Monthly Outlook: May 2022
Markets are off to one of their worst starts in decades. There’s just no way to say that pleasantly. YTD, the S&P500 is down 12.9%, the NASDAQ (last two years’ favorite) is down 21.1%, and international stock markets are down 12.7%. Even Bonds are down 9.5% this year. The important thing, to us, is that the trend of nearly every market has rolled over to downtrend (below their 200-day moving average trend line), thereby triggering our sell signals. There are a couple of sub-sector niche markets that are doing ok, mostly commodities, but do you really want a portfolio of just oil and soybeans? The good news is that we’ve already sold a lot of holdings and are sitting in protection mode with ample Cash. We’re holding just 20% of our stock market targets, counting both long and offsetting hedge positions, so we’re clearly focusing on preservation today. We’d agree that Cash is a terrible long-term holding since it doesn’t even keep up with inflation. But when your choices are this year’s downtrends or 0% from Cash, it’s an easy decision. Cash is King, for now.
Forecast vs Nowcast
Watch any investment news show and you’ll hear endless forecasts and guesses. History proves that most will be wrong, so why do they do it? And why do so many people listen to them? Many self-help books guide us to “live in the present,” to learn from the past, have hope for the future, but pay attention to right now! Similarly, we’ve adopted a concept we call Nowcasting, which is investing according to factual evidence about what markets are doing right now. Is a market trending up or down? It’s a simple measurement to compare its price to its long-term moving average trendline. It’s one or the other, at all times. We strive to stay fully invested for growth in uptrending markets and sell the downtrending markets to protect against loss. With Nowcasting, we’re assured of being right 90%+ of the time. How did we know to sell one stock index fund after another in mid-January and raise Cash? It wasn’t because we made a brilliant forecast. We simply observed the new downtrends, and they triggered our sell signals. Emerging markets were the first to sell, then US Small, then INTL Growth, and so on. Today, since every stock market, or asset class, is in a downtrend, we have our minimum allocation to stocks and lots of Cash. We’ll change our positions when market trends change (back to up).
How Long Will Downtrends Last?
Since we don’t forecast or guess, the honest answer to this question is, we don’t know. We do know from history, that downtrends have lasted three months to three years. And the dip can be 5% to 50%. But, if that’s your range of outcome from downtrends, you can understand why we prefer Cash, for now. We also know that the stock market is as over-valued as it was at previous important peaks like 2008, 2001, and 1929. We also know that the stimulus that created this bubble is behind us and is about to be reduced. So, there is potential for this downtrend to be longer and deeper than we’d like. Although we’re already in maximum protection mode, we’d advise anyone who isn’t there yet to use any bounce to reduce risk.
Will the Fed Do Their Job?
The markets are influenced by countless factors, ranging from fundamentals to psychology. Today, one of the biggest concerns is high inflation and the likely policy responses that are coming to tame it. After the 2008 “Great Recession,” there were massive fiscal and monetary stimulus programs put in place to soften the economic blow. The Federal Reserve (the Fed) printed trillions of new dollars through Quantitative Easing and 0% Fed Funds rates. And they kept the foot on the stimulus pedal all through 2021 (with a slight pause in 2018). But they created this stimulus bubble in financial assets, and they shouldn’t be surprised at the resulting inflation today. One of the Fed’s key jobs is to maintain a stable currency and low inflation. Will they finally do their job and reduce the unneeded stimulus? Will they raise the Fed Funds rate and shrink their balance sheet? They’re telling us, “Yes!”, and we’ll see that at this week’s Federal Reserve Board meeting. If the stimulus created the bubble, the market is guessing that tapering will burst it. It’ll be an interesting year, and we’ll use our iFolios strategy and Nowcasting to keep us well positioned. Importantly, we’ll have Cash to buy cheaper.