Is The Worst Over, Or Is It Just A Trap?

Just for the month of January, the markets are so green that it almost made one forget how bad 2022 had been (with the exception of the last 2 days in January where the markets decide to lock in profits before the FED meetings).  The S&P500 and NASDAQ has jumped by 6.60% and 11.53% respectively, while the DOW climbed by 2.87%.  Even the STI has propped up by 4.08% just in January.  Hindsight is always 20/20.  It is at this level where there are individuals saying they should have injected their capital into the punished stocks in late December to capture the rise in January.  However, who would have known what the outcome would be, especially with so much discussions regarding the looming recession.  So is this the start of the new bull, with investors looking forward to a FED pivot, or is this just a trap, where the FED members will jump in the next meeting with their hawkish tone to punish the markets again (though FED sounds rather dovish in February meeting, which caused the market to propel again)?

Personally, I think this going to be a sideway trend, at least for the first half of this year.  I am going to stick to my speculation I made in this post, where I am predicting the whole of 2023 to be flattish, with a negative bias.  At this point in time, January has proven me to be wrong, however, I am keeping to my speculation as I think FED is going to have a very hard job to do if the stock market skyrockets, which may heat up the economy and spur inflation again.  Despite news of firing and retrenchment by big tech companies recently, it seems like negative sentiments are not widespread, and it is not reflected in the employment numbers released by the government (at least not yet).  

As such, in the event that the markets continue to rise, retail investors are going to feel positive and confident with the macroeconomic conditions, and that may not be a good thing for inflation numbers to come.  Therefore, I think the FED members will continue to do their job to suppress inflation by "on and off" display their hawkishness to tame the market, sending markets into pockets of downward spiral for short durations.  In the slightly longer term, I do not know if recession will materialize, but I think it may occur for a short period of one to two quarters.  In combination with the high interest rate environment, which is likely going to remain this way for an extended period, I believe the overall effects will result in markets moving sideways with downward bias.  

The uncertainty is compounded by the earnings released by the companies over the year.  Many analysts and companies themselves had already lowered the earnings expectations this year, making it a tad easier to perform in line with expectations or even exceed expectations, which will in turn translate to a slight boost in their share prices.  However, if any company earnings fell below expectations, or a negative forward guidance is issued by the company, that may lead to a short-term plunge in share prices (see Microsoft).

So what am I doing for my portfolio with this speculation in mind?  Nothing different.  I am still going to slowly dollar cost averaging (DCA) into my portfolio, to continue to accumulate my shares, and with time, increase my dividends.  Why do I do that if I believe there's a negative bias for the market performance this year?  Simple answer, I could be very wrong (as I have been year to date)!  So if I am wrong, by DCA into the market, I can still capture the rise if I am totally wrong (which is fairly possible) and still get to join the celebrations!  If I am right, I am able to get more shares of quality companies (in my opinion and personal due diligence) at a lower price, which is great from a longer term perspective when the market recovers!

Regardless, stay nimble and be mindful of your personal investment philosophy.  Always invest, diversify and allocate your portfolio in a way that allows you to sleep soundly.  Deep down, I hope I am wrong and the markets rocket to the moon, while continuing to collect more dividends in the coming quarters!  For me, Barista FIRE, here I come...!