April 2024 Market Outlook
A Tale of Two Markets: Strong Economy, Sticky Inflation
We begin April and springtime with US debt, equity and currency markets focused heavily on when the Fed will cut rates, having seen Wall Street economists at every wire house progressively trim their estimated number of rate cuts for 2024. The sticky inflation and employment data of the past few months gives good reason for some tempered enthusiasm. Interestingly, there is virtually no discussion or expectation that the Fed might not cut rates at all this year. I find this puzzling given some of Fed Chair Powell’s comments. After the recent PCE numbers Powell noted that “we don't see it as likely to be appropriate that we would begin to reduce interest rates until the Federal Open Market Committee is confident that inflation is moving down to 2% on a sustained basis,” noting that the Fed would need to see "more good inflation readings like the ones we were getting last year." With the US economy still growing steadily and employment remaining strong, getting numbers like last year is no small order.
In terms of positives for the US economy, however, here are a few points to consider:
Unemployment has remained fairly close to its historic low (current 3.9% vs. Jan 2023 low of 3.4%) in spite of 11 increases in the Fed Funds rate from March 2022 to July 2023
Job openings are still significantly higher than pre-pandemic levels (26% above, according to an Indeed data report)
US consumer spending has grown steadily over the past year, accounting for 68% of our nation’s GDP as of the end of 2023
In February 2024, consumer spending rose 0.8%, the largest gain since March 2023, indicating there has been little pullback in spending in spite of the fairly painful rise in the cost of goods, services and housing over the last year plus
US home sales jumped 9.5% in February and the median existing home price rose 5.7% over the last year (good news for homeowners, at least… not so good for buyers)
Fed data shows wealth among the bottom half of US families rose by almost 75% since the first quarter of 2020, and remains strong
Small businesses, which are responsible for nearly two-thirds of all new job postings, continue to show strong demand for labor as new-business applications rose 34% from 2021 to 2023 and are up since the start of 2024
Labor force participation (working-age population either working or looking for work) has remained steady at 62.5%, unchanged from a year ago
If interest rates continue to hold in a range between 4.0-4.5% on the 10-year US Treasury note, then continued solid economic data can provide further fuel for equities markets to rise and indeed to broaden out to more stocks than the short list that benefited from the rally in 2023.
But it’s not all roses out there. Some darker clouds to consider:
Real wages are falling (the amount people are paid when adjusted for inflation)
While nominal wages have risen by around 10% since Biden took office in January 2021, overall prices have increased 14% resulting in a net wages loss of 4%; further, the decline in real wages has hit virtually every major sector of the economy, meaning Americans are working more hours for less pay and retirees are getting less for their hard earned savings
Housing affordability has worsened significantly; the median mortgage is twice that of 2013 and has increased $1400 since 2020, while affordability is 40% worse than 2022
Median home prices are now 6 times median income vs. 4-5x 20 years ago, while the ratio of rent to median income has risen 25-30% over the last 2 decades (Econofact article “Hitting Home: Housing Affordability in the US”, 3/14/24)
US household debt is at an all-time high of $17.3 trillion (this includes home mortgages, home equity loans, auto loans, credit cards, student loans and retail cards), and consumers have registered negative savings for the last 5 quarters
The Consumer Expectations Index has fallen below 80 (March @73.8; 1985=100), which historically is associated with a forthcoming recession
Average childcare costs are up 32% since 2019, which doesn’t include the effect of pandemic-era funding that ran out last September (i.e., costs should rise further)
Auto loan delinquencies hit a 13-yr high in Q4 2023 at 7.7% (no 2024 data yet)
The US personal savings rate fell to 3.8% in January vs. the long term average of 8.48%
The commercial office vacancy rate of 19.6% is the highest since at least 1979 (WSJ 1/8/24)
And of course, geopolitical threats in Europe, Asia and the Middle East haven’t budged, US debt continues to balloon to unsustainable levels, and US political division is just starting to ramp up to new heights with the 2024 elections.
So what does this portend for the bond and stock markets and how should we position investments?
Bonds
Bonds continue to provide value and good risk mitigation for diversified investment portfolios. With the stall in the Q4 2023 bond market rally, and modest back up in 10-year rates from 4% to 4.30%, we have been able to increase holdings in AAA-rated, monthly-pay mortgage backed securities at 6% yield and higher, AA and AAA rated municipal bonds with taxable-equivalent yields above 6% (10-year and longer maturities), and investment grade corporate bonds with yields between 5.50-6%. Coupling these investments with a smaller holding of US T-bills and money market funds – instruments that offer yields around 5.25% along with high liquidity for when more compelling investment opportunities arise - the fixed income space is rightly earning larger percentages of professionally managed portfolios. Predictable income at rates we haven’t seen for over 15 years continue to underscore the value of having a meaningful percentage of assets in these securities. Remember the rule of 72: your money at a fixed annual rate of 6% doubles in 12-years, and slightly over 10-years at a 7% rate (divide 72 by the fixed rate of return to get the number of years for your initial investment to double). We have been investing in bonds at 6% to 7% since last October.
Stocks
The up-trend in both US and major international market equities continues with the S&P 500 up 10.2% for the first quarter of 2024. Barron’s weekly noted that the index has gained over 8% in the first quarter of a year only 16 times since 1950. In 15 of the 16 times the index gained an average of 9.7% in the following 3 quarters of the year (the 1987 crash being the exception where it lost money after the first quarter). The takeaway is a start like we have had in 2024 has over a 90% likelihood to gain further ground the rest of the year, barring a black swan event which isn’t out of reach given geopolitical uncertainty and US political and social disfunction.
It’s also worth noting, however, that all 3 major indices have begun to lose momentum. This is why we recommended last month to shift a portion of equity allocations to fixed income, commodities and bitcoin (bitcoin we have been recommending to have a small percentage of since last fall). Given the unabated rise in the S&P from 4100 last October to over 5200 today, the potential for a 10% pullback to around 4600 isn’t unreasonable. This doesn’t mean the current secular bull trend has broken down. From the October 2022 low of about 3500 we had 3 sharp pullbacks of -8.1%, -9.4% and -10.4% on the way to the current all-time highs. We would need to see a string of weaker economic numbers to give credence to a top in the equities markets.
How did our March Outlook suggestions do?
We recommended lowering equities holdings to 45% for those with over 50%, and increasing fixed income to 45%. We also suggested having 5% in bitcoin and 5% in commodities (by commodities I mean energy, metals and agriculture ETFs). Here are some indicative figures, as of last night’s close (4/1/24):
The 3 major indices (SPX, DJX, NDX) averaged +1.24%
I-Shares short/intermediate/long bond ETFs averaged -0.80%*
Bitcoin gained +14.52%
Energy (XLE ETF) gained +8.90%
Metals (GLD & SLV ETFs) averaged +5.3%
Agriculture (VEGI & GSG ETFs) averaged +2.52%
*Note: Atlas does not invest in bond ETFs, rather individual bonds where we are able to find higher yields than ETF averages, offering us the opportunity for outperformance vs. bond indices. We like the cushion our fixed rate returns provide to overall portfolios.
We wish you good investing and contact us if you have any questions or comments at info@atlasfas.com, or call us at (561) 704-0400.
Disclaimer
The information presented in this document has been obtained from or based upon sources believed by Atlas Financial Advisors, LLC (“Atlas”) to be reliable, but Atlas does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.
This information is not investment research or a research recommendation, as it does not constitute substantive research or analysis. It is provided for informational purposes and does not constitute an invitation or offer to subscribe for or purchase any of the products mentioned. This document is not to be relied upon in substitution for the exercise of independent judgment.
Observations and views expressed herein may be changed by the personnel at any time without notice. This document is not to be reproduced, in whole or part, without the written consent of Atlas.
March 2024 Market Outlook
This month we are providing a Summary of our Market Outlook for those interested in the Reader’s Digest version, followed by further drill-down for those that want to dive deeper. We hope this fits all and we welcome your feedback.
Summary
With the rising confirmation that the Federal Reserve is not cutting rates anytime soon, and that the cuts will be fewer than the market previously baked in, some equities caution and an increase in bond allocations is merited. We have to chuckle at how nearly every major brokerage house has back peddled on their forecasts and removed multiple rate cuts from their prognostications. We didn’t buy the rosy rate cut forecasts back in November and we still believe they will be less the market expects.
With the recent significant run-up in stocks and small backup in interest rates, we recommend shifting asset weightings with a tilt more to bonds, especially for those with a 60/40 or higher stocks-to-bonds allocation. The secular bull market in stocks is still intact. But a pullback and consolidation is warranted. With market breadth now expanding beyond the Magnificent-7 we look at this as an opportunity to take some gains and buy back on dips. But choppiness in equities markets will likely reign for some time given the outsized stock gains of 2023 and increased caution on interest rate cuts. Bonds still represent excellent long term value, if you know where to look. Hence our recommendation to increase this holding percentage.
For those with a 60/40 or higher equities ratio in their portfolio, we recommend shifting to a 50/50 allocation (stocks/bonds) or just increasing cash that currently pays above 5%. We think a couple of other sectors are advisable as well for additional diversification (see allocations, below). US small cap (e.g., Russell index) and international stocks are beginning to catch up to the major US indices and we believe these will continue to gain relative ground. A modest portion of your equities holdings in these sectors is merited.
In Bonds, value continues in mortgage backed securities where we still are able to find yields of 6-6.25% for AAA-rated securities. These bonds are a great way to add a relatively high and stable return to an investment portfolio. When we first started recommending MBS bonds last year the yields were 6.5-7% and above. At 6-6.25%, they are still an excellent investment.
US agency bonds (AAA) also offer 6% yields in 5-year maturities with a non-callable provision for 1-year. Lower investment grade corporate bonds with several years call-protection are also available at 6% and higher yield, and mainly AA-rated (some AAA) municipals in 5-10 year maturities are offered at over 6% taxable equivalent yield.
Commodities have been stuck in a narrow sideways range for the last year and a half, after a 30% drop from the early 2022 supply-chain bottleneck peak. The divergence between stocks and commodities has reached one of the widest gaps in history, with the S&P 500 at the top of its 2-year range and commodity indices near the bottom. A modest allocation to a broad commodities ETF makes sense for risk diversification and value, especially where a meaningful dividend or carry yield can be had. The iShares Commodity Curve Carry Strategy ETF (CCRV) is a way to participate in 10 different commodities via the futures market. This ETF’s performance since inception has been solid and it’s current yield is above 7%. For details see https://www.ishares.com/us/products/310784/ishares-commodity-curve-carry-strategy-etf-fund.
Lastly, for a number of months we have recommended having some allocation in Bitcoin. We continue to believe this is a good diversification strategy even with the recent run-up in price, though we recommend waiting for a lower entry point on a pullback. Bitcoin wallets are now in the millions and likely will continue to grow, structural support continues to strengthen, and with a finite number of coins (as opposed to the limitless printing of fiat currencies) Bitcoin represents diversification with the potential for outsized gains on a small allocation.
Periodic portfolio adjustments are part of a successful investment management strategy to reflect changes in market value, inflation, global economies and geopolitical events. Based on the observations above, we deem the following allocations to be a prudent example of diversification, growth and value at this time:
· 45% stocks (across US and International index ETFs)
· 45% bonds (across MBS, corporate and muni securities, with concentration in MBS)
· 5% Bitcoin (via a wallet or Grayscale ETHE ETF)
· 5% commodities indices (ETFs)
A tweak of this to 40% stocks – and moving the incremental 5% to cash which continues to pay an attractive rate of 5-5.25% - diversifies risk a bit further and provides dry powder to buy back into stocks on a pullback. Of course, individual financial needs and circumstances vary and need to be incorporated in any investment planning.
Atlas is able to help you assess your current portfolio allocations and make adjustments to align with your investment and personal goals. Reach out to us if you would like to discuss how we can assist you in your long term financial planning.
Other Takeaways
Labor Supply and GDP
Labor supply has remained strong and continues to be a driver for US economic growth, prompting a number of economists to revise upward their GDP forecasts for 2024. Strong participation rates and especially a huge increase in international migration over the last two years has been a key driver of growth in the labor force. Stickiness of labor costs will keep pressure on headline and core Personal Consumption Expenditures (PCE), slowing the rate of decline to the Fed’s 2% target and prompting a slower rate cut schedule than previously thought. Prior expectations for a March cut have slid to June, which still may be too optimistic (Fed member Bostic recently stated he didn’t expect to see any cuts until September).
US Equities Technicals
Stocks declined today with the Nasdaq overall, and Magnificent-7 in particular, leading the way down. After the heady rise from the early January lows of around 4700 to 5100 on the S&P 500 last week, a pullback is more than warranted.
Support on the S&P 500 is now at 4700 and then 4300, and we expect at least 4700 to be reached.
Are we in a Stock Market Bubble?
Though exuberant for the last several weeks, the stock market does not appear to be in a bubble. Rather just a top after an amazingly resilient run up from last October that took out just about every bear in the market. Ray Dalio offers an interesting commentary in his recent LinkedIn newsletter titled “Are we in a stock market bubble?”. His bubble gauge considers value, sustainability of growth rates, impact of new and naïve buyers, bullish sentiment, percentage of purchases paid with debt, and forward purchases based on a price gain bet. His conclusion? The stock market “doesn’t look very bubbly” even at these all-time highs.
The Case for Higher Stocks One-Year Out
With respect to what has happened to stocks following hitting new all-time highs, a fellow advisor shared some insights from Warren Pies of 3Fourteen Research that are worth noting:
First, since 1954, stocks were higher 93% of the time (14 out of 15) one year after the stock market made an all-time high. The one exception was 2007 when the housing bubble burst, subprime mortgages were defaulting, and the great financial crisis was about to start. As he states, “Do we have conditions in 2024 like conditions in 2007? No, at least not yet.” But past events don’t ensure a repeat either.
Second, rates of return one year after a new high all-time high ranged from +4.9% to +36.9%. In addition, drawdowns (market retracements) were shallower over that next year.
These data points make the case for staying invested in stocks on a long term basis, and having a plan to buy back in if you take profits at these levels.
Market Sentiment
The CNN Fear and Greed Index is back in Extreme Greed territory. It seems like just yesterday that we shared the index reading of Extreme Fear (November 2023). How quickly sentiment can swing! But this gauge continues to be helpful in identifying extremes that merit at least modest portfolio adjustments.
US Dollar & Geopolitics
Lastly, the US dollar recently has been buoyed by a weakening European economy and increasing possibility of lower rates there. Long term, however, the US dollar remains in a precarious position if the US government outstanding debt is not lowered. We discussed this at length in prior Outlooks but the key markers have not changed:
· Total debt: $34.4 trillion
· Debt as % of GDP: 123%
· Rising debt financing costs at current higher rates
· Inability of a polarized government to reduce spending
According to Trading Economics, the US debt rises approximately $1 trillion every 100 days! This is astounding. Debt as a percentage of GDP hit an all-time high of 133% at the end of 2023 and has declined slightly in Q1 thanks to GDP growth. But this time bomb has to be dealt with in stringent ways that Congress has not demonstrated the backbone for in many years now.
Coupling US political polarization with continued threats from Russia and China, and a growing humanitarian crisis in the middle east, we have no shortage of fuel to quickly change market stability. On that note, we adjourn until next month. Good investing and contact us if you have any questions or comments at info@atlasfas.com.
Disclaimer
The information presented in this document has been obtained from or based upon sources believed by Atlas Financial Advisors, LLC (“Atlas”) to be reliable, but Atlas does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.
This information is not investment research or a research recommendation, as it does not constitute substantive research or analysis. It is provided for informational purposes and does not constitute an invitation or offer to subscribe for or purchase any of the products mentioned. This document is not to be relied upon in substitution for the exercise of independent judgment.
Observations and views expressed herein may be changed by the personnel at any time without notice. This document is not to be reproduced, in whole or part, without the written consent of Atlas.
February 2024 Market Outlook
Bonds and Interest Rates Outlook
Yesterday’s Fed decision to hold rates steady should not have been a surprise to the markets, including Powell’s statement that a March cut is “unlikely”. The market simply had gotten ahead of itself, as we cautioned last month, in pricing in 6 rate cuts in 2024. This said, Powell was clear that the hiking regime is over and that the board expects to make 3 rate cuts in 2024, based on current inflation and economic data and assuming continued progress toward their 2% inflation goal. This was fuel for a renewed rally in bonds and recovery in stocks today (Feb 1st).
So Where Do We Go From Here on Interest Rates?
We think only two scenarios are plausible, both with the same result: rates either grind lower starting immediately, or they hover at current levels for some time before heading lower. In either case, rates decline. This is good news for bonds and stocks, at least historically.
Extending maturities over the last 2 months has done well and with interest rates heading lower, we believe this strategy will continue to out-perform. In terms of sectors with value when extending maturities, AAA mortgage backed securities and municipal bonds are at the top of the list. Mortgage rates continue to lag and as a result offer us further opportunity to invest in government agency mortgage backed securities in the 5.5-6.0% yield range. These securities represent excellent value which we will continue to take advantage of before the window closes. Similarly, AAA-rated tax-exempt muni bonds are available at a tax-equivalent yield of around 6%, for investors with a high Federal tax bracket.
Investment grade corporate bonds (single A rated) are available in 3-10 year maturities between 5-5.50% with call protection for at least 1-2 years. Somewhat lower yield but these add diversification and similar price appreciation potential. We will search for value opportunities here.
Equities Outlook
It was refreshing to see Fed Chair Powell not buckle to political pressure from Elizabeth Warren and several other politicians to immediately reduce what they claimed are “astronomical rates”. Astronomical? 4-5% rates historically have been quite sufficient to foster steady economic growth and were the average rate level for the 80 years prior to Fed interventions beginning in 2009. The sugar high of 10+ years of quantitative easing and other Fed rate manipulations between 2009-2022 was a fix that is proving hard to live without, especially for politicians. For investors in equities, it’s been like a shot of Red Bull with a triple espresso, as the S&P 500 chart below shows.
86% of the stock market’s rise over the last 100 years has occurred since 2009. This has been heavily fueled by aggressive additions of liquidity (expanding the supply of money) at various times up until 2023. The broad money supply chart below from the Federal Reserve of St. Louis shows how dramatic the growth has been, an approximately 165% increase since 2009 alone.
What do we take away from this? Low interest rates and ample money supply are the greatest fuel for asset price increases and, though the broad money supply has started to turn down, this is a slow process that won’t impede further upside for stocks in the coming months.
The Secular Bull Market is Still Intact
Expectations for the Fed to lower interest rates, for the economy to land softly, for improving corporate earnings, and for looser credit conditions support the case for further upside in equities. The stock market rally that we looked for in our December Outlook is only part way done.
We shared this chart in our December Outlook:
We have had a 10% rally since the last rate hike in July 2023 (S&P at 4450 in July and today at about 4900). We are slightly below the average increase for the first 6-months after a final rate hike, with another 9% to go if we were to come in around an average increase. This also implies more upside to the US stock markets.
Of course, the average rarely proves to be the actual result. Our cautionary indicators are relatively high stock valuations, continued geopolitical tensions that could escalate at any moment, and the CNN Fear & Greed Index solidly in Greed territory. A choppy pattern with a 5-10% correction isn’t out of the question as we press into new all-time highs.
We at Atlas Financial Advisors hope you find these market commentaries helpful. If you have any financial planning questions or needs, please don’t hesitate to contact us at info@atlasfas.com or call (561) 708-0400.
Disclaimer
The information presented in this document has been obtained from or based upon sources believed by Atlas Financial Advisors, LLC (“Atlas”) to be reliable, but Atlas does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.
This information is not investment research or a research recommendation, as it does not constitute substantive research or analysis. It is provided for informational purposes and does not constitute an invitation or offer to subscribe for or purchase any of the products mentioned. This document is not to be relied upon in substitution for the exercise of independent judgment.
Observations and views expressed herein may be changed by the personnel at any time without notice. This document is not to be reproduced, in whole or part, without the written consent of Atlas.
January 2024 Market Outlook
All of us at Atlas Financial Advisors would like to wish you a happy and prosperous 2024!
Bonds and Interest Rates Outlook
In our November 2023 commentary we noted the Fed’s rate increases have likely hit their peak (for now) at a 5.25-5.5% fed funds rate, and that great opportunities abounded to increase bond holdings at 6 to 7+% yields. We added high quality bonds at these high rates. In our December commentary, we updated that the bond rally had been feverish but that high quality 6+% yields were still available (though fading fast at the time!). As with the last month we continue to recommend extending maturities from less than 1-year to 4-7 year maturities. These maturities have declined in yield (risen in price) but now that the 10-year US Treasury note is below 4% (from 5% in November), the horizon gets a bit murkier. We continue to find select mortgage backed, US agency, investment grade corporate and municipal bonds with yields between 5.5 to 6% and believe these still represent good value.
This said, we expect 2024 to be a period of increasing economic and geo-political instability. Tensions are rising across 3 global theaters - Eastern Europe, the Middle East and Asia Pacific – while inflation continues to press the US consumer who represents 2/3 of US GDP. The US government’s massive debt and fiscal deficit are a constant pressure on the fed’s balance sheet and the US dollar. These won’t be resolved easily or quickly.
As a result, with a long term secular uptrend in interest rates appearing to be underway we continue to recommend an above average percentage of US fixed income securities (individual bonds, not bond ETFs). Maintaining a spread of maturities out to 5-10 years in addition to money markets yielding 5% enables us to lock in favorable yields while keeping some dry powder in the form of money markets to take advantage of emerging opportunities. The best value continues to be found in mortgage backed securities as mortgage rates decline at a slower pace than other debt sectors. We are happy to provide insight on what the right percentage is for you based on risk profile, age and other factors.
US Equities Outlook
The equity markets had a tremendous run since the end of October, after a very volatile year. Our forecast for equities in November and December was to regain the old highs in US stocks (this was achieved in the back half of December) and for small caps (Russell 600 preferably) and international stocks to begin to catch up given our expectation of a weaker US dollar and underperformance of these sectors up to that time. These sectors all did well since then and the dollar had a meaningful decline to help fuel international stock holdings.
The S&P 500 chart below shows that, in spite of all the swings and emotional distress over the last 2-years, we are only back to where we started in 2021. The Dow Jones Industrials and Nasdaq 100 made slightly new highs. Approximately $6 trillion of cash is still on the sidelines which, as long as interest rates hold at 4 to 5%, will be pressured to invest in the stock market on pullbacks. We will definitely get pullbacks from current levels in stocks!
The difference today versus the prior 15 years, however, is that investors can get paid 5% while they wait. In prior years, investors with their cash in money market funds lost money versus inflation, making it costly to sit on the sidelines.
That’s the positive side of the current equities picture. On the caution side, valuations are high and tell an important story. The DJIA P/E ratio (trailing 12-months) at end of 2023 was 27.26 vs. a year ago at 20.63. Its historical average is about 16. The Nasdaq and S&P 500 are also rich compared to last year and to their historical averages. Only the Russell small cap index is cheap versus 2022 and well below levels of the last 5 years.
Sources: Barron’s, Birinyi Associates, Dow Jones Market Data
Though small caps are cheap on valuation and have benefited recently from rotation into this sector, there’s good reason for cheap valuations: these companies are most vulnerable in a recession. Rotation to small cap and international stocks should continue to perform well relative to US large caps for the near term. But we must emphasize some potential headwinds for stocks that don’t appear to be getting much attention, namely:
· The market has priced in at least 2 and more likely 3 interest rate cuts. However, the Fed is not going to make the mistake that Fed chairman Volcker made in the 1980’s in cutting rates too quickly, causing a resurgence of inflation. We believe the market has gotten ahead of itself in assuming a lower interest rate environment than the Fed is committed to, at present. 4-5% rates are historically commensurate with decent economic growth rates and the Fed will be happy with this rate environment to gradually bring down inflation to its 2% target. The over-stimulus of the last 15 years (more like 20, actually) has given the markets a sugar-high that it is assuming will continue to be administered. The only scenario in which we see this occurring is a severe recession. Barring that, the interest rate juice for equities to continue to rally sharply is not in ready supply to the degree the markets have assumed.
· The overall perspective on the economy, inflation and stocks is that it’s all pretty good; that just as it was the last 2 months it will continue to be, with little risk of a 10% or more pullback. The Fear & Greed sentiment indicator (see gauge below) tells such a story. We are now in Extreme Greed territory. Extremes usually mark a turn in the markets. If you recall, last October this indicator was in the Extreme Fear zone, following which we had an explosive rally well over 10% for most sectors.·
Economic weakness in the form of rising unemployment, continued high cost of living, and geo-political shocks are not priced into stocks, either in the US or internationally.
· Technical charts show falling Relative Strength Index (RSI) numbers while hitting new highs, and we are well above 50 and 200 day moving averages on all major US stock indices. When coupled with a very low VIX volatility index, this portends a retracement and 5-10% is not unreasonable given the factors above. On a longer term basis however, stocks remain in a secular bull market that started in 2009. Until the 200 day moving average on the S&P 500 and other indices is broken, buying meaningful retracements remains a defensible technical strategy.
Recapping, stocks are pricey at the moment and we believe they will experience a pullback sometime in Jan/Feb. Near term, selling upticks is prudent.
Longer term, however, the combination of sidelined cash, resilient economic data, and technical that confirm we are still in a secular bull market provide support for stocks. Buying stocks on meaningful pullbacks remains the strategy – at least until a clearer picture emerges with respect to inflation, economic strength/weakness and global conflict.
Source: CNN
Where to Invest?
· Bonds - buy dips for a long term investment. These continue to offer good value with less principal risk.
· Stocks – sell rallies and add to positions on retracements to 200-day moving averages. Failure of the 200-day averages is a different picture altogether.
· Portfolio risk hedges - given global and US dollar uncertainty, increasing positions in bitcoin and gold (silver as well) on dips will serve as useful risk hedges. Holding 10-15% of a portfolio in these assets will provide protection with modest downside risk and potentially significant upside gain in 2024.
· Commodities - any further US dollar weakness will provide support to commodities including agriculture, energy and metals. We continue to recommend a modest allocation to these sectors.
Atlas Financial Advisors offers model portfolio allocations (conservative, balanced, growth) for your consideration. You may email us at info@atlasfas.com for further information.
Disclaimer
The information presented in this document has been obtained from or based upon sources believed by Atlas Financial Advisors, LLC (“Atlas”) to be reliable, but Atlas does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.
This information is not investment research or a research recommendation, as it does not constitute substantive research or analysis. It is provided for informational purposes and does not constitute an invitation or offer to subscribe for or purchase any of the products mentioned. This document is not to be relied upon in substitution for the exercise of independent judgment.
Observations and views expressed herein may be changed by the personnel at any time without notice. This document is not to be reproduced, in whole or part, without the written consent of Atlas.