When to get back into the market

By Jared Kadziolka, CFA 27 July 2023 4 min read

Investors are often counselled against trying to time the market, as it rarely works out in the long run. It’s not only challenging trying to pull your money out of the market before a major decline, but just as much of a gamble when trying to buy back in before a significant rebound. 

As much as investors know this to be true, they may still make investment decisions to the contrary. That’s because our natural emotional responses to market volatility coupled with convincing opinions and outlooks from experts and influencers can tempt us away from our investment plan. 

There’s never a shortage of opinions on current market conditions as well as speculation about what should be in store for the future, but typically one of these narratives ends up forming the general consensus among investors and industry experts. These narratives can be compelling and often make a lot of sense at the time—especially when examining past market moves with the benefit of hindsight. The unfortunate reality is that the market often does not follow the narratives that it’s assigned and can behave in unexpected ways. The most recent rally in major equity markets provided a hard reminder of this for investors that re-positioned their portfolios in an attempt to avoid further declines.

The most predicted recession that never came

In early 2022, most market observers agreed that a US (and global) recession was highly probable by 2023. In fact, public opinion was even more pessimistic with many believing that they were already in the midst of a recession in 2022.

This consensus wasn't unsubstantiated. Inflation was high and increasing, central banks were raising interest rates at a historic rate, business and consumer sentiment were at historic lows, the yield curve was extremely inverted, and the stock market had stumbled drastically.

And yet, here in the second half of 2023, not only are we not in a recession, but sentiment has become far more optimistic. A recession is not widely expected this year and the notion of side-stepping one all together—or a so-called ‘soft landing’—no longer seems unrealistic.

The market also shrugged off other negative headlines including the war in Ukraine and a run on US regional banks which led to the second, third and fourth largest bank failures in US history. 

The future is uncertain

Even though the market ultimately resisted the narrative, it’s understandable why many investors held a pessimistic outlook for their portfolios. Early in the year, even Wall Street strategists predicted a down year for stocks in 2023 for the first time in decades.

Projected annual change for the S&P 500

Source: Bloomberg

In addition, the past year saw guaranteed cash investments (like GICs and high-interest savings accounts) offering returns not seen in years. These attractive rates paired with negative market sentiment led many investors to opt for a comfortable, guaranteed return over the uncertainty of a volatile market. Unfortunately, as many investors made the decision to reduce their risk, major equity market indexes turned around and began to rally, leaving some investors behind.

Year-to-date index performance as of July 24, 2023

Source: Y-Charts

The chart above highlights how quickly markets can pivot, and how having an excess of cash can lead to missed opportunities. Investors that de-risked their portfolios and tilted to cash—with appealing yields in the 4 to 5 per cent range this year—would have seen far lower year-to-date returns of roughly 2.5 per cent on this component of their portfolios. 

Getting back into the market

Investors who pulled investments into cash may wonder what the best course of action is to get back to their target asset mix now that the market is recovering. Since markets have more positive days than negative days, fully redeploying cash back into the market usually leads to the best investment outcomes. An alternative strategy is dollar cost averaging where the cash is reinvested through a scheduled set of equal purchases over a specified period of time. This approach can help take the emotion out of reinvesting while also reducing the impact of market volatility and what could end up being a poorly timed lump sum. 

Final thoughts

As the markets have changed course, the narratives have naturally begun to shift more positively as well. That said, investors may continue to have many questions:

  • Are AI stocks a bubble or just getting started?
  • Have markets gotten ahead of themselves? Are they going to correct?
  • Will inflation continue to fall or will it spike again?
  • Are central banks done hiking? How long will they pause for before cutting rates?
  • Where is oil headed?
  • When will a recession begin?

Nobody can answer these questions with certainty, but the good news is that you don’t need to know the answers to be successful in your strategy. As we’ve seen over the past few years, markets are volatile and full of surprises, and predictions should be viewed more as entertainment than fact. 

As an investor, the best course of action is to find a disciplined investment strategy that’s right for you and do your best to stick with it long enough to reap the rewards of compounding. Not only does such a strategy provide the greatest likelihood of success, it also reduces the likelihood of future regret. 

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