Another noticeable trend: Treasuries. Have they at last found their footing after a brutal correction last year? January has been a good sign. We’ll see if that holds.
Then again, you’ve got the assets that fared well last year getting ignored – or worse. Utilities collectively down over 2% for the year. Consumer products powerhouse Procter & Gamble down over 6%. And after an amazing climb in 2022 prompted by global security concerns (read: war in Ukraine), aerospace giant Northrop Grumman is down 19% YTD.
All of this giveth and taketh has coincided with a steady stream of data that suggests inflation is cooling, most recently last Friday’s Personal Consumption Expenditures (PCE) report. Core PCE, which doesn’t include food and energy, is now at the lowest level since October 2021.
Moreover, data continues to show the U.S. economy resilient in the face of elevated inflation and higher rates. The labor market added 223,000 jobs in December. And data out last week showed gross domestic product (GDP) grew 2.9% in the fourth quarter, better than expected.
Still, A Dicey February
Our strategies pick through the winners and the wreckage each month for signs of how the next 30 days are shaping up. All began the year in a mildly to heavily defensive posture. And all (save one) are in the green as the New Year gets underway.
But the Fed is not going to make next month’s prediction easy: it has a 2-day policy meeting scheduled for - of all times - January 31 through February 1. On Wednesday, the Federal Open Market Committee is expected to announce another 0.25% hike in the federal funds rate. Should that hold, no problem per se. But it’s often what Fed Chair Powell has to say after the policy announcement that moves markets.
"Price action in January 2023 bears an eerie resemblance to that in July 2022, when risk assets rallied as investors bought into the idea of a 'soft landing,'" says Gargi Chaudhuri, head of BlackRock's iShares Investment Strategy.
That July rally, you may remember, reversed abruptly when the Fed dashed investors’ hopes and remained hawkish.
Beyond the inflation numbers, the PCE and other recent reports offer a window into a number of economic trends. One of which is the level of savings; it’s declining. The personal savings rate has plunged to around 2.4% from a pandemic peak of 33%. Reliance on credit is growing. Delinquencies have started to tick up.
So, Continued Caution
Liz Young, SoFi’s head of investment strategy, summed it up well last Friday during a CNBC interview. “I’m still cautious [despite bright spots in earnings and economic data]; I still think the economic data and the blowback from the tightening cycle has not been seen entirely.”
She adds, “There’s a high probability that things likely get worse again before they get better.”
And For What It’s Worth…
A Japanese man taught his pet fish to play Pokémon on his Nintendo Switch. OK, that’s strange enough. But while the man was live-streaming a game on his YouTube channel, and stepped away for a break, the fish reportedly changed the name on the Switch account, set up a PayPal account, logged into the Nintendo store, downloaded a new avatar, and spent some money – exposing the man’s credit card details in the process.
Right. I wouldn’t have believed it either, but it was all being streamed in real time on the internet to the amusement of thousands. Article on CNN.
My takeaway: never give a fish access to your personal finances.
* 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 (it has still managed to outperform the S&P 500 over the long run).
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 new 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 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.