Update, Logic and Strategic Considerations
The Technical Take
The technical condition of the stock market deteriorated during the month of January as the major averages traded down through key long-term moving-averages and support-levels. This movement briefly erased about half of the gains from 2021. The sum of this data has moved the Market Edge Cyclical Trend Index indicator toward neutral territory. Moreover, the CTI is now predicted to move into bearish territory by the end of February. We may soon be at the starting of a yearly test of the lows for 2022. It happens every year. Expect a rebound thereafter. Summer lows for tech stocks are common. If so, a rebound period starting after mid-October would be logical. Wow. That’s specific. We shall see.
Tactical Considerations
- Natural resource and cash positions have been a nice cushion to your portfolio valuations over the last few weeks.
- A Russian takeover of the Ukraine may spike oil prices even higher.
- However, a diplomatic resolution has the potential to return oil prices back to earth.
- Unless a resolution is forthcoming very soon summer driving season will further pressure inflation.
- A mid to late summer low in technology stocks due to Fed rate hikes may cause the Fed to pause further rate hikes until after the mid-term elections. This will allow technology stocks to rebound through year end.
- Watch consumer confidence data and weaker than expected consumer demand as weak data will support stock prices as few rate hikes will be expected to ensue.
Anxiety over Policy Mistakes & Wall of Worry Benefits
Worries around the Federal Reserve have gone ballistic. Anxieties over the number of rate hikes have continued to intensify to the point that a significant move to lower multiples has already occurred. If you heard about this but didn’t notice it significantly within your portfolio values it may be due to the overweighting we are holding in cash, value positions, natural resource holdings, and international ETFs in your asset allocation. Each has acted somewhat to buffer your holdings from the extreme volatility. Big spikes in policy uncertainty have often been associated with a supportive wall of worry for the stock market. If this is our current location in the economic cycle it means we are closely correlating to an appropriate asset allocation with several more years of upside before the cycle ends.
In the last 13 weeks, the measure of anxiety surrounding U.S. economic policy has never been higher. When there is this much policy apprehension, the S&P 500 has never suffered a bear market. On the contrary, in times of economic policy calm and complacency, it is more common for the stock market to struggle than when there are intense concerns about what the Fed might do.
Of the four bear markets since 1985, two occurred when policy uncertainty was in the lowest quartile. One materialized when the indicator was in the second-lowest quartile, and one came about with policy uncertainty stationed in the second-highest quartile. Similarly, of the eleven S&P 500 corrections since 1985, three happened from the lowest policy-uncertainty quartile, three from the second-lowest quartile, and five from the second-highest quartile.
The federal funds rate and bond yields are clearly headed higher this year, and the Fed will soon begin to contract its balance sheet. Fed tightening is surely here and will likely be a part of the economic fabric until the next recession. Indeed, policy tightening will eventually end this expansion—as it always does. However, this economic cycle appears to have a Wall of Worry ahead of it and before observed late-stage cycle activity shows up. We shall see.
Sincerely
Vaughn Woods, CFP, MBA
Vaughn Woods Financial Group, Inc.
2226 Avenida De La Playa
La Jolla, CA 92037
858-454-6900
www.vaughnwoods.com
Sources:
Marketedge.com
Leuthold Group, LLC
Seeking Alpha
Gurufocus.com
Credit Suisse
Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0271.