“I like the cover,” he said. “Don’t Panic. It’s the first helpful or intelligible thing anybody’s said to me all day.”
― Douglas Adams, The Hitchhiker’s Guide to the Galaxy
Panicking never helps, especially when it comes to money. What helps is having a system and a plan. Which we do. When the markets were volatile in January, we held up remarkably well. That’s due to our way of looking at market trends, which caused us to reduce equity holdings for the month.
According to Morningstar data, for the month of January 2016, the S&P 500 was down -5.07%. The Russell 2000 (Small Cap Index) was down -8.85%. In February, it looks like stocks, primarily US large cap, are on the rebound. That means we could see a further move up from here. However, it is our opinion that this is only a short-term bounce in a longer-term bear market. Why?
Check out the chart below. Bull market cycles are designated by the green sections and Bear market cycles are designated by the red sections. Historically, these cycles tend to last about 20 years. If the current Bear market cycle started around the year 2000, that means we’ve got a few years to go before we’re out of the woods.
Source: Crestmont Research: http://www.crestmontresearch.com/stock-market/
We also continue to think that we are closer to global recession than what the public is currently hearing about. However, we believe that to be a positive development. Markets don’t go up forever, and a much-needed break is due. Booms lead to busts, which lead to the next boom. (Again, reference the chart above.)
Bonds – contrary to what “should” be happening in a rising-rate environment, bonds (specifically US Treasuries) are doing great. As of right now, they are emerging as the only positive long-term trend. As we mentioned last month, our bond strategies are positioned to seize the opportunity here.
The VIX (Volatility Index) is what we’re paying extra attention to right now. When it is above 20, that tends to mean fear is driving the markets (which usually means the markets are trending down). Below 20, fear is minimal and markets tend to move up. As of Monday, February 22, we crossed below 20 for the first time this year (cnbc.com data). This gives us further confirmation that we could see more of a rebound in the short term (before the bear market cycle continues).
And finally… Gold! It might surprise or amuse those who’ve known how emphatically I’ve been against buying gold for the past three years or so: gold has been moving up in our asset-class rankings. So much that the gold asset class may end up back in a few of our strategies over the next few months. This could play well into our bear market theme as a place where “safe” money usually goes.
Fun Fact: According to a 2013 report from the US Federal Reserve, a typical $1 bill lasts 70 months before it is taken out of commission. That’s up from just 18 months back in 1990! Why do bills last so much longer these days? Mostly because the Fed (which issues US currency) is destroying fewer dollars than it used to. During 2010 and 2011, the Fed installed new sensors on their high-speed processing equipment which enables them to authenticate notes more efficiently, so they don’t have to destroy them at as high a rate.
Source: http://www.federalreserve.gov/paymentsystems/staff-working-paper-20131211.pdf