Rate Expectations
Higher interest rates are scaring the Dickens out of the markets, for good reason
The ROAR Score drops from 40 to 20 this week. Cutting it in half underscores my view that while reward is always possible, risk is abnormally high. My 2-ETF portfolio shifts to 20% SPY, 80% BIL. I will not hesitate to drop ROAR to zero if the drip-drip downturn gets more robust. But this is still the era of buy-the-dip, until it isn’t.
Somewhere, my high school English teacher is laughing. I was a very mediocre student in that subject, more of a math kid. Yet somehow I figured out how to write later on. If you were ever wondering why my articles and alerts sound more like someone speaking to you, rather than “traditional” journalistic delivery, that’s why. So when it comes to using titles as an homage to Charles Dickens’ classic novel read by many US high school kids, “Great Expectations,” I am not the first one on your bingo card, if you know what I mean.
Still, it is exactly that: rate expectations, and the investment markets concern about them re-accelerating to uncomfortable levels, that I think it trumping geopolitical, economic, and stock valuation concerns. However, there’s a much more important development I am watching, and I think any risk-conscious investor should be too. If you are a Seeking Alpha subscriber, my recent article on the S&P 500 covers it in some detail.
But in order to provide a more direct summary of where my indicators, and my experience-based intuition is at, I am sharing below a note I sent to subscribers of our Institutional subscription service. Obviously, out of respect for those who pay for that new service, I don’t talk specifically in these model signal alerts, as they see all of the moves I make in a version of our ETFYourself.com premium shared research deck, which has an additional tab showing my personal positions across the multiple portfolio accounts I run for myself. But in order to help all subscribers, free and paid, understand the evolution of my thought process in these most dangerous of market conditions, I’ll share those notes in generic form as you see below.
Since this is really just a reference to what I’m doing in that other service, the text below is intentionally very small, so folks don’t mistake it as something applying to the ETFYourself.com 7-ETF model portfolio. Changes to that model are summarized in the premium section below, and updated on the model sheet.
BOTTOM LINE: I never can say with certainty that a market is about to spike higher, plunge or do something in between. I’ll let the other folks in the investment publishing field battle it out over whose crystal ball is better. I just want 2 things:
Avoid big loss
Make as much as I can
Hopefully, this note below helps provide some insight into the process I am currently going through, which frankly reminds me of some of the setups for the most vicious market declines in my 38-year career.
That said, I’ve gone super-defensive many more times than things actually fall apart. Again, others can be heroes with their money. I just want to swing at “fat pitches” and avoid the common traps like “I’m a long-term investor” and then I’m down 25%. Or the “buy the dips” behavior, which truly does work…until it doesn’t!
CHARTS THAT TELL THE STORY RIGHT NOW
As someone who has looked at literally millions of investment price charts in his life, this is in the top 5% in terms of clarity. The US 10-year bond started this year around 3.8%, and it is now approaching 4.7%. If that doesn’t freak out the stock market relatively soon, it will be the first time I can recall that not happening. This chart says “destination 5.0%.” Good for bonds if that’s as far as it goes, lousy for stocks, especially dividend stocks and small caps.
And, here is my favorite current stock market indicator, EQAL, the ETF that tracks the 1,000 largest US stocks, equally weighted. So the vast majority of the stock market’s total value, but looking at it in terms of how the average stock is doing. And how is the average stock doing in 2024 so far? It is down 1% as I write this.
Ah, but the S&P 500 is up 6.5% this year. Terrific…unless the broader market is leading it down, which it appears to be. Stocks and bonds fading in price at the same time (since higher yields mean lower bond prices)? How very 2022 of you, markets.
See the note below for more, and know that one of 2 things can occur from here:
My assessment of very high risk for both stocks and bonds can be reversed by one giant market happy reaction to something the Fed says or does, or some other bolt of lightening to change where these charts appear to be going.
OR, I can look forward to transitioning my current defensive posture from one that guards against big loss, to one that seeks to profit from a down market, a la 2022 and early 2020 before it.
Dickens’ classic was a trilogy, describing 3 phases of one person’s life. Investing has phases too. We had the first inflation phase, and the second “we conquered inflation/higher rates/lower stock prices” phase. I am preparing myself for whatever the third phase brings, so I can try to profit regardless of what it looks like. If you are following our work here, hopefully you are too.