FIVE THINGS YOU SHOULD KNOW
INSIGHTS for INVESTORS
One of the hardest things as an investor is resisting the urge to “do” something. Headlines scream, data points play tug-of-war with one’s emotions and investor sentiment swings back and forth.
All this within a backdrop where according to a recent study by the Journal of Accountancy investors biggest fear is running out of money, even for those considered “high net worth.” Bloomberg reported some dire savings info this week as well noting that 20% of those 59 and over don’t have a retirement account, and current estimates show a $7 trillion retirement savings shortfall. Such data may not impact the market, but it isn’t helping the noise around it.
Conflicting data, conflicting emotions wrapped up in a perpetual common fear and proven human “mental wiring” that causes our brains to confuse financial danger with mortal danger … does not result in a recipe for success.
However, you need not “control the financial world” to “control your financial world.”
Key steps to achieving a place of preparedness include:
As we touched on many times before, we are always happy to take you through our unique planning process to help with #1 above, but today’s commentary will focus on addressing #2 and #3 below.
Where is the risk(iest) trade today?
Before we head into some actual economic data (fundamental), let’s explore investor sentiment and positioning (quantitative) to deduce what may lie ahead.
After a recent surge in bullishness in the AAII survey, this week’s survey saw sentiment moderate back into a “neutral” reading. However, the CNN Fear and Greed index that encompasses not only sentiment but also market momentum, positioning and options data (more on that momentarily) current sits at a level associated with investor “GREED.” What does this all mean, for those that subscribe to a more contrarian approach to investing (e.g. “fade the crowd”) such levels would suggest caution but are not at extremes.
Speaking of positioning and options data. Remarkably, despite recent scares and the brutality of the last 15 months, recent futures data showed that investors are still NET short approx. 650,000 futures/options contracts on 10-year bonds, and NET long positions equity options. The myopic nature of many investors never ceases to surprise.
If, as the old adage goes, “the market will do whatever will hurt the most people” expect some renewed equity volatility and continued strength in many parts of the fixed income market as we head into the back half of the year.
So that’s how people “feel” but what about the “facts”?
Current economic data also seems to be indicating caution with the leading economic indicator index having now posted negative readings for twelve consecutive months (most recently -7.7% year over year) which historically has always resulted in a recession. Such an outlook is reinforced when one also considers a recessionary level reading of 46.3 in the latest ISM Manufacturing reading, an ISM service reading just barely above 50 (the line separating growth from contraction), continued declines in retail sales and housing, and continuing unemployment claims rising 37% over the last six months.
On top of this troubling “cake” sits the “cherry” data point which is a still solidly negative yield curve whether one wants to use the classic 10-year vs. 2-year yield (3.55% vs. 4.20%) or our preference of the 10-year minus the 3 month (3.55% vs. 5.04%). A negative yield curve is a strong historical indicator of slowing economic activity and a likely recession.
Such an environment is in part why you are likely hearing more and more from various Fed governors about a pause soon in rate hikes, alongside comments such as those from Fed Governor Loretta Mester this week that it wouldn’t take much of a shock at this point to trigger a recession.
The (Possible) Good News …
All is not lost however, which is why investors need to take this all in and prepare, but not panic. As noted by analyst Tom Essaye “it may seem odd to say that “economic uncertainty” would be something that’s supporting stocks, as it’s usually the opposite. But the uncertainty I’m referring to has to do with how bad the coming economic slowdown will be, because this is a unique time and if ever there’s been a legitimate chance for a very mild recession, it’s now, and it’s all because of the pandemic stimulus and tight jobs market.”
Furthermore, not all data is bad with global data actually surprising to the upside of late with the Eurozone posting a solid PMI reading of 53.9 and UK posting a reading of 54.4. Furthermore, here in the U.S. the most recent composite PMI reading jumped to an 11-month high as of 53.7.
Positioning for Unknowns
It is often said that “cash is king” while others counter with “cash is trash.” We’d say they both miss the mark and that “cash flow is king.” That is why we believe for most investors making sure to have a portfolio that generates cash is critical whether that’s to support one’s lifestyle/retirement today or be a powerful dollar-cost averaging tool to achieve one’s goals for tomorrow.
So, while we always build equity and alternative positions with that in mind, of late we’ve been adding exposure to investment grade bonds with longer durations within many our strategies for the first time in years and strongly encouraging clients to reduce any outstanding cash positions they may have.
If equity markets do face renewed volatility in the months ahead these positions will not only buffer volatility and be a good source for any needed cash, but also be a powerful tool to build wealth by rebalancing into any beat-up sectors of the market.
As always, have a wonderful weekend!
Tim and the team at TEN Capital
DATA, JUST THE DATA
Data points this week included: