Investors are as challenged as they’ve been in a while, with equity markets posting solid returns to start the year and story stocks—today’s version being anything “AI,” such as Nvidia—soaring to new highs, while recessionary concerns and ghosts of 2022 haunt some into overly conservative positioning.
We talk regularly about tilting versus timing. Semantics to some, but vitally important in our minds.
An investor who tilts is defined as one who rarely, if ever, abandons a core asset class, but who may slightly overweigh one versus another as they rebalance to book gains or buy down beaten-up asset classes.
Conversely, an investor who engages in timing usually is making “big calls” defined by vacating asset classes altogether in an effort to avoid losses or chase gains. This investor’s behavior is quite often the result of a process fixated on past performance rather than proper planning and diversification.
One set of “timers” is still haunted by the bear market of 2022, while also being lured in by finally decent rates in CDs and savings accounts. These investors believe they’ve finally found the holy grail of investing—solid returns with no risk.
They fail to see the big picture and the historical realities around these investments as a total solution.
To quote Richard Best of Investopedia, “No matter which method you use to measure inflation, the after-tax return of traditional CDs is no match for the rate of inflation.”
Today’s headline rates are far better than they’ve been, but in large part, they reflect nothing more than the higher inflationary environment we find ourselves in.
One’s true return needs to factor in inflation and taxes, and as Best alludes to above, when one does that, CDs fail to deliver what many expect.
Rather, as Bob Carey of First Trust Advisors LP puts it, such investors have embraced losing money safely. Even bonds failed to keep pace in this regard, and they outperformed cash equivalents 10-fold over the last fifteen years.
The other “timers” these days are those chasing stocks at levels that have many puzzled and are at levels historically defined by near-term peaks. As Bespoke Investment Group noted earlier this month, bulls have surged to levels not seen since November 2021, and “Equally impressive is that bullish sentiment had its biggest one-week jump since November 2020, rising 15.4 percentage points.”
This occurred at a time when stocks, as defined by their price relative to their 50-day moving average, reached “extreme overbought” levels.
The result is a market defined by “extreme greed” on CNN’s Fear & Greed Index.
Stocks continue to hover near recent highs despite the continued deterioration of many key economic indicators. While such dichotomies between the economy and markets aren’t all that infrequent, they usually resolve themselves in due time.
As to whether the data will improve or the market will “let out some steam” economist Brian Wesbury, of First Trust, has this to say: “We still expect a recession starting sometime in the next 12 months, but with productivity falling, that recession may not be the long-term fix for inflation that many seem to believe. This is hard for us to say, but the market seems to be ignoring a whole lot of economic problems and pain that aren’t really that hard to see.”
Wesbury notes that the Institute for Supply Management Services’ latest Report on Business shows a “pullback in the rate of growth in the services sector as the headline index declined … below even the most pessimistic forecast. The two most forward-looking pieces of the report—new orders and business activity—both fell in May.”
Inflation is still a major problem in the services sector, with 12 of 18 major industries reporting paying higher prices in May, he says.
“Recent data show the Federal Reserve’s job in wrestling inflation back down to its 2% target is not over; we expect them to keep monetary policy tighter than what the market expects in the months to come,” Wesbury says. “As for the economy, while we don’t believe the services side of the economy is there yet, we continue to believe a recession is on the way. Equity investors should remain cautious as we navigate these unprecedented times.”
There are concerns regarding credit levels as well. The Bureau of Economic Analysis measure of credit card spending showed further declines signaling that consumers may finally be hitting their limits.
Banks may also be hitting their limits. After just getting past March’s scares in the sector due to big bank failures, more bad news came. As shared by Torsten Slok, of Apollo Global Management Inc., “Two years ago, the number of banks exceeding the FDIC’s consumer real estate loan concentration guidelines was about 300. Today there are almost 700.”
One of the hardest things to do as an investor is maintain a proper emotional—and portfolio—balance when there is always so much media noise and unknowns involving something so important to them—their finances. And yet, it is the path through.
To get too bullish or bearish is nothing more than market timing, and both are extremely difficult to come back from. Narratives are very powerful things, especially those investors tell themselves. While some buy into their philosophy as a permanent solution, some delude themselves into thinking they’ll shift course at just the right moment. In my nearly three decades around the industry, that is not something I’ve witnessed.
Rather, the bear’s fear is only reinforced by a declining market into a belief in further declines that prevent “buying low,” while the bull is similarly deluded into chasing a market higher thus failing to “sell high” until it’s too late.
The hard part about successful investing has nothing to do with needing to outsmart the market, but rather to discipline one’s own emotions and ego. It’s a journey best to not take alone.
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