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Shark Week

| July 30, 2019
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For those of you (like me) who enjoy Shark Week, catch it on the Discovery Channel. If you’re not into Shark Week, I might suggest that we stay aware of the markets, because they can be a bit like this annual TV ritual that captures the attention of so many. Below is a graphic of our asset class ‘relative strength’ matrix. We use this to gauge the health of the market as well as what assets we should overweight and underweight.

Right now, US stocks and International Stocks are acting the best. This would be our 30,000-foot view.

If we drill down a bit, we can see what the makeup of those asset classes is and what specifically we should be investing in.

  • Equal Cap weight versus Market Cap weight
  • Overweight Large Cap versus Small Cap
  • Technology, Industrials, and Financials are overweight

For International, you will see how most of the allocation is to Emerging Markets.  Much of Europe and developed international markets are underweight (or in your portfolios, not represented).

Remember, this is trend following…  This is part of our process, but this part doesn’t look at valuation. We have talked about valuation in the past, and have seen that it is a little elevated and may be a bit ahead of itself in the short-term. I think much of the enthusiasm driving up valuations is the expectation that the FED will cut rates tomorrow and thus take away last December’s rate hike (which, if you were listening to my rants back then, wasn’t needed).

The question that is still out there is will it be ¼ point cut (0.25%) or ½ point (0.50%).  The next chart shows the expectations for how much the cut is likely be (what the “market” believes).

Expectations are for ¼ point cut tomorrow with potentially another cut by September. When we talk about the FED driving the economic car from one ditch to the next, this is exactly what we mean. Raise rates too high (slowing down the economy), then lower rates (stimulating the economy). It’s a lot like the car on the freeway that changes lanes all the time but doesn’t get any further ahead than if they would have just stayed where they were (cue the opening scene of the classic film “Office Space”).

 

We continue to be cautiously optimistic for the public markets and we will continue to stay vigilant and if we need to, we will take protective measures.  

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