The single best piece of advice for timing the market is: Don't fight the Fed. It is very simple, but most people complicate it and are constantly looking for reasons that it shouldn't apply.
All we have to do is look back at how the market acted starting in 2009 and then in 2020 when the Fed flooded the market and the economy with cheap capital. Much of that capital flowed into equities, and it didn't take a genius to ride the wave of liquidity.
We are now dealing with a hawkish Fed for the first time in many years. The Fed has just started raising interest rates and is beginning the process of shrinking its balance sheet with quantitative tightening. This process is going to extend well into next year, but many market players are hoping that the bear market is nearing an end and that we will soon see a new uptrend develop.
Without the Fed-provided liquidity, it is going to be extremely difficult for the market to produce sustained upside.
The Wall Street Journal explored this issue Tuesday and stated: "Going back to 1950, the S&P 500 has sold off at least 15% on 17 occasions, according to research from Vickie Chang, a global markets strategist at Goldman Sachs Group Inc. On 11 of those 17 occasions, the stock market managed to bottom out only around the time the Fed shifted toward loosening monetary policy again."
In other words, don't fight the Fed. The market did not form a solid bottom until the Fed was dovish once again.
The current market circumstances are unlike anything we have seen before. The Fed still has a hike or two of 0.75% coming and any number of smaller rate increases into next year. The danger of a recession is building, and they're still no signs that inflation is easing.
The Fed is not the friend of the market right now, and we have to accept that fact.
The market will still be able to manage some counter-trend rallies, and there are many stocks that have been in bear markets for over a year that may start to see some relative performance, but without Fed-driven liquidity, it is going to be very tough to deliver sustained upside.
Anyone that has started trading since 2008-2009 has never seen a hawkish Fed. They are likely to not understand how much the market action has been a product of the liquidity created by central banks. We are in a different world now, and stocks are not going to move in the same manner that they have in the past.
Stay focused on the price action, and don't count on V-shaped moves that worked so well when the Fed was dovish.
