Tariffs and Tweets
Posted on Sunday, August 25th, 2019
We received a bit more than the usual phone calls from clients this week as stocks gyrated about. Up 300, down 600, up 200, up 100 and up 63 is getting to be a normal week. But if you take note, like a rollercoaster, we go up, down and all around speeding in different directions while we end up back in the same place except this ride didn’t cost us money. By sticking to a diverse asset allocation we have made money in the last 18 months of sideways markets in stock dividends, bond interest and bond appreciation. Do not let the news headlines, tweets and tariffs set you adrift from your investing plan.
We see running a diverse asset allocation that is dynamically updated during the economic cycle as the one true way to positive returns. The hard part is managing the natural human tendency to run for the hills when things get hot. While most pundits were scaring clients out of bonds we made handsome profits. Don’t listen to the pundits and don’t watch the news. The pundits are there to fill up air time and entertain while the news is just trying to scare up some ratings.
While we would expect stocks to follow the path of bond yields here and head lower, we are still stuck in neutral between 2830 and 2960 (we are currently at 2847, at the lower end of the interim range) on the S&P 500. Above 2960 momentum buyers may come flooding in. Conversely, below 2830 the 2800 level (and 200 DMA) looms large. Any breech here and algorithmic selling will take over. When in doubt we defer to the bond market and lower yields have us looking for lower stocks.
You might ask – if we think that stocks are going down then why are we still invested? One factor is that we don’t know that stocks are going down. 18 months ago we were faced with the idea that stocks would go sideways for a year and a half and the vast majority of investors thought owning bonds was a bad idea. We kept our bond holdings and even increased duration earlier this summer. We stuck to our approach and that consisted of owning a diverse allocation of stocks and bonds. In this environment it turns out that was the best approach and a return was generated in a neutral environment.
Now we think that stocks could be in for a tumble. Should we dump stocks?
Last week we said the following.
The Fed may restart QE in the face of year end liquidity pressures. That would send stocks higher. Would the Fed do that with stocks at all time highs or will they let stocks falter first? We think that they should wait but don’t think they will.
In the latest Fed Minutes released this week there are 6 mentions of asset purchases by the Federal Reserve board members. Board members seem confident that asset purchases are a good thing and they could move preemptively.
What is to say that the Federal Reserve will not preemptively begin to purchase assets changing the direction of stocks and bond yields? A portfolio of solely defensive bonds would suffer greatly in this environment. The successful investor has a diverse asset allocation and dynamically adjusts it in the wake of changing economic cycles. Never all in and never all out.
We are positioned defensively and would not mind lower equity prices. The economic cycle appears to be aged as the expansion has lasted for over a decade. Valuations are historically elevated. Small cap stocks here in the US as well as Transportation stocks are now firmly below their 200 DMA and that could portend a further move lower. We see the calendar having an outsized effect on returns here. We could see a liquidity squeeze (and downward pressure on stocks) as we approach the last quarter of the year while professional investors look to protect gains.
There is further evidence this week that the Fed may be preparing the next QE and in that period we would expect equities to rally and bond yields to rise. We hope to see lower valuations to add to our allocations before the next QE starts but there are no guarantees. September is one of the most volatile months. Hang on tight and don’t watch the news.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.