Worst First Half Since... Mr. Ed? David Alan Carter
It’s the mid-year mark, so every news agency that follows business is looking back and making comparisons to this and that. For the reporting class, it’s sport. For investors, it’s pretty glum on the field.
It’s the mid-year mark, so every news agency that follows business is looking back and making comparisons to this and that. For the reporting class, it’s sport. For investors, it’s pretty glum on the field.
- As of yesterday, the S&P 500 was down over 20% YTD, marking the worst first half of a year for the S&P since 1970.
- The Dow Jones Industrial Average is off to its worst start since 1962. In 1962, the Beatles were still performing at The Cavern Club in Liverpool, and those of us old enough to remember were watching Mr. Ed, I Love Lucy, and The Twilight Zone on black and white television.
- The Nasdaq and the Russell 2000 small-cap index are having their worst year ever. Ever.
- Investment-grade bonds, as measured by AGG, the iShares Core U.S. Aggregate Bond ETF, has lost 11% - on course for their worst start to a year ever.
Outside the U.S., it’s been no better. Stocks and bonds in both developed and emerging markets have tumbled, hurt by the same slowing growth and inflation.
And cryptocurrencies? “The most knowledgeable educators in the space are predicting $100,000 Bitcoin in Q1 2022 or sooner,” said crypto specialist Kate Waltman back in November 2021. Bitcoin is currently trading at $19 thousand and change, down 58% YTD.
Good News?
The good news for investors (and there’s always some good news) is that markets haven’t always done poorly after suffering big losses in the first half of the year. In fact, history shows they have often done the opposite.
“When the S&P 500 has fallen at least 15% the first six months of the year, as it did in 1932, 1939, 1940, 1962 and 1970, it has risen an average of 24% in the second half, according to Dow Jones Market Data.” – The Wall Street Journal.
Whether or not the second half is that rosy, for every leg down in the market, there’s more cash sitting on the sidelines. At some point, inevitably, that cash will begin flowing back into equities. The turnaround this time hinges on how quickly the Fed is able to contain inflation, and how much the economy slows as a result.
For What It’s Worth
Of analysts recently polled by CNBC, 40% predict the S&P 500 will end 2022 above 4,000. Another 8% believe it will be above 4,500. As of today, the S&P 500 is clocking in at 3,809.
Finally, under the category “At Least I Haven’t Lost That Much,” this story…
Crypto entrepreneur Sina Estavi originally bought the NFT (non-fungible token) of former Twitter CEO Jack Dorsey's first tweet for $2.9 million back in 2021. He’s been attempting to resell it ever since, initially with a $50 million price tag. On digital marketplace OpenSea, the NFT now has a highest buy offer of 0.0166 ETH. ETH being the cryptocurrency ether.
That translates to $29.
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 (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.
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 (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.
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