did we see the down again?
Well we’re oversold and due for a rally. Late, really. (Stop me if you’ve heard this before.)
Assuming we get a bounce, I’m still inclined to sell all the higher rips we see.
One day we’re going to buy that dip. Heck, let’s back up our dividend truck. I don’t think now is the time.
First, I would like to see the breadth of the market begin to improve below the surface. This is often what usually happens before the markets bottom. We see individual stocks starting to “act better” than the Dow or the S&P. These leaders are quietly establishing their lows and beginning to rally.
Unfortunately, the breadth of the market still stinks. Just 14 shares in the S&P500 advanced last Thursday. (What about those odds.)
Betting on bounces (buy dips) works well when the markets are trending up. But when they fall apart like they are now, these cute strategies cause investors big problems.
Let’s be careful, save money and Wait to the other side of this mess.
I’ve praised plain dough so many times that I’m sure you’re sick of it. We sold the May tear. And more recently, we kicked off June with another “cash is king in 22” reminder:
“We’ve been touting silver in these pages since the beginning of this year. As the Federal Reserve prepared to suspend its money printer, we contrarians posted profits and piled up dollar bills.
We have to be nimble and ready to buy. The best deals happen at the end of bear markets.
I offered space under my mattress for those who needed it. Anything to stop a maverick colleague from buying a “safe” bond fund that was about to get blasted in the face.
Since your revenue strategist started selling mattresses:
- The S&P 500 fell another one ten%.
- TLT “safe” bond ETF
from iShares, flopped 4%.
This column seems like ages ago, but it was only three weeks ago. Three weeks! Either we all age in dog years or the stocks and bonds are too to crash. (Perhaps all of the above?)
The problem with an accident is that it’s like falling after 40 years. Or 60. Or 80. Things break. (Compare us with my kids, who are having falls that would put me on the shelf for a year.) I’m afraid the economy has already suffered collateral damage that will become evident later.
I hate to talk about 2008, but that was the last time the fed funds rate was as high as expected next time. That year began with a stock market crash and ended with the financial system on the ropes.
I’m not saying it’s going to happen again, but there are some disturbing parallels. We have to be careful.
Rising interest rates shattered the economy in 2008. And then other things broke. The initial setup is similar now. Federal Reserve Chairman Jay Powell is ultimately tightening policy at a significant pace.
How high will rates have to go up? Nobody knows. All I know is that it’s a runaway rate train that we must continue to circumvent.
This is tricky for income investors. We typically mix bonds and stocks so we can retire with dividends.
The problem for bonds is that rising interest rates tend to impact bond prices due to the “coupon competition” they provide. Income investors are getting impatient with their current holdings, which don’t look as good compared to other options. They’re looking elsewhere, and this sale drives prices down.
The problem for equities is that higher rates make future earnings from our equities worthwhile. less. A stock is only as good as the sum of its future earnings minus a discounted interest rate. The lower the rate, the more valuable these future cash flows are.
The problem now is that the discount rate is skyrocketing. These future cash flows are less valuable. This is why the market is collapsing.
Cash is the best thing to hold today. This seems counter-intuitive in a world where inflation is 8.6%, but it is very difficult to pick winning stocks in a bear market.
And it’s impossible find a successful long strategy in a to crash market. Think back to 2008. The only assets that gained were the US dollar and US Treasuries.
But treasury bills are not the answer in 2022. The bond market in 2022 had its worst start since 1788, according to a Nasdaq chief economist.
Markets usually overshoot the upside and inconvenience. Looking back, the S&P 500 doubling its March 2020 was, to use a technical term, idiot. But that’s what happens.
The end of this bear market will likely be just as absurd. The largest losses are usually reserved for the end of a bearish move. We call it “surrender”, when everyone throws in the towel and sells.
Bonds will bottom before equities if the Fed manages to get inflation under control. This would put a ceiling on rates and a floor on bond prices. I’ve been bearish on bonds for over two years now – I look forward to renewing our relationship with fixed income when the time comes.
When it does, you’ll hear from me. Until then, you’re more than welcome to stash some cash under my still-performing mattress.
Brett Owens is Chief Investment Strategist for Opposite perspectives. For more income ideas, get your free copy of his latest special report: Your early retirement portfolio: huge dividends, every month, forever.