The stock market has, for the most part, moved sideways this year. The big question is whether stocks are going to eventually break out to the upside and advance to new all-time highs or break down below the lows of earlier this year. There is obviously no way to know with absolute certainty what is going to happen, however, we can look at the weight of the evidence to evaluate market risk.
There are two things that I analyze when trying to determine whether the market is experiencing a minor correction within a longer-term bull market or something more ominous, like a bear market. I like to first look at the economy from a macro level, meaning where are we in the business cycle. Then, I evaluate what is going on in the global equity markets.
Let’s first talk about the business cycle. The stock market trades based upon where the economy is going, not where it is at presently. The economy is, for the most part, cyclical. Normally as the economy grows, inflation rises, and the Fed raises interest rates to control inflation. The raising of interest rates slows the economy, which results in declining corporate profits and thus falling stock prices.
Where are we now in the business cycle? We have been in one of the longest recovery/expansionary periods in history. The last recession coincided with the last bear market that ended early 2009. During the current period of recovery/expansion (2009 to present), the Fed had reduced rates and provided liquidity through what has been termed Quantitative Easing. This injection of liquidity into the markets has been unprecedented from a historical perspective and has helped to keep the bull market alive. However, now the Fed is raising interest rates after a prolonged period of easy money. Therefore, from a business cycle perspective, if we are not entering a bear market now, we are probably getting close.
Now let’s look at the global equity markets to see what they are suggesting about the current period of stock market weakness.
International markets peaked before ours and are all mostly in bear market territory, short-term market breadth has improved however longer-term market breadth is extremely negative, risk-off assets are substantially outperforming risk-on assets, long-term stock market index trendlines have been violated to the downside, and market-leading stocks (such as the FAANG stocks) have been getting hammered. This market decline has all the hallmarks of a bear market, except that the yield curve has not inverted yet.
The bottom line is that the weight of the evidence continues to suggest that stock market risk is extremely elevated.
Stock Market Summary
Negative for Stocks (The Weight of the Technical Evidence is Bearish for Stocks)
Neutral for Interest Rate Sensitive Bonds (Early Bullish Signals Are Beginning to Emerge)
I currently view stock market risk to be high and thus I have client accounts invested 100% in money market funds.
Summary of How I Manage Client Accounts:
- I do not use a buy-and-hold approach like most financial advisors. I believe this strategy, while good for young investors, can have severe adverse consequences for those in or near retirement.
- I use technical analysis to manage risk and preserve principal during major stock/bond market corrections (Bear Markets).
- I have two basic models that I use to manage client accounts. One is conservative and appropriate for investors that are in or near retirement, and an aggressive model for younger more aggressive investors.
- I am a risk manager and will increase our risk level when risk in the market is low, and decrease our risk when risk in the market is high.
If you have any questions or would like me to review your portfolio, please feel free to contact me.
Craig Thompson, ChFC
Asset Solutions Advisory Services, Inc. is a Fee-Only Registered Investment Advisor specializing in helping the needs of retirees, those nearing retirement, and other investors with similar investment goals.
We are an “active” money manager that looks to generate steady long-term returns, while protecting clients from large losses during major market corrections.
Asset Solutions is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.