An Eye on the Horizon
Posted on Sunday, February 13th, 2022
It wasn’t the quiet week we were hoping for but at least no one moved out. No one got sick and I managed to play golf for the first time in 4 months. My balky back held up and I got around in 86 while having some laughs with the guys. It was much needed as this market has been a real roller coaster in 2022 and if you know me – you know that I get motion sickness pretty easily. It pays to keep your eyes on the horizon.
We had this to say last week and we think that it still holds true. Instead of a relentless march higher in equity prices we may be in the midst of a 15-18 month trading range as the battle between the bulls and bears rages on. That range appears to be from 4000 on the S&P 500 at the bottom of the range up to 5000 at the top. The decision to lighten up and sell some of our stock holdings is made more difficult as we are in the middle of that range. It is the bond market that we turn to for clues.
The one thing that began to unnerve us last week was the action in the bond market. The bond market is huge and does not have nearly the volatility of the stock market. One way to look at the bond market is the smarter more sensible older brother of the stock market. The stock market can get a little crazy sometimes – out of control. The bond market being the sensible older brother is more in tune with the economy and takes a longer term approach. Since the Great Financial Crisis (GFC) in 2008 investors have been told to steer clear of bonds. Bonds have actually performed pretty well. That is until last December. Something in the bond market has broken. Perhaps, the economy was given a bit too much stimulus from our friends in DC.
The action in the bond market is telling us that there is trouble on the horizon. Credit spreads have increased and the high yield debt market is losing ground. The Fed is going to raise rates but it is this man’s opinion that they are raising rates into an economic slowdown. There is a recession in the offering 12-24 months out if they continue to move towards higher rates. The market is beginning to price in rate CUTS in 2024. The inflation will slow as the stimulus comes to a trickle. Tax time is going to surprise many as they will owe taxes instead of get a refund. That will crimp the economy and force some back to work all while the Fed is busy raising rates.
We are and have been underweight tech for some time. We are overweight oil stocks and gold. Oil stocks have thrived in 2022 and are up in the area of 20% while the stock market is down. Gold was up almost 2% on Friday and those positions helped our portfolios weather the storm quite well. Oil and gold are commodities and commodities tend to run very far when they get going – in either direction. We will have to keep a close eye on them but for now they are providing a counterbalance to our equity positions.
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
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
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.