longest streak since 2019. Despite a slowing pace of gains as the index approached 4,600, it ended the week slightly above that threshold.

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From major money managers to equity strategists, many entered the year fearing a recession only to find themselves chasing the upward momentum of the share rally as the economy continues to progress. With a 20% increase, the S&P 500 surpasses the average year-end target predicted by Wall Street prognosticators back in January by more than 500 points.

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The perils of attempting to time the market are exemplified by Jamie Cox, Managing Partner at Harris Financial Group, who witnessed a client selling everything in November during a market pullback, only to incur a 15% loss weeks later.

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While staying invested proves to be a time-tested strategy, caution is resurfacing in the market. Hedge funds sold global stocks last week, and analysts at Goldman Sachs and Bank of America have issued warnings about potential losses in equities. The bearish outlook cites stretched valuations, the imminent earnings-related blackout on buybacks, and concerns that interest-rate cuts may not bode well for risky assets in an economic downturn.

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Despite charting indicators suggesting the market has moved too far, too fast, those who acted on such warnings have not fared well. Bloomberg's back-testing model reveals that seven out of 22 chart-based trading models are in the red this year, all performing worse than the simple buy-and-hold strategy.

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Market momentum underscores the risks of staying out of stocks in a year marked by swift rebounds following pullbacks. The S&P 500's recent round trip saw a 10% correction over three months through October, followed by a recovery three times faster. Missing out on significant up days proves costly, as demonstrated by the fact that the index's 20% gain diminishes to 9% without the top five sessions of 2023.

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Despite periodic market retractions, the persistent uptrend over the long term, fueled by corporate America's ability to expand earnings, remains intact. Corporate profits among S&P 500 firms returned to positive growth in the third quarter and are expected to accelerate next year.

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In this favorable environment, there is growing optimism that the benchmark index will reach a new record by the end of next year. Consequently, financial experts are advocating for a patient approach, emphasizing the challenges of market timing and the enduring benefits of a long-term investment strategy.