Ok, we are officially Trumped out. It seems the media has gone over the deep end attributing every market move, in either direction, to the new President Elect. I suppose that helps sell content or newspapers but since nobody pays for the weekly market insights, we are less encumbered by business economics and can write about what we believe to be more important for investors. Because the one thing that certainly trumps Trump is the market cycle. Certainly policy has an impact on the global economy, but it doesn’t drive it. Trust me, they have tried. So, where is the market cycle and how is it looking?
For those that have not seen our Market Cycle approach, this helps guide our asset allocation and is a strong input into portfolio management as well. The basis for the Market Cycle is if you can ascertain in which phase of the market cycle you are currently, this helps tilt asset, geographic, active/passive and style allocations. However, ascertaining which phase of the cycle is not an exact science and we use a multitude of models and indicators, about 30. These models are cross-disciplinary including interest rates, fundamentals, momentum, valuations and economic. (for a great weekend read, our primer on the approach is available HERE)
At this year's annual Robin Hood conference, which was held virtually, the founder of the world's largest hedge fund, Ray Dalio, talked about asset bubbles and how investors could detect as well as deal with bubbles in the marketplace. Q1 2021 hedge fund letters, conferences and more Dalio believes that by studying past market cycles Read More
Still in the Late Bull – We break the market cycle into five phases (chart above). For more than a year now we have believed we are in the Late Bull phase of the market cycle and this view has been reinforced over the past couple of months. This phase often sees decent economic growth, narrowing market leadership by late cycle sectors, higher volatility, some signs of inflation and tightening
monetary policy. While not all present we are seeing more of these characteristics in the market place.
Of course the issue is after a Late Bull phase comes a bear market, which very few people like. The good news is the Late Bull phase is often the longest of all five phases and currently our market cycle model continues to point to a continuation of the bullish phase. Out of our 30 indicators, 23 are positive at the moment (2nd chart on page 1), which is a strong indication the cycle will continue. As an example, in the months preceding past bear markets the number of positive indicators dropped below 10. So there is clearly some positive momentum.
The following table breaks down where all the indicators currently sit and indicates changes from our last printed update on August 29th.
In summary, most indicators are bullish with notable strength in the U.S. economy with some weakness globally. Momentum and rates are positive with fundamentals mixed due to high valuations.
We would continue to have a positive overall view on the equity markets. That being said with heightened volatility, investors should be more tactical. Trimming equity overweights during periods of market strength (like now) and deploying cash on market weakness. All with the watchful eye that if markets deteriorate and enough of our market cycle indicators turns negative, that is the dip you do not buy.
Bond yields in the U.S. have risen from 1.60 to 2.30%. This is a big move which highlights how interest rate sensitive the bond market and parts of the equity market have become. At some point we may see the broader market wrestle with the higher yields, but for now it remains contained. While the move in yields has surprised just about everyone and there may be a pause, we believe the path remains for higher yields. This has continued implications for interest rate sensitive investments that will likely remain under pressure.
Charts are sourced to Bloomberg unless otherwise noted.
Article by Craig Basinger, CFA – Richardson GMP
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