Prediction: Market Blowup? On April 20, the most powerful rocket ever built experienced a "rapid unscheduled disassembly" four minutes after lift-off. That’s the euphemism preferred by Elon Musk’s Space X to describe their Starship being consumed by an orange and white fireball.
Rockets weren’t the only thing barreling toward a blowup in April. On the 11th, Bloomberg said this about the market: “Cracks in 2023’s equity advance are appearing, as hedge funds and other speculators amass the deepest short position since November 2011 when the US sovereign credit rating was cut.”
Rockets weren’t the only thing barreling toward a blowup in April. On the 11th, Bloomberg said this about the market: “Cracks in 2023’s equity advance are appearing, as hedge funds and other speculators amass the deepest short position since November 2011 when the US sovereign credit rating was cut.”
Yikes. What was looming so ominously? The start of earnings season; this one forecasted to be “the worst since the depths of the pandemic crisis.”
Jump cut to April 28. Alas, despite much volatility, the market is ending the month basically where it began. Of the 261 S&P 500 companies that have reported earnings so far, about 80% have reported positive surprises. There have been big winners (largely tech stocks) and big losers (largely bank stocks), but all in all, better than feared.
Where the Economy Stands
The latest GDP numbers out yesterday showed U.S. economic growth decelerated to a 1.1% annual rate in the first quarter. To put that in context, the U.S. economy grew at around 2.2% a year in the 10 years prior to the pandemic.
And the PCE (Personal Consumption Expenditures) price index released just this morning showed that the Fed's favorite inflation measure cooled further in March, a sign that the central bank's rate-hike campaign is having an effect.
So things are slowing, and if the economy continues to cool as the year progresses, a U.S. recession becomes an increasing possibility in the back half. On the other hand, a resilient labor market, higher wages, and built-up savings have households fighting back against that narrative by continuing to spend despite high inflation.
Wild Cards for May
Among the usual suspects for market woes, two events stand out.
Stay buckled up.
And For What It’s Worth…
In celebration of National Grilled Cheese Day, New York eatery Serendipity 3 brought back their grilled cheese sandwiches. But these are not your Momma’s grilled cheese. At $214 per, they’ve been dubbed the world's most expensive sandwich by Guinness World Records.
The French bread is made-to-order with Dom Perignon champagne. That bread is then slathered with white truffle butter and the very rare Caciocavallo Podolico cheese (made from the milk of only 25,000 cows that lactate only two months a year). Once grilled to golden, the sandwich is cut diagonally and each half is gilded in 23-karat edible gold on its cross section.
Finally, the sandwich is served with a side of South African Lobster Tomato Bisque for dipping.
There’s an inflation fighter for you.
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 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 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.
Jump cut to April 28. Alas, despite much volatility, the market is ending the month basically where it began. Of the 261 S&P 500 companies that have reported earnings so far, about 80% have reported positive surprises. There have been big winners (largely tech stocks) and big losers (largely bank stocks), but all in all, better than feared.
Where the Economy Stands
The latest GDP numbers out yesterday showed U.S. economic growth decelerated to a 1.1% annual rate in the first quarter. To put that in context, the U.S. economy grew at around 2.2% a year in the 10 years prior to the pandemic.
And the PCE (Personal Consumption Expenditures) price index released just this morning showed that the Fed's favorite inflation measure cooled further in March, a sign that the central bank's rate-hike campaign is having an effect.
So things are slowing, and if the economy continues to cool as the year progresses, a U.S. recession becomes an increasing possibility in the back half. On the other hand, a resilient labor market, higher wages, and built-up savings have households fighting back against that narrative by continuing to spend despite high inflation.
Wild Cards for May
Among the usual suspects for market woes, two events stand out.
- FOMC Meeting May 2-3. The general consensus from investors is for the Fed to raise interest rates yet again, by a quarter of a point. And then [hopefully] take a pause. As per usual, there is a lot riding on the ‘Fed speak’ coming right after the meeting; how Chair Powell spins the expected rate increase and views the economic landscape ahead.
- Debt Ceiling. Tensions are growing between the White House and House Republicans over raising the debt ceiling. Treasury Secretary Janet Yellen has said the U.S. government risks "economic and financial catastrophe" if the House fails to pass a bill to raise the $31.4 trillion debt ceiling. It could come to a head in June. Which is awfully close to May.
Stay buckled up.
And For What It’s Worth…
In celebration of National Grilled Cheese Day, New York eatery Serendipity 3 brought back their grilled cheese sandwiches. But these are not your Momma’s grilled cheese. At $214 per, they’ve been dubbed the world's most expensive sandwich by Guinness World Records.
The French bread is made-to-order with Dom Perignon champagne. That bread is then slathered with white truffle butter and the very rare Caciocavallo Podolico cheese (made from the milk of only 25,000 cows that lactate only two months a year). Once grilled to golden, the sandwich is cut diagonally and each half is gilded in 23-karat edible gold on its cross section.
Finally, the sandwich is served with a side of South African Lobster Tomato Bisque for dipping.
There’s an inflation fighter for you.
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 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 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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