Contributors: Colby McFadden, Justin Singletary, and Patrick Morehead
It's been a few months since we have provided written comments about financial markets via "From The Boardroom." So, let's fill that gap right here and now with something of value. A look at how 2022 played out and a discussion on a few items we believe investors may want to think about for 2023.
Please do not mistake our lack of written content over the last few months as a sign of us resting on our laurels. In place of writing, we have been working hard to get our video and YouTube game down.
And we have released quite a few videos covering the ebbs and flows that the financial markets experienced in 2022.
My favorite is our year-in-review video you can find here:https://youtu.be/Bc6SJ-t2zzU.
The first ten minutes are fun and the last ten minutes focus on 2023. Enjoy!
To make sure you stay informed, please subscribe to our YouTube channel by clicking here: Subscribe. We will be doing more and more video and audio content as we move forward, and we want you to experience all the fun.
As you watch the videos we posted in 2022, you'll most likely come to see that our market cycle events titled "Taming The 2022 Bear Market" had valuable insights that helped our clients and many others avoid the pain and suffering the classic 60/40 portfolio endured last year when stocks fell, and interest rates rose.
Our goal for 2023? Keep doing what we keep doing best, sharing how you, as an investor, can continue to protect your assets while finding investable opportunities amid a shifting landscape. So, let's not delay any further and get right into it.
Often, to understand how you got to where you are, you need to look back to where you have been. To help add context to the discussion, let's take a brief look at 2022 to then tee up what we are looking for from markets in 2023.
Before we get too deep, I need to remind you that we are only discussing a few of the many options that could happen in financial markets. As you know, everything can change due to developing market conditions, so this is not intended as investment advice.
Let's kick things off with the asset class everyone asks the most questions about….Equities or "The Stock Market."
In January 2022, when equity markets were exhibiting parabolic behavior, we stated:
"Going forward, we still believe we are closer to an equity market top than a bottom, and equity investors should tread with caution."
And provided this chart:
We followed this in February with the following:
"Bottomline, since the turn of the year, there have been multiple signs that risk appetites have changed in markets. Whether this is a temporary change that creates a run-of-the-mill correction with markets rebounding to new all-time highs later in the year or if this is the start of a more extended Bear market is yet to be seen.
For these market observers, we are placing the odds at 60/40 that risk assets have entered into an extended period of risk-off behavior and our models have allocated accordingly. The next 6-8 weeks may be critical in providing more information on the longer-term risk asset trends, so stay tuned."
And by June:
"It's official, as of this past week (Mid-June 2022), the S&P 500 and the Nasdaq are down more than 20% from their last peaks, which places them officially into BEAR MARKETS."
"For these contributors, it's a big relief."
"Since January, we have been discussing and preparing for this Bear Market. At certain points, early on, we were nervous that our analysis could be flawed. Now, we feel vindicated and relieved that we were able to get ahead of this curve for our clients and readers. Now what?"
"Bottom line: In the short term, we are watching for signs that the equities markets could get some footing for a presumed bear market rally back towards 4100 on the S&P 500. "
"From there, we will watch for signs of whether the rally can continue to move higher or lose steam and reverse course to create a fifth wave lower that targets the 2800 to 3200 level on the S&P 500."
Now, here we are, six months later, and the equity market has been bouncing from the June lows towards the noted 4100 level. Not too shabby, right?
As of this moment, the equity market hasn't given us any reason to shift away from our original analysis of a bear market rally that eventually reaches 4100 to 4300 at least one more time on the SP500, which then may fail to probe lower towards SP500 2800-3000 (at time of publication the SP500 is approx 3850).......call it a potential for a 15-25% move lower from current levels.
Obviously, a lot can happen to change this outlook, for the better or worse, so as always, we won't be able to get too complacent with our opinions as it will be more important to be steadfast in monitoring future market trend developments and report back to you in the future as we always do. Regardless, at this moment, we are not convinced the equity markets have found a solid "investable bottom" yet.
In March 2022, as the 10yr U.S. Treasury Yield was breaking above its intermediate term resistance channel at 2%, we provided this warning about the effects that higher rates can have on an investors retirement portfolio and emphasized it with underlines:
We highly recommend that lower-risk investors that may have a larger allocation of their portfolio in bond funds or target-date funds evaluate their options, as sustained trade above 2% may have a drastic (negative) effect on the value of those types of investments.
In June 2022, as rates continued rising, breaking above a long-term trend resistance line (with vigor) at 3%, we followed with:
At this point, it appears rates are either headed to 4%, or they are set up for reversal fairly soon.
Now, in 2023 here is where we are:
As you can see, rates measured by the 10yr Treasury reached just above 4% and now are in the middle of a correction lower, currently resting around 3.55%.
Going forward, it looks as if rates have broken above levels of resistance that have held for nearly 40 years and now the recent pullback in rates is probably looking to test those break-out levels.
A scenario to watch for would be if rates gain footing somewhere between 2.8% to 3% and then make another move above 4%. If that were to occur, investors, if they have not already, will probably have very little choice but to succumb to the belief that the path of rates for the foreseeable future is higher.
If this occurs, holding investments that are negatively affected by rising rates, like many government bond funds and target date funds, could be a painful experience for a period of time. If you didn't see or didn't act on our warning in March of 2022 to reduce exposure to rate-sensitive investments, the next few weeks will be a second chance for you to do so.
Now is a very important time to stress test your portfolio against scenarios that could lead to an environment of higher rates for a more extended period of time.
In January 2022, when The U.S. Dollar was resting on a confluence of support lines, we shared:
"The U.S. Dollar has continued to defy gravity even as so many pundits have predicted the demise of The Dollar over the years. Since January 2021, the Dollar has increased by approximately 6% compared to a basket of the other major world currencies. Not too shabby in a time frame where Uncle Sam has pulled off his best-ever sugar-daddy impression and put a handful of trillion dollars on his credit card so all of us could continue to eat out and order in while we hoarded our toilet paper and binge-watched Netflix during our Peloton bike rides. Thanks, Uncle Sam!"
"Going forward, as of this moment, we believe this trend continues."
In March 2022, as Dollar strength continued, we followed with:
As of now, the longer-term bull case for future Dollar strength is still intact, and pullbacks can be viewed as potential buying opportunities for investors that can handle the risk associated.
In June 2022, we began to give some warnings about Dollar strength possibly ebbing a bit as the bear market enters the next phase:
"This bear market pattern entails the U.S. Dollar gaining strength accompanied by weak performance for metals in the first phase of the bear market followed by dollar weakness and strength in metals prices in the second phase of the bear market. By viewing the charts, it looks like the baton change from phase one to phase two may not be too far off in the future"
Now, six months later, those statements seemingly have been a good heads up as The Dollar has seen a decent pullback in price over the past few weeks/months, helping metals like Gold and Silver show signs of life. We have criticized both throughout the year by calling the shiny metals "the biggest disappointment in an inflationary environment since these contributors were to our parents when we were in high school.".
Going forward, the charts give us the impression that the recent weakness in The Dollar is part of a 4th wave correction with a final fifth wave still to come. The strength in The U.S. Dollar is long in the tooth, so any investors new to Dollar investing will want to tread with caution at this point as the easy money is most likely already made in this Dollar trade.
However, a sign we would be looking for that could lead to an investable opportunity would be if the Dollar were to rise in a fifth-wave rally. While doing so, commodities and metals hold their ground or grind higher in the face of Dollar strength would increase our confidence that there may be some early signs of trend reversals that may poise commodities and metals for a larger rally to the upside. Time will tell, so stay tuned as if this were to occur, it could set up some decent investment opportunities in some of the "old economy" names.
And a view of Gold prices:
We've been working on our next "Catch The Next Wave" publication which will be discussing the next and possibly last secular bull market in Oil and Gas prices. From our research, there is a confluence of fundamental factors that could cause Oil and Gas prices (Nat Gas as well) to rise to levels many are not expecting at current times.
Because of the impact higher energy prices have on inflation, we hope our research is flawed. Unfortunately, the research has convinced us enough that it makes sense to invest time and energy to write about it and bring it to your awareness.
As mentioned earlier, stay tuned for more. Better yet, if you want to stay ahead of the curve on this subject, subscribe to our YouTube Channel: SUBSCRIBE
For now, let's curb the Oil discussion with an image with our thoughts:
I don't know about you, but my news feed has been chopped with headlines like "Is the Real Estate Market Going To Crash?" And, it's a fair question considering how high prices have reached in residential real estate in the past few years.
Also worth mentioning, there is still a good amount of "last recession recency bias" influencing people's minds that causes them to think that recessions and bear markets equal housing collapse, which isn't true.
As discussed in many previous writings, the main fundamentals of RE have been interest rates and employment. If you watched our August 2022 video "Are Real Estate Prices Going To Crash?" (click here to watch https://youtu.be/VBF3IPhbgDU ), we raised the question - Is there now a third component? The short-term rentals (think Airbnb), Ibuyers (think Redfin), and Wall Street and Family Office money flows into RE in the form of a corporation.
Since the publication of that video a lot more has come out in the press about this subject, and we believe it is a subject that will begin to take center stage city by city if affordability and wealth gaps continue to get stretched.
Similar to our view on Energy prices, our additional homework on RE since our August video has led us to the belief that it is worth further discussion as there are items that you, as an owner or investor in Real Estate, should be thinking about, so we will be having a follow on video for our Retirement RED ZONE readers in the next few weeks. Stay tuned for more.
Bottomline, those looking for potential growth trends which may have greater strength relative to the stock and bond markets, may want to pay greater attention to the price action in Oil, Nat Gas, Precious, and Industrial Metals as well as strategies that do well in higher or rising rates and weaker equity and real estate markets for the foreseeable future.
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