Long-term investing is difficult in a volatile market environment and requires serious scenario analysis. In other words, if you are fully invested and nervous about the market environment, do you try to sell and reduce your exposure?

For most investors, myself included, this is a hard thing to do for fear of being wrong and missing another step higher in the markets. Frequent trading costs can also reduce your overall performance in the markets.

On the other hand, if you are a more nimble investor and increase your cash to 50% of your holdings, when do you redeploy some of it to the market?

Hold money: The co-host of the PreMarket Prep show Denis Dick is a much more active long-term investor and will limit its market exposure to varying degrees. Depending on the market environment, it may reduce its market exposure to 50% or less.

Over the past few months, Dick has gradually reduced his exposure during unexpected market rallies.

Why? The main reason is the rapidly rising rate of inflation and the upcoming actions of the Federal Reserve Bank to raise interest rates. Traditionally, stocks outperform poorly in this type of economic environment.

Due to higher rates caused by rising inflation, the average consumer will have less money to spend on discretionary or expensive items.

In turn, the lack of consumer spending will negatively impact corporate earnings, which will translate into lower earnings and/or earnings forecasts.

Additionally, the war in Ukraine and its impact on the global economy have yet to be determined.

Game changer? On Friday’s show, Dick explained what catalyst was needed to inspire him to gain more exposure to the stock markets, and it was very much in line with his reason for being cautious.
According to him, the prices of goods cannot continue to increase at such an alarming rate.

Dick asked himself the question: what is the catalyst to turn around this market?

The answer: CPI data. “You can see this market take a few legs up and have a sustained rally when you have CPI (consumer price index) data that shows some softness and actually shows prices rising a bit” , said Dick.

“The Fed will get ahead, and we’re already starting to see that. Used boat prices in my area are collapsing.

The last word: The question remains when the Consumer Price Index data will finally start to come down. It’s impossible to predict when this will happen, but the first chance it will have will be May 11, when the April data is released.

Otherwise, investors will have to wait another month until June 10, and so on. In the meantime, buckle up your seatbelt, as there is plenty of room to drop.

Discussion of this topic from Friday’s show can be found here: