A Warning: As Markets Continue to Rally

With pre-market futures showing gains before the market officially opens for this week, some investors are growing concerned the short-term rally has gone too far. This morning’s opener shares a few brief data points, and then concludes with some very strong advice—a bit of a warning actually!

For starters, here is a look at the S&P 500’s performance this year.

As you can see, stocks are down for the year, but well above 20-day and 50-day moving averages, suggesting the market has “broken out” to the upside and is due for more gains. However, the S&P 500 may be hitting a key resistance level around 4,200 where it sold off early this year. Technical analysis can be interesting and useful, but just remember it is largely meaningless if you are a long-term investor. As a long-term investor, short-term moves are mainly just noise that can cause you to make short-term emotional mistake. Don’t let the short-term noise take you off track for achieving your long-term goals.

The Fed Is the Problem

Another short-term fearmongering tactic (that can cause some investors to focus too much on the short term, and lose sight of their long-term goals) is federal reserve fearmongering. For example, the Fed’s interest rate hawkishness has driven stocks lower this year.

…and now last Friday’s strong jobs report has given the fed the green light to be even MORE hawkish going forward.

For a little perspective, the fed doesn’t care about the stock market (in theory) because it’s not part of their dual mandate. Specifically, the fed’s dual mandate is focused on keeping inflation reasonable and keeping unemployment low. And now that last Friday’s jobs report came in strong (i.e. unemployment is low) the fed has more reason to focus on battling inflation (which is sky high) by raising interest rates further (which will drag heavily on the economy and the stock market). Even though a strong jobs report may seem good for the economy in this situation it is not good for stocks in the short-term. And you will undoubtedly here more saber rattling and fear mongering about how the fed is setting up more declines for the market. Don’t let this distract you from your long-term goals.

The Bottom Line:

You will likely hear a lot of short-term market fearmongering in the days and weeks ahead (such as valuations are still too high, and corporate earnings estimates still need to be lowered). And while these arguments have some merit, don’t forget that fear sells and the media picks and chooses scary headlines to get more attention and page views. Further, the media doesn’t actually care about your investments (they care about their advertising dollars). The advice of this morning’s opener is simply to NOT lose sight of your long-term goals.

Said differently, now that the market is rebounding, people are wondering if they should take some chips off the table. This is the inverse of earlier this year when the market was falling and people were wondering if they should “buy low” or “go all in.” The reality is, if you are a long-term investor—you should stick to your long-term goals and your long-term plan. One of the biggest mistakes long-term investors make is to get distracted by short-term noise and fearmongering.

Psychological mistakes are costly. On the other hand, disciplined long-term investing is a winning strategy. Don’t get distracted by the noise, instead stick to your disciplined long-term plan. Your future self will thank you.