Monthly Outlook: October 2023
We know that stocks have been in a correction the past two months, and it feels a little painful. The S&P500 is down 6.3%, and the NASDAQ is down 6.6%. International stocks are down 7.5%. Bonds have lost 3.1%, too, so they aren’t helping, either. The question being asked is whether this is a normal 5%-10% correction or the beginning of something worrisome? There is a lot of handwringing about inflation and interest rates, recession or no recession, rising unemployment, stalling corporate earnings, dysfunctional government and shutdowns, upcoming elections, and so on. If we could just know all the answers today! Of course, no one can but there may be something better that we do know. At least when it comes to investing, we can measure with 100% certainty the price trendline for every market. We can observe, on a daily basis, whether a market is above or below its trendline. Often, a market can stay uptrending or downtrending for months on end. But when a market crosses its trendline, its “line in the sand,” that’s our trigger to either buy or sell. Gains happen when a market is above its trendline, and losses can occur when they move below. Recently, many markets have moved below their price trendline, so we’ve been necessarily selling to protect from further downside.
We break the global stock market down into six markets and invest in each one with a corresponding index ETF. They’re not equally weighted, but they add up to 100% coverage of the global stock market. Our most bullish scenario is to be fully invested in all six markets, when they are all trending higher. That has been the case for most of 2023. As a market trends higher, we have to let it “wiggle” a little in a zig-zag manner as it moves higher. For that reason, we never sell at the absolute peak or buy at the absolute bottom. We’ll give up the top 5% and bottom 5% for that fat 90% in the middle.
In September, some of the markets wiggled down just a bit too far and have rolled over their price trendline. They’ve moved from uptrend to downtrend. That’s our signal to sell and move from growth to protection mode in that market. US Value – sold September 26th. US Small – sold September 20th. International Growth – sold September 7th. Emerging Markets – sold September 21st. Only US Growth (think Big Tech and internet) and International Value remain above their price trendline and so we remain fully invested in those markets. Following the trendlines and signals leaves us with just 50% net invested in stocks as we start October.
You might note the dates of our recent sell signals. While we’ve made decisive movements, many of them came in late September after some initial weakness in August and September. The benefit will kick in if these markets continue to slide lower from here and we’ll avoid “the big loss.” Of course, we don’t know if that’s coming or whether markets will rebound back up. In that case, we’ll have to buy them back as they cross above their price trendline. But we’re watching and ready to respond to what the markets give us. We know that markets tend to trend higher about 80% of the time but it’s the 20% of downtrends that can really hurt, and they tend to come quickly. We’re confident that we’ve done the prudent thing to raise some cash from these newly downtrending markets.
Evidence Based Investing
It’s tempting to engage in the never-ending banter about the economic and political problems du jour. There are multiple tv, radio, and podcast opportunities to fill the day. Occasionally, they provide some insight and new ideas, but mostly I find them to be grandstanding as they talk over themselves. As Yogi Berra said, “It was impossible to get a conversation going, everybody was talking too much.”
Much of health care and education use evidence-based techniques and procedures to improve outcomes. They look at factual data and results to inform themselves as to best practices. Our iFolios strategy is evidence-based investing. We don’t listen to the banter and opinions. We look at actual price trends and look for crossovers from up- to downtrends. When, and not until, any market starts a new downtrend, the evidence shows that losses can (and often do) develop. It’s best practice to sell at the signal and wait for a better trend. Yogi also said, “You can observe a lot just by watching.” We’re watching, and trading accordingly.