Updated: Jan 27, 2022
by Robert Holman | The Defensive Advisor | www.defensiveadvisor.com
EQUITY MARKET RATING … 4 (0-4 bearish, 5 neutral, 6-10 bullish). There is good reason to believe we are in a bear market being brought on by market expectations for significant increases in interest rates, which lowers stock market values by a well-understood mathematical process. Interest rates are one of the 5 key determinants of stock market prices, perhaps the most important of all.
EQUITY MARKET and ECONOMY … The case for the market NOT entering a bear market is strong, AND the case FOR the market entering a bear market is equally strong. In so many ways, the markets were not responding rationally to the Fed’s intent to raise interest rates until about three weeks ago. But that has changed. So, “Now the Really Hard Work Starts”.
Yesterday, for a while, stocks were down 9:1, often a sign of capitulation and reversal, but in my view, we were not there long enough to do meaningful damage, and many/most accounts actually increased in value marginally by the end of the day.
As I write this, the Dow is down almost 800 points, but is attempting to rebound similarly to yesterday. One can only wonder what happens tomorrow when the Fed announces its rate decision. Could the market go up, just because the speculation comes to an end, and things become known, and so investors experience a period of relief from all the worry? It’s certainly possible. And now, as I’m nearing the point of publishing this (about two hours later than usual, lots of phone calls and texts today) the DJIA actually IS UP.
But, would an upcoming rally be a bear-trap-rally (rising prices within a bear market, it looks so good, and it seems like the rally is back on, only to have prices fall like an elevator a short time later)? Only time will tell – we will see. BUT, investors have to pick one view from among several choices on these issues, and those who do not understand the issues are subject to a high degree of risk, and possible erosion of capital, and setback to retirement plans.
FED – whether the Fed announces an intent to raise interest rates by 25bp (1/4 of one percent) or 50 bp (1/2 of one percent), EITHER WAY, the market is likely to be disappointed. Either they are not fighting inflation vigorously enough or they are overreacting and raising rates too quickly which may bring on a recession. My guess is 25 bp increase in March, end of tapering, and a dove-ish statement about future rate hikes if inflation subsides (data dependency).
BUT, here’s the deal, the take-away, what really matters. Either the Fed addresses the WORRY about FUTURE RATE INCREASES AFTER MARCH and CALMS the markets, OR NOT (nothing good happens in this scenario). AND, of course, the Fed Chair would have to NOT MISSPEAK and drive the markets crazy, as he has done in the past, which necessitates several days of additional clarifying comments -- if that happens this go round, WORRY will not subside no matter how dove-ish his statement are meant to be.
When change happens, we happen to change. We now hold short positions to protect our hard-earned dollars. Since late September, we have moved toward energy, financials and certain consumer stocks. But I still own some technology shares (that the market says were overvalued). <Note: I deleted some figures here and below that had errors in the calculation of the amounts and the time periods, and the related comments that followed the erroneous calculations.>
I’m trying to assess in my own mind if there is anything in the course of events over the last 120 days, where I would have done things differently regarding those technology shares – I crave to acquire knowledge, including any “lessons learned” that will help me succeed in this endeavor.
None of us in this business is perfect. As I’ve always said, you should expect an investment manager to do better than the market in 8 out of 10 years, and if you both are very lucky, even better. Of course, the compound rate of return for the multi-year period needs to be at least 4% better than the averages.
I expect this thinking process will take some time (due to lots of fact checking and looking at raw data, etc.). I know that it will result in a letter to my clients on decisions made, and events that transpired, and any lessons learned.
I would like to add that it is somewhat concerning that we are seeing greater than anticipated effects from Covid-Omicron – although it is peaking – there have been some revenue misses but good earnings, a few earnings misses, and some lower guidance for the period just ahead because I think corporate executives themselves are WORRIED about what the Fed is going to do.
The Fed has to understand that it can impact economic growth when it causes uncertainty in the minds of corporate executives that it will go too far, screw things up, and actually crush corporate outlooks for the future, resulting in delayed hiring, cost reductions, pauses in inventory purchases, etc. The Fed must be aware of that, and take it into consideration in its interest rate decision making.
Many investment advisors do not even attempt to respond to changes, they just rebalance, which to me seems either “lazy” or maybe it's just a “lack of knowledge” of what to do. Unfortunately, the client is the loser when the investment advisor takes no action.
Please keep in mind that different parts of the equity market are affected unequally by what is occurring now. To find out what sectors, styles, and strategies are working beyond those that I’ve mentioned today, please consult with a financial professional who works full-time in portfolio management.
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Excelsior Divitiae. Published every Tuesday at 12:00 noon. For more information on my investment and planning services, or to sign-up for this weekly e-Newsletter, visit my website: http://www.defensiveadvisor.com/services OR http://www.defensiveadvisor.com/contact
Opinions voiced in this post are for general information only and are not intended to provide specific advice to or recommendations for any individual, without complete knowledge of that individual’s total financial profile. No strategy assures success or protects against loss. Past performance does not guarantee future results.