Investors Move to Sidelines Ahead of Fall Uncertainty

Anticipating market volatility ahead of a potential Federal Government shutdown over the debt ceiling debate and an expected announcement that the Federal Reserve will begin to slow down its quantitative easing program, investors headed to the sidelines in droves in August. Investors sold more than $30 billion of bonds and bond funds in the month of August. August also saw the biggest outflow of money from stock mutual funds since the financial crisis of 2008.

It wasn’t just the “average” individual investors exiting the markets. Some financial advisors have been recommending that clients lock in gains for the year by moving into cash in August. And at least one national brokerage firm was advising clients to exit the market. Jeffrey Saut, chief investment strategist at Raymond James & Associates was quoted in InvestmentNews magazine in late August saying, “There is a dearth of catalysts right now. The fact of the matter is, the market’s internal energy is gone near term.”

The real fact of the matter is that Mr. Saut, as well as the tens of thousands of investors heading to the sidelines appear to have gotten it completely wrong. In August the S&P 500 index experienced a negative 3.13% return, fueled in large part by the large number of individual investors and advisory firm clients fleeing the market and moving to cash. But these investors who left the market have missed the rebound in September. With a handful of days remaining, the S&P 500 index is up 3.95%.

This short two-month snapshot of market performance illustrates the folly and futility of attempting to time investment markets. It is certainly understandable for the “average” investor to misread signals or economic conditions. It is a completely different matter for financial advisors or the chief investment strategist of Raymond James to make these kinds of mistakes. How can financial professionals, who study investment markets for a living and have access to information and data that the “average” investor doesn’t have, get it so terribly wrong?

It is important to remind ourselves that investment markets react, in the short-term, to news and events that are both unknown and unpredictable by their very nature. If Mr. Saut, who has access to financial data most investors could only dream of, is unable to predict the future, who can? We would argue that if Mr. Saut, or any other financial professional for that matter, could accurately forecast and predict market performance he would not be working for Raymond James. Mr. Saut would use his knowledge of investment markets and ability to predict returns for his own betterment.   And unless Mr. Saut was extremely benevolent, he certainly wouldn’t share this knowledge or ability with the rest of us investors because it would harm his ability to earn investment returns.

Investment markets reward patient and strategic investors and punish those who speculate. Remember the example of Jeffrey Saut the next time you are tempted to forecast or predict the movements of the market. Even the best informed professionals make erroneous market timing predictions most of the time.

Sources:, InvestmentNews