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The Market is Afraid of Unknowns, Not Our Imaginations

We discuss the difference between the unknown’s spooking markets versus the worst fears of our imagination that need to be quieted, as we take a look at a) where are markets today, b) why do things feel the way they do today, and c) where are we likely headed.


  1. Equity Markets – were lower this week with U.S. stocks (S&P 500) down -2.94% while international stocks (EAFE) fell -0.41%.

  2. Fixed Income Markets – were mixed with investment grade bonds (AGG) up 0.92% while high yield bonds (JNK) fell -1.22%.

  3. Fed Holds Firm – Following the release of April’s monthly inflation number of +8.3% (down slightly from March), Federal Reserve Chairman Powell reiterated their plans to have rate increases of 50 basis points at each of its next two meetings. Powell also claimed that the extent of a recession will be a result of factors that are outside of the Fed’s control. The Senate also voted this week to extend Powell’s term for another 4 years.
  4. Twitter Purchase on Pause – In a surprising shift this week, Elon Musk announced he was putting his purchase of Twitter “temporarily on hold”, while he seeks confirmation of claims that fake/spam/bot accounts make up less than 5% of users. Musk’s goal is for Twitter to verify real users and “prioritize” replies over non-verified accounts. If new findings suggest spam accounts make up a much larger percentage than once thought, then expectations are Musk may seek to negotiate a lower purchase price.

  5. Key Insight – [VIDEO & ARTICLE] We discuss the difference between the unknown’s spooking markets versus the worst fears of our imagination that need to be quieted, as we take a look at a) where are markets today, b) why do things feel the way they do today, and c) where are we likely headed.


To be like the rock that the waves keep crashing over. It stands, unmoved and the raging of the sea still around it.” – Marcus Aurelius


What a week?! I hope you all made it through without too much heart burn, I know it was one that certainly kept me on my toes. While such times are an emotional challenge for everyone, I love the thrill of having to be so engaged and seek to embrace Marcus Aurelius’ famous quote, “To be like the rock that the waves keep crashing over. It stands, unmoved and the raging of the sea still around it.”

In the midst of such market storms, they seem as though they will never end, but all storms pass, and the “waves” of volatility eventually subside.

Below you will find a lot of wonderful charts (makes for a quick read) that help paint a great picture of (I) where we are, (II) why it feels the way it does, and (III) where we are likely headed.

I hope you find them of value, and of course that this week’s messages help you live out the wonderful words from Rudyard Kipling’s poem If, “If you can keep your head when all about you are losing theirs … Yours is the Earth and everything that’s in it…”

I. Inflation and Interest Rates – Where We Are

One of the primary headwinds facing risk markets (stocks and credit) today is the intwined issues of inflation and interest rates. The popular narrative today is that with inflation this high, the Fed will over hike their Fed funds rate and create a market crashing recession.

First, as our clients can tell you we warned of this risk in January while markets were still near their all-time highs and raised 10% cash in our High Income Series at that time. We don’t pretend to be market timers, but unlike many in our industry we aren’t asleep at the switch either.

That all said, we also went on the record as saying we thought those fears would likely get overdone and create a good long-term reentry point, which we did this week.

So, what does history have to say about such an environment and such an outlook? Despite what you are undoubtedly hearing, and may even be feeling, history is on our side.

Derek Horstmeyer of George Mason performed an interesting study looking back on other periods of negative real rates that persisted for at least a month (i.e., periods of high inflation that surpass current interest rates, thus creating a negative return on conversative fixed income, currently between -6% and -7%).

What did he find? Rather than being an environment that should induce panic in investors, they are actually a good entry point for most asset classes over a two and one-half period of time. (see chart below)

As you can see from the chart, outside of a thinly held asset class like emerging markets, all asset classes produce a solidly positive average return over the two- and one-half-year period.

But what about when the Fed engages in a steady hiking of their interest rate?

A study by Dimensional Funds found the following which will likely surprise you.

For one, they found that, “On average, US equity market returns are reliably positive in months with increases in target rates.2 Moreover, the average stock market return in those months is similar to the average return in months with decreases or no changes in target rates.”

“What about the months after rate hikes? This question may be of particular interest when the Fed is expected to increase the federal funds target rate multiple times. Exhibit 2 presents annualized US equity market returns over the one-, three-, and five-year periods following one or two consecutive monthly increases in the fed funds target rate, as well as following months with no increase.”

In short, while certainly a headwind, inflation and interest rate hikes do not automatically equate to the doomsday scenario you’re likely hearing about on T.V. which brings us to, “how does it feel?”

II. Sentiment & Positioning – Why does it feel this way right now?

Ask any investor do market’s move up in a straight line? After a slight chuckle, they’ll say of course not. And yet, as soon as the inevitable volatility that defines any investors journey hits, the fear-center of the brain is triggered, and a flood of emotions follows.

So how are investors doing with this current pullback? By any historical metric THEY ARE FREAKING OUT.

Look at the following few charts, all of which show sentiment at lows not seen other than in the darkest moments of the Great Financial Crisis. You’ll also note that such levels almost always signal that a market’s pullback is closer to the end than the beginning.

In fact, sentiment is so bad that such levels of “bearishness” have only been seen seven times before, and as the chart shows you, history suggests being a contrarian during such periods. Note: the last two times the CNN Fear and Greed Index came in around 5, were at the lows in December of 2018 and March of 2020.

Investor positioning reflects their dire outlook. Consider the following: 1) investment grade bonds now trade at a 5%+ discount with over a 4.25% yield, 2) investors positioning according to Goldman Sachs proprietary stock position indicator currently sits at -2.7 almost double at extremely light position which would be 1.5 on their scale, and finally 3) stocks have been severely beaten up with 80% of the Russell 3000 below their 200 day moving average and over 50% of stocks on the Nasdaq down over 50%!

According to research by Bespoke, when bullish sentiment falls this low (e.g., into the 2nd percentile), the median one-year return is 23.24% with no 12-month returns of less than 20% outside of a couple periods in 2008. Which begs the question, is this 2008?

III. Is this 2008 again? – Where We Are Likely Headed

Hopefully by this point, any panic you may have been feeling has subsided a bit as you consider what in all probability lies ahead given historically analogous timeframes. While technicals suggest the selling may not be entirely over, fundamentals and the above suggest that the likelihood of a 2008 event are very small.

Well respected analyst Tom Essaye had this to say around 2008-like fears, “…the consistent comparisons I’m hearing to ’99-’03 and ’08-’09 ring hollow. This isn’t 1999. We aren’t coming off a huge tech bubble that engulfed huge new portions of the investing public. And this isn’t 2008, where the bursting of a massively speculative bubble crippled banks, lending and consumer spending. This isn’t a bubble popping on its own. Its’ an economy that’s running “Too Hot” and the Fed and global central banks are engineering a slowdown. But, their goal is not to implode the global economy—they won’t sit idly by if that starts to happen, regardless of inflation. It’s important to keep that in mind midst all this negativity.” Attempting to explain current market weakness he stated, “at this point, selling feels almost mechanical—as though the declines themselves are driving sell programs which cause more selling which triggers more programs. And, with these declines performance is now starting to resemble periods when fundamentals were really terrible (like post September 11, depths of the global financial crisis, etc.). When selling becomes the main negative catalyst (not fundamentals) it’s very difficult to say when it’ll stop (it usually takes a solid piece of macro news and we haven’t received any in a while) but I do want to make clear that at this point, these declines cannot be justified by fundamentals … we are now getting to levels where for longer term accounts I am intrigued on the long side.”

Similarly, JPMorgan noted that while, “…the U.S. economy contracted by an annualized 1.4% in 1Q, well short of consensus expectations for a 1.0% expansion. This follows a positive surprise in the fourth quarter, which showed a boomy 6.9% annualized growth rate. The first quarter’s dismal headline rate masks some positive under- lying dynamics in the economy. The average growth rate between 4Q21 and 1Q22 was 2.7%, which is likely a better measure of the true momentum in the U.S. economy.”

Did some steam need to come out of the economy and markets after the government inflated boom in response to COVID? Yes, but that does not mean we have the valuation concerns of 2001 or structural issues of 2008.

In Closing

One of the things to keep in mind at this moment would be the following quote from famed investor Howard Marks, “In good times skepticism means recognizing the things that are too good to be true; that's something everyone knows. But in bad times, it requires sensing when things are too bad to be true. People have a hard time doing that.”

We can’t change our feelings, but we can change our response to them.

Markets aren’t broken today, investor sentiment is broken, and there is a big difference in how one should respond.

Lastly, it is important to consider that trying to avoid “5% of pain” is a fool’s errand today. You very well may have 5% more downside in stocks or bonds, and you almost undoubtedly will lose 5% of your purchasing power within cash over the next 6-12 months. The 5% of pain is inevitable, but you get to choose whether that 5% will be in the form of temporary volatility or a permanent loss.

Keep your head up and remember your superpowers as a well-balanced investor (time, income, diversification, and perspective/knowledge of history). If you aren’t a client of TEN and want to know if those apply to you, you are always welcome to reach out.

Have a wonderful weekend!

Tim and the team at TEN Capital

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