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 well-understood mathematical processes. Interest rates are one of the 5 key determinants of stock market prices. They are equal in importance to corporate profits and the current/future growth rate in corporate profits.
EQUITY MARKET and ECONOMY … FIRST A REPEAT: The DJIA and the S&P500 peaked in the first week of January, but truthfully, neither index made much progress since mid-July. This gives us a chance to look back at 6-30 statement balances and compare them with today. Are you up/down and how much? Reviewing our accounts for the period June 2020 to NOW, where it’s easy to make comparisons (accounts with no new money added, for example) we are ahead of the market averages – specifically, the market is down slightly but our account values have grown slightly.
In so many ways, the markets were not responding rationally to the Fed’s intent to raise interest rates until about four weeks ago, but that has changed now since the Fed has spoken on these issues.
NOW FOR NEW COMMENTS: This is a tough call, but I believe we are in a bear trap – that’s a rally that occurs within a bear market that is so, so seductive. It feels like the rally is back on, but those feelings are the “trap” part. Only time will tell – we will see. However, It’s my belief that it’s wise and prudent to be cautious.
It seems to me that the primary trend should be down with interest rates rising quickly. Unless corporate profits can rise quicker than interest rates and I’m not convinced they will rise faster. And, if short-term rates (2-year maturities or less) rise above long-term rates (10-year maturities or more), that would be a sign of a coming recession. That has not happened yet, and may not happen for 18 months or more. It’s my view that the market will “stay down” at lower levels (unless interest rates return to near zero, as they have been in the recent past.
So, where does that leave us --- it is possible to make profits in industries that thrive in this type of economic environment.
FED – FIRST A REPEAT - My guess is 25 bp increase in March, tapering ends in March <correct> and a dove-ish statement about future rate hikes if inflation subsides (data dependency) <sorta correct>. The Fed’s tone was hawk-ish, but the statement about data dependency was pretty clear to most observers. So, if inflation subsides, so will the Fed need to aggressively raise rates subside and they can take a more conservative and less risky path to rate hikes.
NEW COMMENTS – Right now, the markets seem to be pretty much ignoring the Fed. Who knew? The market seems to be rallying because of CERTAINTY about what the Fed is going to do. In other words, the fogginess is gone, and the market likes that.
REPEAT: I would like to add that it is somewhat concerning that we are seeing greater than anticipated effects from Covid-Omicron – although it seems to be peaking.
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) where corporate profits may increase faster that rising interest rates.
Many investment advisors do not even attempt to respond to market changes, assuming no one has any predictive ability - they just rebalance - which to me seems either “misguided” or “lazy” or maybe it's just a “lack of knowledge” of what to do. Unfortunately, I believe the client is the loser when the investment advisor takes no action - the result usually being missed profits for the client, or losses that did not have to happen. Please consult with a financial professional who specializes in full-time portfolio management.
PORTFOLIOS … Just click here, and I’ll be happy to give you a complimentary portfolio evaluation – sending you an email explaining what’s good, how it’s likely to perform, and giving you a couple of ideas for improvement, all at no cost to you. Alternatively, you may also contact me by email at firstname.lastname@example.org, or by calling 972-702-6032, and I’ll also give you the names of two stocks we own in our portfolios and two stocks nearing Buy status.
TO MY CLIENTS … THANK YOU FOR YOUR TRUST. We’ve had great success since we started this RIA in mid-2018, substantially ahead of the market return over the same period of time.
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.