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The best choices are often uncomfortable

| June 06, 2023

I mentioned a couple weeks ago that some of the best decisions in my life were very uncomfortable. Maybe you have had a similar experience.

Investing is no different, in fact the magnitude of comfort or discomfort certainly seems more acute when assets are priced multiple times per second. This is one of those times.

We discussed “green shoots” several months ago and followed that up with a piece a few weeks ago. In that more recent musing, we said that those green shoots looked like they were starting to take root and grow. Our model was reflecting that, and we said if that continued, we would be back to fully invested. Well, guess what? Here’s what our asset classes look like now.

You can see that US equities are now solidly in the Number 2 spot. Here was the progression of the asset classes over the second half of May.

I know that’s hard to see, but US Equities took over that #2 spot on May 26, but we use a +/- 5 differential before we make the change. It keeps the chance of being whipsawed down a little bit. That +5 happened on May 30 and has widened even more since.

It’s interesting. The last time we saw our model in this condition was coming out of the Financial Crisis in 2009. International was #1 and US was #2 and stayed that way for many months before US and International flipped spots.

So today the model says to be fully invested and ratchet up the risk in the portfolio. That certainly flies in the face of how we are all feeling about the markets. Don’t even think about watching the evening news, it’s all doom and gloom. But the markets are telling a different story.

Remember, the markets are discounting mechanisms. They discount 6 to 9 months in the future. It could be argued that the markets in October of last year were starting to see the end of the rate hikes by the Federal Reserve and the potential of a “soft” or “no” landing scenario. We have gone through those scenarios in past weekly blogs, and you certainly know where I sit on the chances the FED will maneuver through this gracefully. But I’m willing to say that I might be wroorr, woowroorr! Fonzie can say it much better than me. Click on the clip below.

The yield curves are inverted.

Valuations for the S&P are not cheap. Below is the CAPE P/E ratio that shows we are in the 92.5% ranking of valuation. Only surpassed by the 1929 peak before the Great Depression and the Tech Bubble in 2000. Of course, we know how those times worked out.

And let’s not forget the big sucking sound of money being pulled out of the system. Money supply is the life blood of the economy. Right now it is being removed at an unprecedented rate.

But as we’ve noted in the past, sentiment has been bad for a long time. Now is no exception. Take a look at the AAII survey.

Then there’s the Fear & Greed index, which seems a bit extended at the moment, although it was very much in the fear camp just a couple months ago.

What about all the money sitting in Money Markets? Yep, there’s a lot of that.

Here’s the article if you want to read it.

Finally, I believe we are at an important juncture in this market. Even though our model has flipped positive, there is still a chance of a market selloff. If the market continues to stay “narrow,” it will be unlikely to make considerable headway from here. If it broadens out, the areas of the market that have been underrepresented since October will start to outperform the 10 largest companies (the ones that have provided nearly all of the return for the S&P this year). You can read the article for the headline below here.

That’s it for today. Have a good rest of the week and let’s talk if you need more information or clarification on anything discussed here.