All We Have to Fear is Fear Itself.
Jeffrey Gundlach says “sell everything”. Dennis Gartman says “stocks are in trouble”. Bill Gross says he “doesn’t like stocks or bonds”. Goldman Sachs economists say equities are expensive and recommend being underweight. There is talk in the air of poor earnings. It seems market observers have taken a page from the presidential candidates and can’t find enough things wrong with the economy and markets. It’s time for a reality check.
In the real world of actual markets, prices are telling a different story. Year-to-date, the S&P 500 is up 7.7% (total return including dividends) and has gained ground for 5 consecutive months, including a resounding July, taking prices to all-time highs. The Vanguard Corporate Bond Index (BND) is up 4.0% year-to-date. An investment in a balanced 60/40 portfolio in SPY and BND on January 1, 2016 would have produced a not-to-be-scoffed-at 5.1% return through today (albeit with dramatic and perhaps untenable volatility in Jan-Feb and Jun). In other markets, gold remains very strong, up 29% YTD. During a robust July for risk-on asset classes, my favorite risk-off asset class (gold) gained about 2.5%. Oil is up 57% from generational lows in February, even after the drop of the last two months. Long-term passive investors should maintain a multi-decade timeframe and continue to devote most of their attention to other things.
Active investors would do well to remember that as in politics, in markets it is much harder to be optimistic than pessimistic, a human trait granted by nature to ensure our survival. I have to be careful to not tread on fundamental commentary, which is not my focus. But it is hard to not acknowledge a reality at least as compelling as the one peddled by the gloomy crowd. Interest rates remain at historic lows, the world’s central banks are engaged in a coordinated reflationary exercise deploying capital of a size no group of private entities can match. Data from economies such as the U.S., China, India, and others get stronger by the day. Great Britain did not fall into the Atlantic Ocean after Brexit. Technology innovation is flourishing globally. Despite the rhetoric, the U.S. is poised for a historic election, regardless of the winner. Cycle theorists suggest an upcoming shift back to an era of private sector confidence, similar to that seen in the early 1980s. And despite every bad piece of news possible over the last year, U.S. equities are at or near all-time highs.
My models suggest that risk assets remain in an equilibrium state. In this state, data-based positive expectancy models rooted in trend, momentum, and value principles are appropriate to predict future market movements. Almost without exception, these models point to a buy everything scenario (both risk-on and risk-off asset classes), namely equities, bonds, gold, and commodities on longer timeframes. The one exception is to sell oil, but on short- and medium-term timeframes. Of course, there will be volatility and prices won’t go in one direction. Furthermore, prices could reverse like so many seem to want. That is the nature of positive expectancy models, where you manage bet size over an uncertain win/loss stream, ensuring that you avoid risk of ruin.
Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. Accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.