When the universe returned me kicking and screaming to my present state of affairs, I was reminded of headlines that have been breaking recently. Headlines like...
“Inflation Hits Levels Not Seen Since The 70s!”
In 1970, global median inflation had reached 5.5% after trending up during the 60s, and then continued to trend up in a range from 5.5–14.4% through the 1970s before culminating at 14% in 1980.
In comparison, the current U.S. inflation rate stands at 8.5% (globally that figure is around 7% as of March 2022). Model forecasts and consensus expectations suggest that global inflation could rise to almost 10% later this year before it starts declining. Whatever, we’re currently living with 70s style inflation.
And the beat goes on.
This throwback inflation is at the root of much of our problems with the stock market of late, leading off with the expectations that the Federal Reserve will raise interest rates multiple times this year, and in bigger chunks than previously imagined. This will increase the cost of borrowing (home mortgage rates have already risen to 5%+), and dent economic demand - on top of evidence the U.S. economy may already be shrinking.
Add to that renewed COVID-19 lockdowns in China, further disrupting supply chains. Not to mention a grinding, hot war on the other side of the world with a nuclear-armed nemesis. Treasury Secretary Janet Yellen has warned of further “large negative shocks” that are “likely to continue to challenge the economy.”
All of this leading to another throwback to the 70s: stock market declines. The Nasdaq Composite index, solidly in bear market territory, is closing out its worst first four months to start a year since 1973. The tech stocks that pack that index have been tumbling lately; Netflix losing -37% on Wednesday due to slowing growth and mounting competition. Teledoc plunging -47% on Thursday. And just this morning, online behemoth Amazon down -14% after results and outlook fell short of expectations. Even Apple, the world’s most valuable company, was slipping after its glum outlook overshadowed record quarterly sales and profits.
I’m writing this before the strategies crunch their numbers for the upcoming month, so I can’t yet speak to May’s picks. But April had The 12% Solution and Bond Bulls in predominantly cash positions. Global Trader and The White Knuckle got some help by hedging with currencies, although the latter lived up to its name and still took a pretty good hit. We have a couple of reporting days to go for April, but suffice it to say it was a tough month for traders and investors alike, across the spectrum.
- Berkshire Hathaway, a reflection on Warren Buffet’s stock-picking prowess, down -7.4% in April.
- Tiger Global Management, hedge fund to billionaires, down -22.5% in April.
- Cathie Wood’s disruptive innovation fund ARKK down -27% in April.
The takeaway: this is a treacherous time in the market.
But to keep things in perspective, each of the above examples has had stellar performances in the past, and I have no doubt they will again. Markets will turn. Supply chains will loosen. Inflation will come under control. The timing may be cloudy, but all things economic move in waves and cycles.
And the beat goes on.
** 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.