What will the stock market do next?

I’ve been asked to comment on the most recent market decline. My initial reaction was, markets go up and they go down. America is a great country but the US Constitution doesn’t guarantee always-rising markets. I sat down and I wanted to write a reassuring message. I wanted to express my empathy. Somehow, I found that my reservoir of empathy was empty: After recent decline the market is still up twenty-something percent from the beginning of 2017.

And then I stumbled on Dalio and Wilson predicting what the market will do next, and I have to confess, I started writing and could not stop. (I apologize ahead of time for the rantiness of this message.)

  • Ray Dalio: Cash on the sidelines will pour in to stem the bleeding in this market.

  • Morgan Stanley’s Wilson warns investors not to buy the dip.

Two contradictory headlines on the MarketWatch home page, right next to each other.

Do you listen to Dalio or Wilson? I want to let you in on a small Wall Street secret: Neither Dalio nor Wilson knows what the stock market will do next. Don’t be fooled by their fancy pedigrees, the gazillions of dollars they manage, the eloquence of their logic, the myriad of data points they marshall. Nobody but nobody knows what the stock market will do tomorrow, next week or next year. Stock market behavior in the short term is completely random. Completely! You’ll have a better luck predicting the next card at a black jack table than guessing what the stock market will do next.

The media of course needs to fill pages and rack up views, and so there are gazillions of explanations (I’m trying to use the word gazillion at least three times in this article) for why the stock market does this or that. The explanations always sound rational, but for the most part they are worthless because they have zero forecasting power. A strong jobs report sent stocks up. Explanation: The economy is doing great. A strong jobs report sent stocks down. Explanation: Investors are worried about higher interest rates. I can give dual spin to any news, maybe only short of nuclear war. 

My biggest problem with “The stock market will do this” headlines is that they turn investors into degenerate gamblers. I see people trying to treat the stock market like a casino. They get lucky at times and catch the wave of randomness (especially if the market marches higher every single day). Success goes to their heads, the feel like they’ve got this whole stock market thing figured out. Stocks are just bits of data that are priced on the exchanges gazillions of times a day. This is not investing – I don’t even want to insult gambling by calling it gambling. At least gamblers don’t gamble with their life savings and 401k’s (unless they are degenerate gamblers).

What will the stock market do next?

It’s the wrong question. It’s the question that should never be asked, and if asked should never be answered. Asking this question shows that you believe there is some kind of order to this random madness. There is not. And if you answer with any answer other than “I don’t know,” you’re a liar.

How do you deal with market declines? Stop looking at the market as if it were a casino and start treating stocks as businesses that you are trying to buy at a discount to fair value. Stock price is an opinion of what the market is willing to pay for this business right now. Yes, it’s an opinion, not a final judgement. The stock market is going to be a miserable place for you in the long run if you take market opinions on any given day seriously and treat them as final judgements.

If you start treating stocks as businesses and you start analyzing them and valuing them as such, then market drops stop being a source of pain and turn into a source of pleasure. I read somewhere that most money is made during bear markets (when you buy stocks on the cheap) – it just doesn’t feel that way at the time. Even if you are fully invested (we are not) why does it really matter that the market decided to price your stocks lower today (unless you believe the market is right)? Will it matter three, five years from now? If you own undervalued companies, they may get more undervalued before they become fully valued. As long as you’ve got the valuation right, you’ll eventually be proven right.

Let me tell you what we did when the market took a dive. We looked at stocks we owned and asked ourselves a question: Had their values changed? They had not. Then we asked if we wanted to increase our positions in any of them. Then we looked through our long watch list to see if any stocks had hit our buy-price targets. That was it. That is the only rational way to invest. Anything else is … 


So, how does one invest in this overvalued market? Our strategy is spelled out in this fairly in-depth article.

Vitaliy Katsenelson is the CIO at Investment Management Associates, which is anything but your average investment firm. (Seriously, take a look.)

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eclectic syncretist Osmium Wed, 02/07/2018 - 08:29 Permalink

The long-term general uptrend in stocks is primarily just a reflection of the Fed's degradation of the value of the dollar/inflation. Physically holding gold and silver keeps you at least even with that trend, over the long-term, in a way that can't easily be taken from you. It also provides great peace of mind for those who value that.

Wonderful article with the only caveat being it neglects to accept how much power the Fed wields over the markets. Guessing what the Fed will or won't do has become too important to ignore. To me personally, it's hard to believe that the Fed will really be able to increase interest rates another percentage point this year, while simultaneously selling hundreds of billions of US treasuries off its balance sheet, and issuing a trillion or so in new bonds to finance the national debt, without popping the stock market bubble. On the other hand, these humongous issues of new debt are not positive for the value of the dollar, and coupled with the ongoing international move away from the dollar, it seems likely that the Fed will need to keep interest rates rising in order to make sure the dollar doesn't fall too fast, so they are in a very difficult situation and are probably hoping to make sure this a managed pop, something like Japan had in 1990.  

Of course, the Fed totally flubbed it in 2007-2008, so God only knows how this one will shake out. One thing's for sure, the dollar as we know it will not last. It was designed to fail, after all.

In reply to by Osmium

Whoa Dammit Tue, 02/06/2018 - 22:00 Permalink

"Start treating stocks as businesses and start analyzing them and valuing them as such."

Wow, it's refreshing to hear statements like this about stocks from an Investment Manager. Most fund runners these days are just into the latest tricked out vehicle that will take their customers for a ride.

Whoa Dammit Tue, 02/06/2018 - 22:00 Permalink

"Start treating stocks as businesses and start analyzing them and valuing them as such."

Wow, it's refreshing to hear statements like this about stocks from an Investment Manager. Most fund runners these days are just into the latest tricked out vehicle that will take their customers for a ride.

The Real Tony Tue, 02/06/2018 - 22:07 Permalink

If you treated stocks like a business every business would be out of business gone chapter 11. Paying 6 times fair market value for stocks and stock indexes is a great business model... to avoid.

Fed-up with be… Wed, 02/07/2018 - 02:01 Permalink

Well, allow me to "argue" that this is BULLSHIT.   First, let's examine what "value" means.  OH, is it this BULLSHIT that the companies report, and I mean HEADLINE REPORT, called, NON-GAAP.


Some of us here might be smarter than others and will spend the time to read the NON-SPUN bullshit.  That will MAYBE give us an edge.


However, take it from a Guy who WAS ON THE INSIDE of Corporate THINK.   WE ALL LIED about our forecasts to create a sense of value and ALL COMPANIES LIE.

Fed-up with be… Wed, 02/07/2018 - 02:05 Permalink

Remember, guys and gals, ALL Of the value is in FUTURE earnings, and PRE-ANNOUNCEMENTS and the trick is to KNOW the market in which you might want to invest in....and that means you must be, by definition, an INSIDER.


OH, and only CONGRESS gets to "invest as insiders" legally---right?   THEY PUT MARTHA in jail for the very thing that they do daily.  If this Country ain't a stinking asshole of a shit hole, then I am not understanding those terms.

I have said it here over over:

1.  THEY WANT US to argue over shit they do not care about.

2.  They want us to NOT DO THE MOST LUCRATIVE things which are outlawed, only to then turn around and do those things themselves, and:



If this ain't a crock of shit, I am not sure what is.  WE ARE FUCKED.

heretical Wed, 02/07/2018 - 05:49 Permalink

I thought it was a good, very rational article.

With the proviso that the markets are now anything but rational, more resembling a casino than fair valuations. Anyone still in this rigged game should really have pulled out long ago.

Jungle Jim Wed, 02/07/2018 - 09:28 Permalink

I don't care. I don't have any stocks. I just want to know about gold. What's gold going to do next? I mean like soon, like this  year anyway. Not in ten years or a hundred years.

Maestro Maestro Wed, 02/07/2018 - 10:30 Permalink



The Federal Reserve (The Fed), the European Central Bank (ECB) and the Japanese Central Bank can create UNLIMITED and INFINITE amounts of dollars, euros and yens amongst themselves AND cover up this unethical and ultimately illegal collusion by extending so-called currency swaps to each other.  ('I didn't create money out of thin air; I got it from the American/European/Japanese guy, see?')




The central banks can (covertly or openly) buy ALL of the stock and bond markets and make the go up at will.  This, as you all know, they have been doing since at least the '80s.




The stock market goes down, all the major banks who are shareholders and administrators of the Fed, such as JP Morgan, Bank of America, Citibank, Goldman Sachs et al; these scumbag bankers are directly RESPONSIBLE for the fall in the stock markets.


ANY stock market crash was by definition facilitated and CAUSED by the bankers.


You can take that to the bank.

Honest Sam Wed, 02/07/2018 - 10:45 Permalink

Sometimes I feel like an absolute genius that could blow away even the most successful Jeopardy contestants.

Here's the answer to what the stock market will do next, Regis, for $20,00,000:

"The Stock market will fluctuate".

gawd, this shite is so easy.

Davidduke2000 Wed, 02/07/2018 - 11:01 Permalink

will go up to 30,000 as the new us central bank boss hired a new plunge protection aggressive team to smash gold and push up the stocks to the highest levels using the central bank freshly printed free money.

P.K.Snosage Thu, 02/08/2018 - 08:24 Permalink

Given that many of the features of the global economy are totally unprecedented (size of QE, low level of interest rates, high level of debt in many economies, size of China in the world econony, role of technology in suppressing wages and inflation, the Amazon effect, etc) how confident can anybody be in their views about how the economy will evolve from here (given that we’ve never been here before)?

To be honest, mate, I have no idea and either do you.

Iconoclast421 Thu, 02/08/2018 - 08:26 Permalink

Puts and calls are so ludicrously expensive right now that it is pointless to even look at the market. The VIX actually went down yesterday despite a 1% drop in QQQ. That's how broken things are right now.