Without a Defined Why, the "Watch Outs" Creep In
Market volatility doesn’t just dominate the headlines, it often dominates investor mindshare. With a well-defined “why” behind your plan, the deadly “watch-outs” that can derail your goals can be kept at bay.
Five Things You Should Know
Insights for Investors
What Kind of Bear Market Do We Likely Have?
I’ve seen all sorts of lame attempts at forecasting, including one well-known figure that insinuated that since it’s been about twice as long as the historic average time between recessions, the next recession will be twice as deep/bad. Being funny, cute, provocative is one thing but, actually attempting to guide people with such drivel is a crime of sorts in my book.
All the work we put into these commentaries, and into curating the wonderful partners that supplement our process, is solely to be better informed, to be more balanced and, hopefully as a consequence make better long-term decisions on behalf of our clients.
If one is going to compare recessions to glean potential insights, then the circumstances and actual fundamentals that drove them must be properly understood. Goldmans Sachs put together some great thoughts and graphics on just this subject and we wanted to make sure to share them to provide a more positive take on what may lie ahead.
Please see below.
Are There Reasons to Believe Things Could get Better?
A. Fundamental Arguments
Alpine Macro’s Global Strategy team, a well-respected analytical shop, is now making the case that the recent bear market in equities is nearing an end, and consequently that investors should start buying on weakness rather than selling stocks on strength:
Their points include, and we quote:
Another key fundamental point, that if nothing else strikes at the heart of those that want to liken our current circumstances to the great recession of 2008, is the present state of Corporate Balance Sheet Strength. A recent Fed/Duke CFO survey (cited by Apollo) asked, “Why does your company not need to borrow money in the next 12 months?” 80% of companies respond that they don’t need to borrow because they have enough cash on their balance sheets. Only 10% of companies think that interest rates are too high.
Refer to the Goldman recession comparison above and know financial imbalances (and that’s being kind to what existed heading into 2008) do not exist anywhere near the levels that we saw at that time. (See accompanying chart below)
Furthermore, the topic of the moment, inflation, is improving by any objective observation. JPMorgan noted, “On the bright side, we see promising signs of inflation coming off its highs in July. Oil and gas prices have dipped meaningfully (down 11% and 4% from June), as have airline fares (down 8%), and this should lead to a deceleration of price pressures in the coming months.” Bespoke commented in similar fashion pointing out that, “After briefly surging above $130 per barrel right after the invasion, crude oil has now declined nearly 28% from that peak. Look for these declines to start showing up in the monthly inflation numbers in the months ahead” (See chart below).
B. Quantitative Reasons
The reasons for embracing something other than the direst outlook are mounting from a quantitative perspective as well.
Fund manager Thomas Hayes pointed out two key points: “1) U of M Consumer Sentiment at 50. Since 1980, the last 3x it dropped below 58, it marked the lows in sentiment and peak in inflation. Avg S&P gains 12 months later were +20.87%. 2) “Fed does want to "reduce demand" but they don't want to destroy the economy. They promised $47.5B in Quantitative Tightening in June. They only did $7.5B (and were net buyers of Treasuries).”
Again, as to reading the proverbial tea leaves to try to understand the Fed’s likely thinking, consider Bloomberg stating, “Bullard, another policy hawk, began to cross the wires and he largely echoed Waller’s view that a 75-bps hike was appropriate, and the neutral rate is likely lower than previously thought.”
Similarly, "This softening of inflation expectations is one reason why we expect the FOMC will not accelerate the near-term hiking pace and will deliver a 75bp hike at the July FOMC meeting," per Goldman Sachs Chief Economist Jan Hatzius.
And from Torsten Slok the opinion that, “With reference to the dual mandate, the Fed will later this year begin to talk about how the downside risks to growth are intensifying, and those recession risks will ultimately outweigh the shrinking upside risks to inflation.”
Lastly, is the topic of investor sentiment which we brought up a couple months ago, and with all due respect to the struggles of mid-June, does appear to be indicating a floor near current market levels.
According to Bloomberg, “Investors are in "full capitulation" as outlooks for global growth and profits are at all-time lows, according to the BofA's latest fund manager survey. Cash levels are the highest since 9/11 and equity allocation the lowest since Lehman. BofA's Bull & Bear Indicator is "max bearish" and recession anticipation is the highest since May 2020.” (See following charts).
While poor sentiment does not guarantee an immediate market bottom, history has shown that the more extreme sentiment gets in either direction, the sooner and greater the market “surprise” has usually been.
C. Technical Arguments
Machines run a majority of daily trading activity and thus any fully informed take on market activity must have some understanding of each component influencing their movements.
And while there are many ways to spin “past performance” to scare investors of what may lie ahead, an honest historical evaluation unveils a different likelihood.
“Oversold? Yes, in a big way. Weekly MACD is now more oversold than both the 2008 and 2020 lows. Going back to 1994, the 2008 weekly MACD reading was a record low reading, until this week. To reach the 40W MAV the SPX will have to plunge even deeper into oversold territory.
MACD (Moving Average Convergence/Divergence explained: The MACD is an oversold/overbought indicator that looks at the relationship between a long term and a short term moving average.” - Source: “Weekly S&P 500 Index Chart, by Gary S. Morrow, July 14, 2022 (see accompanying chart)
In Closing: Mindset Matters
Consistency and an appropriate timeframe for your goals is key to one’s financial success as JPMorgan CEO Jamie Dimon alluded to last week when asked if the economic “hurricane” that he himself had coined/mentioned would make him change course regarding his plans.
He responded by saying, “We’ve always run the company consistently, investing and doing stuff, through storms. We don’t like to pull in and pull out, and go up and go down, and go into markets, out of markets through storms…We invest, we grow, we expand, we manage through the storm.”
Investors would do well to mimic his response with regards to their plans and portfolios.
His sentiment that, "We are prepared for whatever happens and will continue to serve clients even in the toughest of times", reflects the same mindset we bring to serving our clients.
Proper preparation is why during a manic bull run while times were still “good” we preached the importance of our L.I.V.E. philosophy, of not being captive to past returns when determining your allocation, and instead encouraged investors to pare down their exposure to then winners such as tech stocks and traditional fixed income.
And for those nearing or entering retirement we pounded the table on the importance of building a portfolio that would generate sufficient income to avoid forced selling during the inevitable rough times ahead, such as the current period.
We share all the above not because we are certain of what will happen, but to counter the chorus of doomsayers out there that pretend they do. And to remind investors again that successful investing is not about predicting markets but building a plan and portfolio that are ready to both survive and thrive through all the inevitable twists and turns.
Have a wonderful weekend!
Tim and the team at TEN Capital
Data, Just the Data
Data points this week included: