Wall Street vs. Main Street In fits and starts, the market finally delivered a Santa Claus rally for the month of December. In fact the market - if one thinks of the market as the S&P 500 - had a very good year.
But dig a little deeper, and you discover that five individual stocks in the S&P 500 (Apple, Alphabet, Microsoft, Nvidia and Tesla), accounted for more than half the benchmark’s gain since April.
But dig a little deeper, and you discover that five individual stocks in the S&P 500 (Apple, Alphabet, Microsoft, Nvidia and Tesla), accounted for more than half the benchmark’s gain since April.
Unfortunately for the majority of stocks, the market topped in February and it’s been downhill since. Currently 85% of all U.S. stocks are trailing the S&P 500. Nearly 60% of all stocks are trading below their 200-day moving average. And 42% of all stocks are technically in a bear market (when an index or stock is trading at 20% or more below its highs). To say the indices have failed to reflect what’s really going on in the broader market is an understatement. Often that’s the case, but 2021 was a particularly strong disconnect.
Beyond the stock market, if all you had to ponder were overarching economic numbers, you would assume that everyone would be cheering 2021. After all, economic growth was the strongest it had been in decades. Businesses reopened, jobs were plentiful, wages rising. And the errant container ship Ever Given came unstuck in the Suez Canal.
So Why The Long Face?
So why are Americans mostly… miserable? The University of Michigan Index of Consumer Sentiment reports the lowest end-of year reading since 2008, when the world was in the throes of the global financial crisis.
COVID-19 is a huge factor. The virus was supposed to be long gone by this point, or at least that’s what we’d hoped back in January with a life-saving vaccine being rolled out. But an unexpected rise in vaccine reluctance has meant only 62% of the U.S. population have received shots, and only 30% of them are boosted. And so the virus is still with us. Even worse, the U.S. is ending the year with a record number of cases.
Surging inflation has also been weighing on Americans. In a University of Michigan report, a fourth of respondents cited a hit to their living standards due to inflation. Food prices are rising. New cars – if they can be found – are going for hundreds if not thousands of dollars over list. First-time homebuyers are largely locked out of the housing market due to spiking home values and a feeding frenzy around listings.
How Did The Strategies Do?
But for Bond Bulls, the strategies are closing out 2021 with decent gains. We’ve been fortunate. Here’s the rundown on performance:
While the strategies were largely helped by a reliance on the large indexes, most were also negatively impacted by a Treasury market gone squirrely. Bond Bulls in particular, as well as Global Trader and White Knuckle, suffered as the long-duration Treasury fund TLT searched for a footing in a year dominated by inflation talk and non-stop speculation of coming Fed actions.
Though positive trends in the bond market were hard to come by in 2021, I do expect Treasuries to continue to provide a hedge during market crashes.
How Is 2022 Shaping Up?
We’re starting the new year surrounded by the Omicron variant that is more transmissible than Delta. Fortunately, it also appears to be less virulent. Supply chain troubles look to be easing, and inflation is expected to moderate in the first half of the year. Yes, the Fed will be raising interest rates, but will be doing so slowly and methodically, hopefully giving the market a chance to breathe. Last but not least, the economy remains strong.
That’s the bull case. Is everybody onboard with that sentiment?
Tom Lee of Fundstrat Global Advisors, usually Mr. Positive and quite often Mr. Accurate, sees some turbulence ahead. As of December 27, his exact words: “I think 2022 is really treacherous.” --CNBC
And star stock picker Cathie Wood of ARK Invest, sees a bit of difficulty ahead as well. As of December 29, her exact words: “In our view, fears of inflation will give way to confusion and fears of recession during the next three to six months.” –Tweet
OK, so what’s an investor to do? Have a plan. Stick to the plan. And know that there’s a ton of money sloshing around our system, and even if the worst comes to pass, that money won’t stay on the sidelines for long. It wants to go somewhere, and it’s magnetically attracted to risk assets like stocks.
Cheers, and Happy New Year.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection** remains paramount.
Best always,
David
Beyond the stock market, if all you had to ponder were overarching economic numbers, you would assume that everyone would be cheering 2021. After all, economic growth was the strongest it had been in decades. Businesses reopened, jobs were plentiful, wages rising. And the errant container ship Ever Given came unstuck in the Suez Canal.
So Why The Long Face?
So why are Americans mostly… miserable? The University of Michigan Index of Consumer Sentiment reports the lowest end-of year reading since 2008, when the world was in the throes of the global financial crisis.
COVID-19 is a huge factor. The virus was supposed to be long gone by this point, or at least that’s what we’d hoped back in January with a life-saving vaccine being rolled out. But an unexpected rise in vaccine reluctance has meant only 62% of the U.S. population have received shots, and only 30% of them are boosted. And so the virus is still with us. Even worse, the U.S. is ending the year with a record number of cases.
Surging inflation has also been weighing on Americans. In a University of Michigan report, a fourth of respondents cited a hit to their living standards due to inflation. Food prices are rising. New cars – if they can be found – are going for hundreds if not thousands of dollars over list. First-time homebuyers are largely locked out of the housing market due to spiking home values and a feeding frenzy around listings.
How Did The Strategies Do?
But for Bond Bulls, the strategies are closing out 2021 with decent gains. We’ve been fortunate. Here’s the rundown on performance:
- Bare Knuckle (a variation of The White Knuckle): +39.0%
- American Muscle: +27.6%
- The 12% Solution: +21.8%
- Lean Muscle (a variation of American Muscle): +20.1%
- The White Knuckle: +14.3%
- Global Trader: +12.6%
- Bond Bulls: -1.7%
While the strategies were largely helped by a reliance on the large indexes, most were also negatively impacted by a Treasury market gone squirrely. Bond Bulls in particular, as well as Global Trader and White Knuckle, suffered as the long-duration Treasury fund TLT searched for a footing in a year dominated by inflation talk and non-stop speculation of coming Fed actions.
Though positive trends in the bond market were hard to come by in 2021, I do expect Treasuries to continue to provide a hedge during market crashes.
How Is 2022 Shaping Up?
We’re starting the new year surrounded by the Omicron variant that is more transmissible than Delta. Fortunately, it also appears to be less virulent. Supply chain troubles look to be easing, and inflation is expected to moderate in the first half of the year. Yes, the Fed will be raising interest rates, but will be doing so slowly and methodically, hopefully giving the market a chance to breathe. Last but not least, the economy remains strong.
That’s the bull case. Is everybody onboard with that sentiment?
Tom Lee of Fundstrat Global Advisors, usually Mr. Positive and quite often Mr. Accurate, sees some turbulence ahead. As of December 27, his exact words: “I think 2022 is really treacherous.” --CNBC
And star stock picker Cathie Wood of ARK Invest, sees a bit of difficulty ahead as well. As of December 29, her exact words: “In our view, fears of inflation will give way to confusion and fears of recession during the next three to six months.” –Tweet
OK, so what’s an investor to do? Have a plan. Stick to the plan. And know that there’s a ton of money sloshing around our system, and even if the worst comes to pass, that money won’t stay on the sidelines for long. It wants to go somewhere, and it’s magnetically attracted to risk assets like stocks.
Cheers, and Happy New Year.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection** remains paramount.
Best always,
David
__________
** 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.
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 that hold up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
** 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.
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 that hold up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
RSS Feed