Election and the Stock Market October started out surprisingly strong, with the market roaring into mid-month. Then the chop began, and the downslide.
As I write, the S&P 500 is rapidly heading back to the flat line for the month. Most of the strategies suffered as well, largely attributable to a failing bond hedge.
The Surge in Treasury Yields
Since the Federal Reserve cut short-term rates by half a percentage point on September 19, the 10-year Treasury yield has gone from 3.6% to 4.2%. Bond funds have an inverse relationship to yields. Case in point: TLT, the 20-year Treasury Bond ETF. Since that Fed rate cut, TLT has dropped 7%. That was not something the market was expecting, and most of our strategies were on the wrong side of that trade.
As I write, the S&P 500 is rapidly heading back to the flat line for the month. Most of the strategies suffered as well, largely attributable to a failing bond hedge.
The Surge in Treasury Yields
Since the Federal Reserve cut short-term rates by half a percentage point on September 19, the 10-year Treasury yield has gone from 3.6% to 4.2%. Bond funds have an inverse relationship to yields. Case in point: TLT, the 20-year Treasury Bond ETF. Since that Fed rate cut, TLT has dropped 7%. That was not something the market was expecting, and most of our strategies were on the wrong side of that trade.
To their credit, by roughly mid-month, provisional picks showed the strategies moving away from TLT and related Treasuries and into more resilient funds. But the jarring move up in yields eventually got the attention of equity investors – and spooked them.
What Are Bonds Saying?
According to Mike Santoli, Senior Markets Commentator at CNBC, one take is that the selloff in bonds is an indictment of the Fed for a panicky policy mistake by easing 50 basis points into a resilient economy. “Traders were caught betting on continued aggressive dovishness from the Fed, perhaps on further economic softness. And instead the economic data immediately began surprising to the upside, quickly forcing the Street to dial back future rate-cut expectations.”
Earnings
Adding to the chop: quarterly corporate earnings reports. At this stage, we’ve got mixed results. Positive earnings surprises reported by S&P 500 companies have been offset by significant downward revisions to EPS estimates for a few key companies. As I write, Meta and Microsoft are dragging on the market post earnings – despite good numbers.
With Apple reporting after the close today, and Nvidia set to report November 20, earnings will continue their influence well into the new month.
And About November?
One word: elections. OK, two words: elections and Nvidia.
Depending on the winner of the U.S. Presidential election, markets could see an immediate relief rally (relief that the uncertainty is now behind us). Or an immediate ‘sell-the-news’ drop. Beyond the immediate, expect the markets to begin factoring in the corporate winners and losers in a new administration. How that would play out is just speculation at this point.
And then, a Fed policy meeting November 7 (market expects a 25% rate cut), and the earnings report for market-mover Nvidia coming along on November 20.
He Said, She Said
And For What It’s Worth…
As reported by The Week magazine in its October 25th edition: “It was a good week for exciting new chapters, after Ryan Salame, Sam Bankman-Fried’s lieutenant at collapsed crypto-fraud firm FTX, announced on LinkedIn that “I’m happy to share that I’m starting a new position as inmate at FCI Cumberland!”
Salame joins a team of more than 1,000 felons at the federal prison, for an engagement expected to last 7 years, 6 months.”
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.
--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 mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection 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 even a bit of the Zen Knuckle combined with a couple of the above.
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.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on 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.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
What Are Bonds Saying?
According to Mike Santoli, Senior Markets Commentator at CNBC, one take is that the selloff in bonds is an indictment of the Fed for a panicky policy mistake by easing 50 basis points into a resilient economy. “Traders were caught betting on continued aggressive dovishness from the Fed, perhaps on further economic softness. And instead the economic data immediately began surprising to the upside, quickly forcing the Street to dial back future rate-cut expectations.”
Earnings
Adding to the chop: quarterly corporate earnings reports. At this stage, we’ve got mixed results. Positive earnings surprises reported by S&P 500 companies have been offset by significant downward revisions to EPS estimates for a few key companies. As I write, Meta and Microsoft are dragging on the market post earnings – despite good numbers.
With Apple reporting after the close today, and Nvidia set to report November 20, earnings will continue their influence well into the new month.
And About November?
One word: elections. OK, two words: elections and Nvidia.
Depending on the winner of the U.S. Presidential election, markets could see an immediate relief rally (relief that the uncertainty is now behind us). Or an immediate ‘sell-the-news’ drop. Beyond the immediate, expect the markets to begin factoring in the corporate winners and losers in a new administration. How that would play out is just speculation at this point.
And then, a Fed policy meeting November 7 (market expects a 25% rate cut), and the earnings report for market-mover Nvidia coming along on November 20.
He Said, She Said
- The stock market looks poised for a 7% correction by mid-November, according to technical analyst Mark Newton of Fundstrat, citing complacent investor sentiment ahead of the general election on November 5. Newton believes such to be a "short-term correction only" and "not the start of a larger decline." In other words, a buy-the-dip opportunity.
- “The market continues to punch above its weight,” says Bryn Talkington, Managing Partner of Requisite Capital Management. Regarding sectors outside of big tech that have been doing well all year, “There’s more to come.”
And For What It’s Worth…
As reported by The Week magazine in its October 25th edition: “It was a good week for exciting new chapters, after Ryan Salame, Sam Bankman-Fried’s lieutenant at collapsed crypto-fraud firm FTX, announced on LinkedIn that “I’m happy to share that I’m starting a new position as inmate at FCI Cumberland!”
Salame joins a team of more than 1,000 felons at the federal prison, for an engagement expected to last 7 years, 6 months.”
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.
--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 mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection 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 even a bit of the Zen Knuckle combined with a couple of the above.
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.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on 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.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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