Why Everyone’s Talking About… Market Timing

Market timing is an investment style that aims to catch the moments when prices are about to change direction, and thereby capture short-term gains. It is often contrasted with ‘time in the market’ – the idea that staying invested in assets rather than trying to predict the moments of change is a more reliable strategy.

Market-timers use a range of techniques to achieve their objectives. They may look for trigger signals – buying or selling when certain figures, such as economic statistics, hit certain levels. Or they may look at market trends, buying or selling when prices rise or fall to a level outside a historic range. But while turning points in markets look obvious with hindsight, spotting those moments in real time is far harder – some would say impossible.

The main difficulty in timing trades is separating meaningful market signals from ‘noise’. In financial markets, noise refers to the cacophony of data that can obscure genuine underlying trends in prices.

Share prices move constantly and each movement is the result of individual trades. Traders may be reacting to a specific piece of news, their own dynamic objectives, or worse, their own fears or dreams.

For market timing to work, a trader needs to be able to distinguish between noise and genuine signals. They also need to be able to do it consistently, because even if they can get it right some of the time, on the occasions they get it wrong they will be missing gains and perhaps incurring losses.

Historically, long-term investment strategies have delivered strong returns above inflation. Between 1996 and 2022, the S&P 500 delivered returns averaging 6.8% per year in real terms.² During that time, there were periods in which the market fell, many of them entirely unpredicted – including the Global Financial Crisis of 2007-8.

Spending those 25 years in the market would have provided inflation-beating returns. To beat those returns by trying to time the market would have meant timing those short-term ups and downs accurately most of the time.

The world’s most highly regarded investors typically take a dim view of market timing. Warren Buffett once said that he was “no good at forecasting the near-term movements of stock prices,” adding: “I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.³”

Spending time in the market is not the same as passive investing. While it also involves holding investments for longer periods, it requires an active approach to research analysis and judgement. Investing in growing companies with further potential and holding or even increasing those investments over several years, is a type of active investment for the long term.

Timing trades is still part of active long-term investing, but it does not try to capture gains from short-term market signals. Ignoring those market signals that are not meaningful is itself an active decision: rational active investment involves rigorous processes driven by analysis rather than by emotionally driven timing decisions.

Expectations for equity prices in 2024 are mixed. Economic growth figures in many economies are still volatile and the outlook for central bank interest rates remain uncertain. For example, Bank of England Governor Andrew Bailey recently warned there was “some way to go” before inflation reached its target,⁴ while the Bank’s Monetary Policy Committee warned that a further rise in interest rates could not be ruled out.⁵

This uncertainty goes to the core of the market-timing debate. Choosing a precise moment to invest in equities or other risk assets can be fraught, and short-term indicators such as sector-specific data and company results – above or below expectations – can cause significant short-term price movements.

Fixed income assets, or bonds issued by corporates or governments, are widely seen as reliable long-term investments. Capital is relatively secure and in the case of government bonds (US Treasuries or UK gilts, for example) it is as safe as it is possible to be. The income stream is also predictable.

However, the value of bonds can fluctuate in the short term in response to central bank interest rate changes – or changing market expectations about future rates. Government bond prices also fluctuate in response to predictions for government borrowing – the larger the requirement for borrowing, the higher the yields investors will require.

Private assets are often cited as an example of an asset type for which time spent invested is a crucial component. Private equity, private debt and direct investment in real estate or infrastructure all involve a longer-term commitment.

Indeed, in the short-term, private assets are often expected to show poor or negative returns, with the expectation for outperformance only over a longer period. Institutional investors have been increasing allocations to private assets in recent years, partly to secure long-term returns but also to diversify away from volatile equity and bond markets.

Identifying so-called ‘megatrends’ in the economy and business is one method that professional investors use to try to cut through short-term noise. The decarbonisation of the global economy, benefiting renewable energy and other industries, and the growth in artificial intelligence (AI) are two examples of megatrends that have often been identified by commentators.⁶

The short answer is no. A Natixis survey⁷ of institutional investors’ expectations found the prevailing mood was uncertainty.

For example, institutions are split over whether a recession is inevitable in the near future, with 51% saying yes and 49% saying no. But even those who expect a recession are divided about its timing: 39% expect recession in the first half of 2024, 42% expect it to come in the second half, and the rest expect it to hit in 2025.

A similar variety of opinion exists over whether financial markets will become more stable in 2024, with 59% expecting higher levels of volatility for equity markets and 39% expecting the same for bonds.

Indeed, according to our aggregation of the public outlooks of many of the world’s global financial institutions (GFIs), caution is the watchword, owing to uncertainty over ‘exceptional circumstances’ – an unprecedented rate-rising cycle, a tense geopolitical backdrop and the covid debt backlog, among others.⁸

Many GFIs have not tried to make short-term predictions, having been burned with their calls in 2023 – the global recession that never happened, premature assertions that ‘bonds are back’, and so on. Instead, they’ve chosen instead to favour a longer-term view with a thematic investment approach – which includes factoring in the energy transition, as well as AI – and middle-of-the-road economic forecasts.

This clear division of opinion about the most basic questions about markets shows just how difficult it is to time a market. What is more, always attempting to time the market risks sitting on the sidelines holding cash, which provides little or no return, for substantial periods of time. This is why investing actively, looking for value in fundamentals, and spending time in the market has a far better record of delivering real returns.

Ultimately, successful investing is – and always has been – a long-term endeavour. To echo the wily Charlie Munger, time in the market is far more important – and fruitful – than trying to time the market. And reminding oneself of that fact is key to building a portfolio that can withstand not just the down times, but the triumphant upswings too.