2023 Market: Stallion and Cowboy If we were off to the races in January, February put the brakes to that. In this topsy-turvy market, nothing sucks the life out of a rally quite like good economic news. And we got some.
The Good News
The Good News
- Consumer spending surged 1.8% in January from the previous month, with retail sales showing the biggest increase in nearly two years. And consumer spending drives the economy, so that’s good. Right?
- Employers added half a million jobs in January, more than twice as many as economists had predicted. Work is good, right?
- Income grew, helped along no doubt by a 8.7% cost of living adjustment for more than 65 million Social Security beneficiaries, the largest such increase in 40 years. Yay!
The Bad News
All of the above. Of course, in a normal world, a world where up is up, all of the above would be celebrated. We don’t live in that world. We live in a world where up is down and down is up.
The bullet points above speak to the continued strength of the U.S. economy. And a strong economy means the Federal Reserve’s efforts to slow inflation by increasing interest rates are not working as quickly as they’d hoped. To wit, the Federal Reserve’s preferred inflation gauge, the personal consumption expenditures price index (or core PCE), unexpectedly accelerated in January.
Investors worry the data will lead Fed policymakers to keep ratcheting up interest rates until something breaks.
“The consumer is the stallion running wild and the Fed is the cowboy,” says Mark Zandi, Chief Economist at Moody’s Analytics. “And the Fed will win at the end of the day.”
Going Forward
All of this raises the question of what the rest of the year will look like. In times of great uncertainty like these, perhaps we can glean some wisdom from those most steeped in the market brew, who surely will all be on the same page.
Mike Wilson, Chief Investment Officer for Morgan Stanley: “Given our view that the earnings recession is far from over, we think March is a high-risk month for the next leg lower in stocks… Ultimately we think this rally is a bull trap.”
Tom Lee, Head of Research at Fundstrat Global Advisors: “We remain constructive… Our base case is the stock market will surprise forcefully to the upside.”
Liz Young, Head of Investment Strategy at SoFi: “I think the equity market is too expensive here.”
What, no consensus? I’m shocked, shocked I tell you.
Best bet? Continued caution.
And For What It’s Worth…
Want to send your faraway sweetheart a kiss? A Chinese contraption with warm, moving silicon “lips” could be the answer. Advertised as a way to let long-distance couples share “real” physical intimacy, the device is equipped with pressure sensors and actuators, and is said to be able to mimic a real kiss by replicating the pressure, movement and temperature of a user’s lips.
The reactions from social media users have ranged from humor and intrigue to shock and disgust.
Article on CNN Business.
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
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* 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.
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