Today’s title is an old saying in the investment world. Another version is “Buy the Bombs, Sell the Bugles.” I guess if you think about it in historical settings (in relation to the market) there are two potential outcomes. The first is the whole world gets bombed out and your money loses all relevance. Or the second is that hostilities end and the market goes back up. The question is then, “When?”
I was on a call with Blackrock early this morning and read a note from our good friend Bob Doll who is CIO of Crossmark Global Investments (and Nuveen prior to that).
Both firms basically thought the same thing. Equities are not cheap (we’ve been saying that for a while), the ‘war’ in Iran is more like weeks and not months, and oil prices will come down once the Strait of Hormuz opens back up.
We have basically heard that from most of the “smart” people on Wall Street. To be honest, the markets are not really down that much from recent highs, though volatility has picked up in a big way.
Oddly enough, our model went from ‘risk-on’ to ‘risk-off’ the week of February 2nd. At the time, it was saying that volatility was likely to go higher and may be associated with lower stock prices. Here’s what’s happened with volatility since that time.
It’s up nearly 50% since then. Meanwhile, the markets are down a few percent.
And wouldn’t you know it – our model flipped on March 2nd back to ‘risk-on’. In full disclosure, we haven’t made that change yet, as we are feeling like there needs to be more clarity on the Middle East war, skirmish, fight (whatever you want to call it). That being said, we are likely to take action in the coming days or weeks as this issue winds itself down.
We should also note that, as you might expect, not all data is pointing to a ‘risk on’ approach being favorable. Our friends at SentimenTrader saw their composite risk model go ‘risk-off’ on March 4th, two days after our main model went ‘risk-on’. It doesn’t make one right and the other wrong. Instead, it depends on time horizons.
If we look at weeks (which nobody is really invested for weeks) the SentimenTrader model shows that the market struggles for the following three weeks after a signal like the being discussed here:
But when we broaden out the view, the year out numbers tend to be very good with a good win rate.
The combination of these two research inputs seems to be saying that the longer-term prospects are strong, but there’s no need to rush risk back into the portfolio.
If we’re right and the US is able to come to a settlement in the Middle East, we should see volatility subside and oil prices head back down. Overnight, oil prices spiked towards $120 a barrel, so we’re clearly not there yet.
Now, things have settled down a bit. WTI Crude is around $96 a barrel as I write this.
Still up a lot from the mid 60’s a couple weeks ago, but maybe the fever has broken on the oil market. It wouldn’t surprise me if we see oil in the 60’s or 70’s if we look out 6+ months from now. Remember, oil and gas always goes up faster than it comes down. If we see the oil market come back to previous levels, we should also see the markets reverse back up.
Of course, let’s hope cooler heads prevail and we can find a peaceful and enduring solution in the Middle East.
I hope you have a good week. If you have any questions or comments about this or any other topic. We will certainly be happy to have a conversation.