Monthly Outlook: April 2023
March was another volatile month for markets but ended up with gains across most markets. The first week of March brought news of a bank run focused on Silicon Valley Bank, Signature Bank, Credit Suisse, and other smaller names. But by March 13th, bailouts and stimulus programs came to the rescue and markets rallied for the back half of the month. Markets just love “cheap and easy” money, and our government doesn’t disappoint. Between the FDIC, Federal Reserve, Congress, or Executive orders, every “crisis” is met with a stimulus program. We could debate whether it’s the government’s job to prop up markets (we won’t), but that’s the Pavlovian response that traders have learned.
For the first quarter of 2023, the S&P500 is up 7.4%, the international stock market is up 8.9%, and bonds are up 3.2%. Despite all the stressful news and worry, markets are holding up fairly well. Importantly, the trend of nearly all markets is up, and that’s our call to stay invested.
Trade the Rally?
We often talk about “trends” and how they provide us buy and sell signals for each market. We constantly analyze long-, mid-, and short-term moving averages to define the trend of each market. We know, using history and math, that gains come from markets that are up-trending (above their long-term moving average). Nearly 80% of the calendar time, markets tend to trend higher and should be bought/held for gains. We are in one of those trends right now. On the other hand, that means markets trend lower 20% of the time. That’s when big losses can occur. Our goal, then, is to be fully invested in markets that are up-trending to capture gains, and to sell/trim markets that are down-trending to reduce loss. Hopefully, that sounds like common sense to you, as it does to us.
Market trends, as we define them, can last for a couple of weeks to a couple of years. We love the long multi-year uptrends best, of course. But we cannot know how long a trend will last ahead of time, so we trade every signal to keep our portfolios positioned correctly. After a nice 18-month uptrend in 2020 and 2021, markets have been particularly volatile the past 15 months with many trend changes. We’ve had to make more short-term trades, as a result. Already this year, some markets have changed trend two to three times. On April 1st, we’re 95% invested in uptrends. All of the big gains come from sustained uptrends, so we’re optimistic.
Trade the Coming Recession?
We always consider the current economic situation, and there are many indicators that suggest a recession is imminent. We look at yield curves, employment levels, LEI, CPI, PPI, interest rates, valuations, and many other data points to assess the economic outlook. We’ll spare you the detailed analysis, but the summary is that a recession is highly likely in the near future. If we knew that for sure, we’d be inclined to reduce risk in portfolios by selling stocks, buying bonds, and raising cash. We’d advise investors to reduce debt, deleverage, and sell other financial assets. But we don’t know that a recession is imminent or for sure. There’s a possibility that government stimulus, for example, staves off an economic slowdown. It’s also possible that the economy slows a little, but remains so strong that it avoids an all-out recession. The challenge with making fundamental or economic predictions is that you must be both right and time it perfectly.
How to Trade It
The name of the “game” is to buy assets at one low price and sell them at a higher price in the future. It all comes down to price. Sure, we can use economic data and fundamentals to predict the likely future. Some will get it right, but the vast majority of smart analysts won’t. Predictions occupy a lot of tv and radio airtime and newsprint, but they’re really not that useful.
Or we can look directly at prices and determine if they’re trending higher or lower. All of the fundamentals, economics, and psychology are baked into prices at all times. While it’s prudent to be well versed in these aspects, it’s more profitable to trade the price trends. That’s what we do. A recession is probably coming, but prices are trending higher. For now, we’re invested and using tight sell-stops. We’re making money, carefully.