The month started out swimmingly. The first few days in September saw a promising upswing with the S&P 500 posting a gain of a few percentage points by the 12th. Perhaps investors were giddy with gas prices falling at the pump and demand for real estate beginning to taper.
Inflation licked? Not quite.
One day later, a hotter-than-expected report on inflation sent the stock market reeling. The Dow lost more than 1,250 points and the S&P 500 sank 4.3%. Bond prices also tumbled, sending yields sharply higher.
“We have got to get inflation behind us,” said Fed Chair Jerome Powell. “I wish there were a painless way to do that. There isn't. Reducing inflation is likely to require a sustained period of below-trend growth and there will very likely be some softening of labor market conditions… We will keep at it until we're confident the job is done."
Expectations for a soft landing have gone out the window. The question, now, appears to be how hard of a hard landing will there be. As I write, the market is at a new 2022 low; the S&P in bear market territory at -23% YTD, the Nasdaq worst still at -32%. For the Dow, September alone was the worst monthly performance since March of 2020 (the COVID Crash).
Bad as those numbers are, they look tame compared to the data on some Big Tech names.
- Meta (formerly Facebook) is down 59% YTD.
- Nvidia is down 58%.
- Netflix down 60%.
- Google, Microsoft and Amazon all down from 29% to 32%.
“It’s the most negative I’ve seen tech going back to 2009,” says Dan Ives, Managing Director at Wedbush Securities.
Lest the carnage tempt a change of heart in Fed policy, Fed Vice Chair Lael Brainard reiterated – just this morning – that the central bank is “committed to avoiding pulling back prematurely” on restrictive monetary policy in its efforts to bring down inflation.
Any good news out there?
- U.S. consumer confidence index rose in September, reports The Conference Board. That marks two back-to-back monthly increases. Improving confidence may bode well for consumer spending in the final months of 2022.
- The economy is still humming along - for now - despite some high-profile profit warnings from the likes of FedEx, 3M and Sherwin-Williams. And possibly Apple (rumors have Apple cutting iPhone production on growth fears).
- The latest AAII (American Association of Individual Investors) Sentiment Survey shows that the percentage of individual investors describing their six-month outlook for stocks as “bearish” hit 60.9%. The last time it was that high was near the end of the Financial Crisis in March of 2009.
Why in the world is this last one good news? History says the more pessimistic the investor class becomes, the better the prospective returns look six months out.
So what will October bring? Plenty of investing gurus are suggesting we’re in a buying opportunity, while some say we haven’t seen the bottom yet. To my eyes, we’re still clearly in an overall downtrend. This is reflected in the majority of our strategies as they continue to lean toward the defensive. So, caution.
And For What It’s Worth…
Meta (formerly Facebook) has released its BlenderBot 3, a conversational AI (artificial intelligence) prototype that can, in Meta’s words, “interact with people in smarter, safer and more useful ways.”
Asked by the BBC for its thoughts on founder and CEO Mark Zuckerberg, the chatbot responded, “His company exploits people for money, and he doesn’t care.”
The bot has also made clear that it’s not a Facebook user, telling Vice Media Group’s Janus Rose that it had deleted its account after learning about the company’s privacy scandals. “Since deleting Facebook my life has been much better,” it said.
The company is now warning users that BlenderBot 3 will make “untrue and offensive statements.”
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 - especially now - that protection* remains paramount.
* 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 a significant position in a model built for protection. For example, the new Zen Knuckle with its volatility hedge. Or Bond Bulls and/or The 12% Solution, as they both have sensitive cash triggers, and can switch between different bond funds.
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.
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.
Finally, 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.