Trust In the Bull? Yes, But Hedge. As anticipated, the Federal Reserve pushed its key policy rate to a 22-year high last week with another 0.25% interest rate hike. But investors are betting that might be it for a while.
July delivered data showing U.S. consumer sentiment rising and inflation easing, adding to growing optimism that the economy will avoid a recession and encourage the Federal Reserve to end its cycle of interest rate increases.
July delivered data showing U.S. consumer sentiment rising and inflation easing, adding to growing optimism that the economy will avoid a recession and encourage the Federal Reserve to end its cycle of interest rate increases.
Indeed, while Fed economists are forecasting a noticeable slowdown in growth starting later this year, during a Q&A after the meeting Fed Chair Jay Powell was quick to add that, given the resiliency of the economy recently, they are no longer forecasting for a recession. “My base case is that we will be able to achieve inflation moving back to our target without the kind of really significant downturn that results in high levels of job losses.”
July Notables:
The Consumer Price Index (CPI) climbed 3% in the year through June, less than the 4% increase in the year through May and just a third of its roughly 9% peak last summer.
U.S. GDP, a broad measure of overall domestic production, was stronger than expected, growing at a 2.4% annualized rate in Q2, almost a full percentage point stronger than the 1.5% expected.
The Consumer Sentiment Index, a construct of the University of Michigan, jumped 12.7% to 72.6 this month, the highest reading since September 2021. Joanne Hsu, the director of the University of Michigan's Surveys of Consumers, attributed the surge in sentiment "to the continued slowdown in inflation along with stability in labor markets."
Earnings season – underway – has been better than expected. So far, 55% of reporting firms have beaten consensus estimates. That’s above the historical average.
More stocks on the rise. "This bull market is no longer just a mega-cap story. A new chapter of broadening participation has developed," said Adam Turnquist, chief technical strategist at LPL Financial.
Party On, Garth?
Certainly, a whole lot of signs are pointing to a corner being turned. For much of the YTD, the markets have performed well despite not appearing to reflect the fundamental reality of economy-threatening rate hikes. Now, with inflation on the retreat and so many things going right, it’s easy to understand the increasing confidence of investors.
Is that a confidence we can trust? In the words of the late Ronald Reagan (adapted for investing): trust, but hedge. After all, valuations have grown rich and there is no shortage of economic headwinds (e.g., gasoline prices are rising, the Chinese economy is slowing, Russian action is disrupting global food markets, and the economic impact of climate change is worsening).
While historical stats favor an advancing bull through the end of the year, a 5-7% pullback in the coming weeks/months would not surprise many market analysts.
Lucky for us, our strategies have built-in hedges in one form or another.
And For What It’s Worth…
EV adoption is accelerating. According to the Financial Times, it took nearly eight years to sell the first million battery-powered cars, trucks and vans in the U.S., a milestone hit in 2018. The two million mark was hit roughly 32 months later, and the third million 15 months after that. The accelerating pace brought the fourth million after just 10 months. Tesla continues to dominate, making up about 61 per cent of the market.
For the time being, EV cars and trucks remain the province of early adopters, comprising less than 10 per cent of new vehicle sales. But as the figures above show, that is changing – fast.
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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.
July Notables:
The Consumer Price Index (CPI) climbed 3% in the year through June, less than the 4% increase in the year through May and just a third of its roughly 9% peak last summer.
U.S. GDP, a broad measure of overall domestic production, was stronger than expected, growing at a 2.4% annualized rate in Q2, almost a full percentage point stronger than the 1.5% expected.
The Consumer Sentiment Index, a construct of the University of Michigan, jumped 12.7% to 72.6 this month, the highest reading since September 2021. Joanne Hsu, the director of the University of Michigan's Surveys of Consumers, attributed the surge in sentiment "to the continued slowdown in inflation along with stability in labor markets."
Earnings season – underway – has been better than expected. So far, 55% of reporting firms have beaten consensus estimates. That’s above the historical average.
More stocks on the rise. "This bull market is no longer just a mega-cap story. A new chapter of broadening participation has developed," said Adam Turnquist, chief technical strategist at LPL Financial.
Party On, Garth?
Certainly, a whole lot of signs are pointing to a corner being turned. For much of the YTD, the markets have performed well despite not appearing to reflect the fundamental reality of economy-threatening rate hikes. Now, with inflation on the retreat and so many things going right, it’s easy to understand the increasing confidence of investors.
Is that a confidence we can trust? In the words of the late Ronald Reagan (adapted for investing): trust, but hedge. After all, valuations have grown rich and there is no shortage of economic headwinds (e.g., gasoline prices are rising, the Chinese economy is slowing, Russian action is disrupting global food markets, and the economic impact of climate change is worsening).
While historical stats favor an advancing bull through the end of the year, a 5-7% pullback in the coming weeks/months would not surprise many market analysts.
Lucky for us, our strategies have built-in hedges in one form or another.
And For What It’s Worth…
EV adoption is accelerating. According to the Financial Times, it took nearly eight years to sell the first million battery-powered cars, trucks and vans in the U.S., a milestone hit in 2018. The two million mark was hit roughly 32 months later, and the third million 15 months after that. The accelerating pace brought the fourth million after just 10 months. Tesla continues to dominate, making up about 61 per cent of the market.
For the time being, EV cars and trucks remain the province of early adopters, comprising less than 10 per cent of new vehicle sales. But as the figures above show, that is changing – fast.
_____
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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