There have been some wild trading days recently in U.S. stocks and bonds both up and down driven by the news du jour. We have had earnings reports, inflation reports, employment reports, wild weather reports, war reports, etc…
Strangely enough, with all of that going on the indicator of financial market volatility – the VIX – has gone down precipitously in the last few weeks – take a look…
The VIX moving lower is a little counter intuitive considering the news on the wires and the fact an election is right around the corner…
There are some positive things about where the economy and asset markets are right now. First and foremost as we have mentioned several times in the last few months – things are actually holding together. The idea that the our economy and markets can withstand the abrupt about face that the Federal Reserve has performed this year is actually impressive. Just to recap, if you rewound one year, you would see the Federal Reserve purchasing $120 Billion of assets in the open market MONTHLY to support markets and an interest rate set at essentially ZERO. Considering the about-face, how are we holding together? Foreign assets fleeing worse markets overseas coming to our shores? The market is holding together now but the effects of Fed actions just haven’t hit yet? Cash levels are still very high on corporate and even consumer balance sheets and that will sustain markets for a while yet. No one knows for sure -but markets are holding together surprisingly well.
Past just anecdotal opinions, some of the things that are empirically bullish include corporations coming out of stock repurchase blackout periods. Right now, corporate buybacks are running at about $3-4 billion per day and that is likely to increase to $4-5 billion in the near term. This is obviously a bullish indicator. Other indicators include the positioning of speculative funds. Stock funds are not as heavily invested as they normally are which indicates buying needs to come in. Many hedge funds are actually SHORT the market which is another indicator that a lot of the selling has already occurred, and it is now buying that will be entering the market.
Additionally, the bear market is getting on in age – the long-term historical duration of a bear market is 11 months and that is exactly where this one sits. Certainly, the bear market could continue, but history is starting to wander toward the bullish side.
As far as the negatives that are affecting these markets, they are so obvious we almost don’t even need to write them. Interest rates going higher is of course the most glaring bearish indicator, but of course you can throw in a lot of geo-political strife and things look like the end of the world may be near. Many tech companies are announcing layoffs from their workforce – and the strong employment situation has been the shining star of the economy over the last few months. If inflation starts ticking up, many feel that the economy could start to domino downhill. But again – when things look so grim and the market isn’t going down, it makes us think that things are stronger than many are betting…
Of course, the election coming up makes us think about investing differently depending on who has power. The most obvious conclusion is that the green-energy investments are going to take a hit should the Republicans gain majorities in the House and Senate. Accordingly, traditional energy investments may catch some momentum. In general, investors historically have benefitted from a division of party power in Washington. So that favors Republicans gaining strength. Biotech and defense spending are two other sectors that may get a boost from Republican victories and additionally the Republicans will probably take tax hikes off the table if they gain more power- which would be bullish for the stock market in general. Should the Democrats retain their majorities one may expect infrastructure and health care stocks to be supported.
All our analysis could of course be completely moot depending on the actions of the Federal Reserve. Although we do admit there may be some behind-the-scenes motivations for Fed actions that we are not privy to, in general we fear that the Fed is reading from a faulty playbook. If you have a hammer, everything looks like a nail and right now the Fed seems to be swinging their hammer -interest rate rises- at every nail they see. Higher interest rates are not the universal deterrent for inflation that Fed appears to believe that they are. We believe that higher interest rates from some perspectives ARE INFLATIONARY and if the Fed’s actions are causing inflation, then why would they continue them in order to reduce inflation? Your guess is as good as ours – apparently beatings will continue until morale improves. We’ll see how well that works out. At the end of the day, everyone fears the Fed will continue to raise rates until something breaks – so do we. If that is keeping you up at night, don’t be shy to lighten up your stock portfolio. With interest no-risk interest rates as high as they have gotten we have essentially created a Universal Basic Income for rich people. Just another of the unintended consequences of having the Federal Reserve in charge…
As always – stay tuned and don’t sell your gold.
Regards and good investing,
Gresyon Geiler