There is enormous potential for those who understand when to buy and hold stocks.

When To Dump Stocks And When To Hold

Understanding the stock market fluctuations is crucial. By following its cues, you can strategically know when to dump stocks before they decline and reenter the market when there’s potential for growth, thereby making informed investment decisions.

When to dump stocks before they hit the skids depends mainly on:

Inflation! That’s right, folks, and it’s here to stay.

Whenever the All Commodity PPI has gained more than 3.5% annually on average over five years, stocks have suffered. After adjusting the results for inflation, stocks have gained only 1.7% during such periods. This was the case from February 1973 through November 1985. During that time, the market fluctuated, but stocks generally were poor performers. Five-year bonds did just as well and provided little of the anxiety and heartache that stock investors experienced during those tumultuous years.

Historically, stocks have done well whenever the All Commodity PPI has gained less than 3.5% annually over five years. Their inflation-adjusted return during such times has been 10%, which was the case from September 1953 through January 1973 and from December 1985 to 1994.

If you buy and hold stocks when the All Commodity PPI is falling and sell when it’s rising, you won’t always reap significant gains. But over the long haul, your money will grow. For long-term stock forecasting (five years or more), this index beats all other inflation gauges hands down.

The Consumer Price Index (CPI) is the most popular inflation gauge. Typically, this is the acronym and figure that news reporters and politicians quote regarding the economy’s health.

CPI data is reported as a percentage increase in the previous month. Other times, the twelve-month rate of change is given. Some analysts follow a core rate of inflation, which is the CPI’s rate of change minus food and energy items.

It’s important to note that while the CPI does correlate with stock prices over long periods, it has limitations as an inflation gauge. Compared with some other measures, the CPI is a poor predictor of stock prices, providing a more balanced view for investors. 

One reason is that it’s widely followed. Every time the CPI is released, the stock market reacts. A lower-than-expected rise never fails to bring a bullish response; a higher-than-expected rise typically brings a bearish reaction.

Attempting to time market swings based on CPI can be challenging. First, these swings are often unpredictable, making it difficult to profit consistently. Second, as a broad measure, the CPI changes slowly, making it hard to track. Third, the CPI has an upward bias due to the nature of consumer prices, which rarely go down, further complicating the timing strategy.

An Alternative Option To Measure Inflation

Another popular way to measure inflation is the so-called GDP deflator. This is calculated quarterly and released simultaneously as the GDP (gross domestic product) figures. GDP tries to measure America’s total dollar output of goods and services over the last three months, and it shows what percentage of GDP growth is due simply to price increases.

Since GDP includes everything produced, the GDP deflator is easily the most comprehensive inflation gauge. Unfortunately, it has several significant pitfalls. For one, it’s old news or, as they say, a lagging indicator. Released only once every three months, it tells you about past versus current trends. Moreover, the GDP deflator is based on thousands of estimates. So it’s constantly revised, sometimes months after the data’s release.

However, over the long term and after significant revisions, the GDP deflator can be a good indicator of inflation trends. But in the near term, using it is akin to planning a vacation based on last season’s weather. By the time you get there, everything has changed.

Go To The Source

To be valid, information on inflation must show trends as they unfold rather than after they’ve happened. To get closer to the “source” of price trends, investors should track changes in producer prices instead of solely relying on the CPI or GDP deflator data.

Here’s a link to the Producer Price Index PPI website: https://www.bls.gov/ppi/

Here’s a link to the Consumer Price Index CPI website: https://www.bls.gov/cpi/

The CPI and PPI are calculated by the Labor Department and released once per month. Unlike the CPI, which concentrates on retail goods, the PPI measures the prices of semi-finished goods. As such, the PPI picks up price changes earlier than the CPI.

As with the CPI, there are several ways to measure PPI. The best is the ‘all-commodity producer price index,’ regarded as the “All Commodity PPI.” This index includes commodity prices and goods that make up the PPI. Well-known commodities like cotton, oil, grains, etc., are used in many things, so price increases eventually have a ripple effect throughout the economy.

Consumer prices will ultimately reflect changes in the prices of the multitude of commodity “building blocks.” Shifts in the “All Commodity PPI” usually occur before stock prices react, which makes it an excellent long-term measure of inflation.

As a result, the “All Commodity PPI” is the most reliable indicator of the stock market’s long-term (three to five-year) future and serves as a viable indicator of when to dump stocks before they hit the skids.

Disclaimer: Investors should make investment decisions based on personal financial goals and objectives. We aim to educate investors to make informed decisions by featuring historical financial and economic data publicly available on the CRB Commodity Index and Producer Price Index websites.