The latest Australian inflation data shows the 'new' consumer price index (CPI) fell by 20 basis points to 6.8% from July to August.
Nevertheless, markets are still wagering that the Reserve Bank of Australia (RBA) will deliver a 50 basis point increase to the cash rate when it meets for its policy meeting next week.
Should it complete the full 50 basis points this would bring its policy rate to a near-decade high of 2.85%.
Surprisingly, while still an enormously high CPI print for July–August, markets have taken the small decrease in inflation reasonably well. The S&P/ASX 200 Index (ASX: XJO) closed 1.44% higher on Thursday.
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Inflation must go: RBA
The stimulus for the RBA's hiking cycle is the abnormally high inflation and central banks around the world have made a commitment to stamp it out.
Empirical data shows that inflation is a unique and nasty occurrence for investor portfolios as it hurts both stocks and bonds – thus breaking down traditional rules of diversification.
As a result, the downside seen on the charts this year has been deep and widely felt.
However, those opting to sit on the sidelines for too long might be missing out on some ample opportunities to invest, so says Pengana Capital.
"[H]istoric data suggests that waiting for certainty that markets have bottomed, and interest rates are again falling, may mean missing out on periods of strong share market returns," the firm recently wrote on its website.
Pengana notes that markets are forward-looking and are constantly seeking to price in all of the 'negative' news – be it surrounding an event, a particular company, or the economy at large.
This is important, as by the time the worst of any economic fallout is felt, investors will already be looking at what is coming next.
In the event of a recession, say, the market would be looking to when the next upswing in the economic cycle will be, versus the current situation.
Market positioning is very important
How the market perceives the future has implications on what 'factors' are set to perform as well, namely growth or value stocks.
Pengana notes that growth, while overly sensitive to the business cycle, often makes a comeback earlier than most originally predict.
Oftentimes, the firm says, this comeback performance begins to stage itself before there is a full market bottom – as was seen in 2002 and 2009, following those two market crashes.
Thinking about Pengana's arguments a little more, there's actually weight behind them. Markets do move in cycles, and there is always a winning and losing side to every trade.
In particular, waiting on the sidelines for too long in this economic climate also prohibits the investor from participating in large shifts in investor sentiment.
Right now, for example, the Great British Pound (GBP) is taking a beating on the foreign exchanges, and this has forward-reaching implications for companies who are domiciled here, and export to the country.
Further, there's also been an enormous rally in commodity prices in a cause-effect pattern throughout the past 12 months, and this has set ASX mining giants up to pay large dividends for years to come.
The point is, being a prudent investor means continuously weighing up a large data set and then synthesising that data into quick, actionable insights to make decisions.
Often that means thinking beyond the current situation, keeping a long-term view in mind always.
That also means trying to pick a top or bottom in the cycle is a risk not worth taking, a point that's backed up by years of historical data. Instead, remaining true to the tried and tested 'tenements' of investing are paramount.
As the saying goes, it's time in the market, not timing the market, that matters.
