A couple weeks ago we discussed the model getting closer to flipping positive (more stocks). Well, today that happened.
So, with this positive cross, we will be adding more stock to the portfolio in the coming days. It is a bit concerning, given everything that is going on in the world, but I have found that the most uncomfortable trades usually are the best ones.
Not that the water is completely without sharks, just that the sharks tend to be offshore for now. This means, of course, that we could have a reversal of our indicator, which would lead us to shifting back to a conservative posture again. But for right now, we view the markets as broadening out and that is typically a good thing (in general).
What do we mean by “broadening?” Here’s an example. The small-cap to large-cap ratio hasn’t been this wide, nor as deep, since the tech bubble (a narrow market). A reversal here would represent broadening in the market, and should lead to outsized returns for those holding small caps.
Speaking of those sharks, many data points do show that the economy is slowing. The big question is whether or not we will have a recession. My opinion is that we will have a technical recession, though it may not feel like one. The market may have already priced that in. AllianceBernstein thinks that the economy will slow but stay positive.
Also on the uncomfortable side of the ledger, the leading indicators just came out today and posted another -0.3% for June. That adds to an already negative number for what is supposed to be a reliable forward-looking view of the economy.
The new orders and expectations for business conditions continue to be the worst area of the index.
A slowing economy, modestly rising unemployment coupled with OBBBA (One Big Beautiful Bill Act), which means lower taxes for most while potentially raising taxes for othersand an increase in total government debt. Speaking of debt, with the OBBBA, the debt limit came off and guess what happened? The national debt ballooned by over $400 billion over night.
Now over $37 trillion, quickly closing in on $40 trillion. Here’s a chart of the interest that is paid on the US debt.
According to the CBO (Congressional Budget Office) interest payments could reach $1.8 trillion by 2035. My guess is it may be higher than that.
So with all the concerns out there, the market is broadening out. This could be weeks or months. Maybe a year. We will have to find out. For now, we have to follow the model even though our brains tell us to do something different. Quite often our brains trick us and cause us to do the wrong thing at the wrong time. We will see how this signal pans out and be ready to conserve assets if the model turns again.
As always, please let us know if you have any questions about this or any other topic. We will be happy to have a conversation.