The markets had been on a tear. Driven by modestly positive inflation data that spurred hopes the Federal Reserve would take a less aggressive approach to future rate hikes, the tech-heavy Nasdaq Composite rallied a whopping 20% between mid-June and mid-August.
Of course, it was still on the wrong side of its 200-day moving average, and would need to climb another 17% just to break even with the high it made in late November 2021. But it was a heck of a summer rally just the same.
The operative word is “was.”
"Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy." -- Fed Chair Jerome Powell.
The comments sent markets tumbling. The Dow lost more than 1,000 points. Lower still on Monday. Lower again on Tuesday. As of noon on Wednesday, the Dow and the S&P 500 are both down more than 3% for August, while the Nasdaq has lost 4% for the month.
OK, so investors’ expectations were all out of whack. No longer. Said Minneapolis Fed President Neel Kashkari with regards to the sharp selloff: “People now understand the seriousness of our commitment to getting inflation back down to 2%.”
Powell’s pushback against market hopes for a dovish pivot is the latest setback in a challenging year for investors. Other ongoing risks include…
- The Fed is accelerating its unwinding of its near-$9 trillion balance sheet.
- China’s economy is slowing down.
- With winter approaching, an energy crisis threatens to tip Europe into recession.
So what will September bring? Looks to me like a fork in the road. Stocks could continue breaking bearish to retest the June lows in the coming weeks. Or we could stop the slide in short order and bounce up and down within a trading range until more convincing evidence emerges to make investors more comfortable in a long-term bullish or bearish stance.
At one extreme, there’s the eternal sunshine of Fundstrat’s managing partner Tom Lee. “The drivers of accelerating inflation have essentially evaporated,” says Lee on CNBC. He continues to advocate a market rally into year end. At the other extreme, famed investor Jeremy Grantham, who said to Bloomberg only hours ago: “My bet is that we're going to have a fairly tough time of it economically and financially before this is washed through the system."
The next few days may shed more light with a bevy of economic reports updating consumer confidence, construction spending, and vehicle sales – not to mention the big August jobs report that drops at the end of the week.
And For What It’s Worth…
As reported by The Week, Tesla’s CEO and reigning Technoking Elon Musk recently had this to say on Twitter: “The downside of elf ear surgery probably outweighs the upside.”
This, in response to a series of tweets by the singer Grimes, who is Musk’s ex-girlfriend and the mother of two of his children, opining that she was considering modifying her ears with plastic surgery to look pointy like an elf’s. Grimes was a tad hesitant to go forward for fear of ear cartilage damage.
If Musk’s prudent advice is headed, that’s one less celebrity with elf ears, meaning one less strange and awkward conversation parents will have to have with their children. So, thank you, Elon.
In a later tweet, Grimes solicited the names of anyone who "could do vampire teeth caps.” Alas, a Technoking’s work is never done.
** What does protection look like? At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can also mean an overweight position in a model built for protection (i.e., Bond Bulls, Lean Muscle, The 12% Solution).
It can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or the new Zen Knuckle and pretty much anything else.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Finally, protection can mean keeping an eye on the provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary). See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.