Monthly Outlook: November 2023
Global stock markets had a decent run from March to July. But they’ve been zigzagging lower over the past three months. We know many of you have noticed because you’ve been calling in for reassurance. We all know that markets bounce around daily, but we focus on medium- to long-term trend changes. That is, we’re looking for the day when any of our market ETFs cross over their price trendline. And we can report, we are seeing crossovers happening right now. As a reminder, price trendlines are a simple calculation, based on moving average prices. They’re numerical like a thermometer reading. On our charts, we can see when any of our market index ETFs cross above or below their price trendline. That’s our trigger to either buy or sell, and we’ve been selling.
So, what’s up? US Growth Stocks, Commodities, and Short-Term Bonds. That’s about it. Note that US Growth Stocks are only about 1%-2% away from a price trendline crossover, so we have sell-stops in place. That leaves the following markets and index ETFs downtrending: US Value Stocks, US Small Company Stocks, INTL Growth and Value Stocks, Emerging Market Stocks, Long-Term Bonds, and Real Estate.
Behind the scenes, we’re creating an “iFolio-Meter” to illustrate our view of how the global stock markets are trending. It looks like a speedometer and ranges from 0 to 100. Zero is our most bearish reading and 100 is our most bullish reading. The “speed” or score is based on the underlying trends of the global stock market components, so it’s a factual reading of current price trends, not our guess. Most of the time, it will be in the 80-100 range, indicating it’s safe to be fully invested, or nearly so. Today’s iFolio-Meter score is “31,” if you’re wondering. Thirty-one is bearish and explains why we’ve been selling stock ETFs over the past two months and why we have cash reserves in safe money market funds.
No Trend Lasts Forever
Now that I’ve dumped all this bearish and downtrending data on you, let me assure you that we’re not worried a bit and we actually look forward to changes in trends. Uptrends give us the opportunity to make money and that’s our goal, of course. But downtrends are also useful if played correctly. We can step aside by selling and sitting in safe money funds. When the downtrends are over and turn back up, we’ll be able to buy lower and make bigger gains in the next uptrends. Downtrends, like the one we’re in now, can last one month or one year, no one can know in advance. We’ll watch and wait, and invest with the trends that the markets give us.
Today’s Pain Trade and Opportunities Ahead
As a money manager, we’re always considering what traders call “the pain trade.” That is, what is the one trade that no one wants to make? What is the market or ETF that no one is buying? It’s a way to consider the out-of-favor or contrarian view because that’s where opportunities lie, sometimes. Today’s pain trade is Long-Term Bonds. They’ve been killed for the past two years as the Federal Reserve has raised interest rates (Fed Funds) from 0% to 5.25%. Rising interest rates always equal falling bond prices, and vice versa. The 20-year+ US Treasury Bond has lost 42% over the past two years, and that includes interest. “Ouch!”, is right! But here’s the potential opportunity: If interest rates have peaked and start to fall as the economy slows (a most likely scenario in our view), then bond prices will rise (the opposite of the past two years). It’s a bit too early to make this trade, but we’re watching the price and looking for a price trendline crossover in the weeks ahead. Long-Term Bonds could be a good total return opportunity very soon, but we’ll see.
A Quick Word on High Income and Dividend Funds
Every time stock markets start to trend down (like now), pundits tout the virtues of high income and dividend funds. Dividends of 5%-9% sound appealing, we know. But we look at the total return on all investments, which includes the dividend and the price change. It makes no sense to buy an ETF that pays 5% if it’s losing 20%, right? A total return of -15% is not good. That’s what these funds are doing right now. We’ll watch their trends and stay open to the idea, but not today. We absolutely love how our portfolios are positioned today, given the trends.