The Bears Who Cried Wolf

Bears Beware:

This one is going to be a bit of a longer one and it’s also going to be a little bearish on the outlook for equities going forward. I know, I know… I’m usually just discussing FX, but I want to take a look at the possible outlook since inevitably equities and FX have links and overlaps. That being said… since the financial crisis, it’s been a rough ride for anyone who dared to question the relentless rally of the S&P500. The bears, generally, have been much like the proverbial boy who cried wolf, and I don’t want to be one of those doomsayers who makes a career out of being wrong 

 

S&P500 Chart 

Easy ways to protect the flock: 

Now, the first thing you should all know is that my current pessimism is not just a result of having two rough days in the equity market. I have been, at best, neutral for the last month or so, and to me it looks like the S&P500 is, to some degree, running out of momentum. Likewise, I’m rather concerned by the current valuation of US stocks, especially when compared to the lower valuations in Europe, but especially the UK. So, to me, the time looks right for a slight repositioning of the portfolio – certainly away from tech – to focus more on the relative value in the market. 

 

Buffett Indicator (US Stock Market / GDP) 

Source: Currentmarketvaluation.com 

 The UK, in particular, looks ridiculously cheap when compared to most other developed markets. We’ve seen this being an after-effect of Brexit and the continuous drag which politics continues to exact on UK equities. However, we have to be real, we should expect a steeper yield curve, continued elevated materials prices and also relative value to outperform as the hot multiples in tech come off their highs. This all points to a juicy investment case for the FTSE 100 and broader indices. 

 

FTSE 100 performance versus SPX and Eurostoxx indexed 

 

Don’t be a sheep: 

Long-time readers will of course know that I hate the bond market far more than the stock market. This largely comes down to my inexperience probably, but the idea of buying an asset which yields a paltry 1.5% a year in a 5% inflation environment just doesn’t excite me. And this is why I’m an advocate of repositioning rather than an outright switch into a more defensive bond position. I’m about to contradict myself, sorry. I’d also like to see a little bit of cash available – if we do get a decent correction, then it’s worth having 10-20% on the sidelines ready to go and take advantage (yes, I know cash yields nothing… so surely I’d rather own bonds? No. You can always lose money in bonds too if yields spike aggressively higher). Or, if you’re especially keen to lose money, Germany can help you there. 

 

US Treasury / Bund yields. 

 

If the worst happens… you can always buy new sheep 

OK… I admit I’m really stretching the metaphor here now, and this is probably not the best title, but it’s late Tuesday and I’m tired . Either way, I’m not the only one who seems to like cash now… have a look at Berkshire’s Cash pile and you’ll see that Warren has plenty of cash ready to deploy for when the time is right. I’m not saying Warren is bearish, but clearly there aren’t many deals to be had. 

 

Berkshire Cash Pile. 

 

Who else in the village goes hungry? 

When the village doesn’t heed the warnings of the boy, they all suffer (the metaphor’s about to get stretched even further). Who else is affected when the equity market sells off? Well when we have intensive selling, this tends to be due to “risk aversion” in the markets. Consequently, the USD would be expected to do well, along with the JPY and CHF. The charts below consider these correlations with other markets. 

 

USDJPY v SPX  - Extreme risk off leads to stronger JPY

Gold v SPX - Gold harder to judge... but generally extreme risk leads to higher gold. 

 

Morals of the story: 

Liars are not believed even when they speak the truth. This could be my position if I stick to my bearish views forevermore, and it does seem like the bears are increasingly to be ignored. However, I do think it wise at the moment to diversify a little, move a few sheep inside away from the wolves, and keep some spare powder dry to take to the market if the worst happens. It’s a tough world, and taking a little money off the table now could make you feel pretty good about yourself in a few months time. 

 

I know full-well a few of my readers will take my bearishness as a signal to YOLO into SPX puts, this I respect, but don’t advise. The S&P500 has been on a remarkable run the past decade, and history says that bull markets don’t last forever. We have all the symbols of massive speculation in the markets. 

 

Buyer beware. Crypto mania in random assets like “Squid Coin” (from the popular “Squid Game franchise) have just seen hundreds of millions of USDs stolen from investors, NFTs sell for unfathomable amounts of money, and increasingly I seem to be getting stock tips from friends who have no interest in markets whatsoever. When the shoeshine guy knows more about the market than you, it’s time to sell.