Since the turn of the calendar, the financial markets have been downright ugly. From their highest closes to yesterday’s intraday lows, the Nasdaq, at its worst point, was down by -29.19%, the Dow Jones Industrial Average was down -15.14%, and the S&P 500 was down by -19.55% before bouncing back in a late day rally. Interest rates have exploded higher with the 10-Year Treasury yield up 112% at the peak on a year-to-date basis, driving bond prices lower at a pace not seen in decades and dragging Real Estate Investment Trusts down the drain. Since its July 31st,2020 closing peak, the iShares Core US Bond Aggregate tracking ETF was down by -15% at its lowest print a few days ago and the Vanguard Real Estate ETF has seen 20.42% of its value erased from this year’s peak to yesterday’s low: So much for balancing portfolio risk!
Last May, I wrote an article titled “Inflation 101” (https://www.sabowealth.com/post/inflation-101) where I discussed in simple terms how the Fed works. At that time, it was becoming apparent that a policy shift was in order. I adjusted our fixed income models to reduce sensitivity to rising rates and those changes worked wonderfully on a relative basis, however, in hindsight, a shift to all cash would have had better results on an absolute return basis. In February of this year (Risk Off! https://www.sabowealth.com/post/risk-off) , I updated our equity models to account for the headwinds facing the markets. We raised cash & cash alternative positions to the highest levels since the pandemic and focused solely on defensive sectors and hedged strategies; Again, this worked out beautifully on a relative basis but has failed to produce positive returns in an absolute sense in the short run.
As I walked into the office on Monday, the market was 29 sessions into the current selling stampede (a cluster of down days with little to no relief). Historically, these events tend to last 17-23 sessions, so we were long in the tooth with this one. The market gapped lower to start the week and then whipsawed back and forth as liquidity all but dried up and the algos took control, selling off on Thursday morning (session 31) on yet another hot inflation metric. This session was different, the pressure more muted than prior days. At 2:30pm, the market touched an important downtrend line and the selling abated. From that point the market rallied back to close near Wednesday’s level.
I’m not one to make bold calls on market tops and bottoms- I’ll leave that to the talking heads on CNBC. I believe my job is to manage risk and attempt to capture returns when the environment is appropriate. At this point, the markets have discounted the “Bad News” regarding Inflation, Fed tightening, Russia/Ukraine War, and the most recent China Lockdown. I have not heard a piece of positive financial news in weeks and Investor Sentiment is in the toilet. Market Internals are washed out and the Technicals are screaming oversold. We knew the Fed would have to tighten monetary policy as the economy was roaring due to all the easy money. China will eventually allow their people to go outside again. Putin is a wildcard.
We are not in a Credit Crisis like 2008 or a Technology Bubble like 2002 and the COVID pandemic is in the rearview mirror for now. The economy is hot, and the Fed is taking steps to reduce excess inflation. The labor market has two jobs to offer every one person seeking employment and corporations are earning money in spite of increased costs.
I have readjusted my models again and began putting risk back on when it appeared Wall Street had thrown in the towel. Will yesterday mark the bottom? Nobody can know for sure but it but it’s a lot closer than it was at the end of last year!
Cheers to warmer days coming our way! I hope everyone enjoys their summer and the markets begin to cooperate in a more constructive manner.
Should you wish to discuss anything written in these articles, our present strategy, or just touch base to see how things are going, please don’t hesitate to reach out to our office @ 843-651-2030. Also, feel free to share these newsletters with your friends and family via email and visit us on our website at www.sabowealth.com or www.facebook.com/sabowealth.
Important Disclosures: Past performance is not a guarantee of future results. The statements contained herein are solely based upon the opinions of Edward J. Sabo and the data available at the time of publication of this report, and there is no assurance that any predicted or implied results will actually occur. Information was obtained from third-party sources, which are believed to be reliable, but are not guaranteed as to their accuracy or completeness.