Metals - “You had one job to do!”

Arghhhhhh, METALS, YOU HAD ONE JOB….GO UP!  

The last few weeks metals have been a bigger disappointment than many of us were to our parents during our high school years. 

With all this inflation and global crisis talk that is happening, one would think the metals would be rockin' higher in price.  So far, not the case.  

In our last From The Board Room, we shared the following chart and mentioned… “what we don't want is to see prices drop back down into or below the breakouts from the triangle pattern”.

Would you know what happened since then?  The metals markets started to show their rebellious side.  

After breaking out of a triangle pattern to the upside, the upward momentum hit a brick ceiling of resistance and since then prices have pulled back near the original breakout zones.  This is either a warning sign or an opportunity for metals investors.    

After upward breakouts like we witnessed in metals, it is preferred (if you are bullish) that the upward momentum gathers additional steam and volume and starts to rip thru resistance like a hot knife through butter.  

If that doesn't happen, the next best option is for a pullback to retest the breakout zones.  Which may be what is taking place.  And, if those break-out zones hold the retest it may set up the right foundation for a multi-month move higher in metals prices.  The next steps will be important to watch.

Since we are disappointed but not angry with metals, it is important for risk management to also be aware of the flip side to the bull thesis.  As we mentioned in the chart - If you are expecting higher prices in metals and the breakout zones happen to fail by prices moving below them, get out because the pattern is broken.  Stay tuned.  

Currencies - Dolla Dolla Bills Y'All

King Dollar has continued to smoke the rest of the world's currencies with additional gains in value relative to the Yen, Euro, and pretty much every other currency that exists across the globe.  Some would say the US Dollar has been hotter than Steve Harvey on a Family Feud Mothers Day marathon in Georgia.  

Not too surprising to our readers, we have been tracking dollar strength for over a year now.  Here are the most recent charts we published in March.

And here is an updated chart as of May 8th.

What’s next you ask?  

After all this strength, The U.S. Dollar should be reaching some resistance and possibly a short-term top.  If you haven’t already, be sure to subscribe for future From The Boardroom to stay ahead of this trend.

The typical pattern for the U.S. Dollar during bear markets and recessions is to gain strength in the beginning phases when everyone is in denial about the bear market and looming recession.  

Then, once everyone wakes up to reality and the Federal reserve realizes they are behind the curve and need to become more accommodative (aka: “Hey Jerome, turn that money printer on”) things tend to change and The Dollar may then start to experience some struggle.  We are most likely weeks if not months from this point so stay tuned as we will surely keep you informed. 

Interest Rates - No Safe Haven For Conservative Investors

In the event you have a friend or family member with their investment account at places like American Express, Edward Jones, American Funds, Franklin Funds, or…..wait for it ….ARKK Investments (oof), you may want to perform a wellness check on them when they get their April and May statements.

No doubt there is some serious soiling of Depends in the Leisure Villages of the world as retirees that have a “Diversified, Balanced Portfolio” review their recent account statements and realize that a “balanced diversified” portfolio doesn't do squat in this type of market.  

The reason for this?  Bear markets are liquidity events.  Meaning everything other than cash and the U.S. Dollar gets sold as market participants work hard to shore up their balance sheets.

When bear markets are accompanied by rising interest rates and inflation they become something bigger.  They become an event that leaches investors' portfolios from both sides of their “diversification” creating losses in their risk assets like stocks as well as losses in what they thought would protect them when stocks go down, their bond portfolio.  

This is when investors realize that diversification without a focus on correlation is a big mistake.  This is also what we learned in the 2001 and 2008 bear market and why we focus on the five (5) asset classes that we focus on.  The Quiver approach combines diversification, correlation, and strategy to avoid being leached by the market when investors run for the exits.  

Enough of the bear market investing lesson with a Quiver commercial mixed in, let’s get into the charts.  Here are the last couple of charts we shared with readers discussing the U.S. ten-year treasury rates.

As you can see, interest rates tracked by the 10-year treasury have continued to reach for the sky.  The notes in the charts tell the story.

Experience in former markets indicates that just as they are too high in bull markets, they get too low in bear markets. - Benjamin Graham

So what does this mean for your portfolio?

It most likely means anything in your portfolio that is interest-rate sensitive, like government bond mutual funds or exchange-traded funds, has dropped in value.  For example here is an image of the past year's performance of the Franklin Government Securities Fund, a widely held government bond fund.

As you can see, the struggle has been real for bonds.  Leaving “diversified” portfolios a bit dazed and confused as the typical hedges to volatility aren’t working.  

At this stage for rates and related investments, as noted in the charts we are looking for signs of a reversal.  

While we wouldn’t be trying to catch a falling knife, we can see some signs that the short-term moves may be reaching extremes.  This helps make the intermediate-term value in accumulating interest-bearing investments more attractive. 

An investor interested in preparing for the possibility that the second half of the bear market could see a flight to safety along with a more accommodative Federal Reserve may want to start to consider a strategic and slow accumulation of rate-sensitive investments if that person's time horizon and risk tolerance is appropriate (food for thought, not investment advice). 

Equities - Errrrr, Houston  We have a problem.

The true investment challenge is to perform well in bad times - Seth Klarman

Attention Past Readers!  Share The Love!  

Our charts and comments on equity markets since the turn of the year have been stellar.  This is the result of us benefiting from the lessons we learned in the bear markets of ‘01 and ‘08.  And, it is helping our clients and loved ones maintain and grow their wealth in these challenging markets.  Help spread the love.

Give your friends and family a gift that keeps on giving.  Share this article with them and let them know you’ve been following us.

Over the last few weeks, equity markets have been taken out to the woodshed and chopped up.  As of May 11, the YTD return for the SP500 is -17.9, the Nasdaq -28.22, and most government bond funds -10%.  

While the year-to-date returns for commodities are; Nat Gas +136%, The Dollar +7.8%, Oil +35%, and +33% for most food commodities. 

Sounds like an inflationary bear market to us.  

If you want to see some real carnage just look at stocks like Netflix, Disney, Peloton, Rivian, and Facebook.  All are down over 50% and in some cases as much as 80% from their highs.  Oooof.

Since the charts have been guiding us well, let's start the equities conversation with a recap of what we shared with readers in March and April of this year.  Starting with the long-term view. 

Then the shorter-term view from March 31st when we did our client and VIP virtual event.

And now, the current view as of May 11th.  You will see in this chart, that markets have been behaving within the realms of past expectations, for now. 

Where is the end to the decline? 

Well, if this bear market acts like previous bear markets there will be a few perceived ends or bottoms to this process.  The first of those is probably fairly close to where we are now.  

There is a lot of reversion to the mean attraction in the 3600 to 3800 of the SP500 so we suspect this first macro decline may find some footing in that area which is fast approaching.

From there, we will be looking for signs of a snapback rally to develop.  Whether that snapback rally turns out to be a deceiving bear market rally that eventually fails to lower lows, all the way down to the 2500 area on SP500 (which would be the normal behavior from past bear markets), or morphs into a new bull market is yet to be seen.  One step at a time.  

In our view of things, the next few weeks will be very important for any investor that may have become surprised and concerned about the volatility of their portfolio. If you are not sure if this is you, look at your April and May statements, and then let us know how you feel. 

In the event those feelings are uneasy.  The next market rally will be your chance to readjust the risk and allocation of your portfolio. 

It’s important to realize that the market and economic world has changed.  What created wealth in the last 10 years is going to do wealth destruction for the next few months or longer (the average bear market lasts 349 days).  If you and your portfolio don’t change with the times you will be forever “riding things out” as opposed to riding the next wave. 

I’ve found that when markets are going down and you buy funds wisely, at some point in the future you will be happy. - Peter Lynch

That is all the time we have for this month's Market Minutes From The BoardRoom.  If you found value in it please share it with a friend or family member.

Until next time. Take care.

P.S. Keep your eyes open for a couple of bonus charts and follow-on commentary for Natural Gas and Real Estate to come in the next few days.  We share our analysis on the popular question “Is real estate going to crash?”.  And, “How high can gas prices go?”