“Coddiwomple” is not a word many people are familiar; it means to travel in a purposeful manner towards a vague destination. I can’t think of a single word that better describes investing in markets, writes Landon Whaley Tuesday. Watch him explain the word for traders.
Markets are headed toward vague destinations, we don’t know where they’re headed. Despite this reality, if we want to be successful investors, you and I must remain purposeful in the way we approach markets as they move towards their vague destination. With that in mind, this week I’d like to coddiwomple through the financial market behavior we saw during the month of October…
The Q4 has started with a bang! If this is your first time risk managing a Fundamental Gravity #4 regime, let me congratulate you on making it through your rookie stage and coming through it not just unscathed, but ahead of the game if you followed our lead.
The carnage has been widespread this month: U.S. equities (-9.0%), international developed equities (-9.8%), emerging market equities (-9.9%), energy commodities (-8.2%), base metal commodities (-1.3%), broad-based U.S. commodity index (-4.6%), U.S. total bond market (-0.3%), international developed bonds (-0.5%), emerging market bonds (-0.4%), international developed currencies (-0.5%), and finally, emerging market currencies (-0.6%).
In short, there was no place on the globe to hide this month.
Well, I guess that’s not entirely true; you could have hidden in either the Asset Allocation Model, which gained +1.0% and is now up +12.3% for the year, or the Gravitational 15 portfolio (U.S. centric, long only equities), which held its own, giving back just 75 basis points and is still up +10.5% year-to-date.
In the Gravitational Edge Playbook on September 24, I made my initial call for an FG4 in Q4 environment and told you it was going to catch most investors off guard. I also said that in addition to an increase in volatility across all asset classes (check) that “You can also expect an exponential increase in storytelling as the crowded U.S. trades that have been working for two years cease their run, and people spin narratives to explain why” (double check).
I’ve heard all manner of rationales for the “sea of red” we’ve seen across financial markets over the last four weeks. My favorite is that investors are climbing a “wall of worry.” What the fudge is a “wall of worry,” and if such a thing existed, who would voluntarily climb it?! I’ve also seen more doomsayer articles in the last two weeks than stripes on a Brazilian tapir calf … stories like this one from a guy who looks at eight market divergences and concludes “… there is unlimited downside risk in the market right now and I don’t think it’s being respected.”
I hate to break it to you, pal, but there’s no such thing as unlimited downside risk. This is third grade math, but I’ll walk you through it slowly. Downside risk is capped at 100%, all the time and under all conditions.
But of all the reasoning and excuses given for what we’ve seen over the past month, I haven’t seen one person discussing the two factors that actually caused the risk-reward characteristics we saw in markets: growth and inflation.
That’s right, the party responsible for October’s carnage is our trusty Fundamental Gravity.
I’ll be the first to admit that this economic reality may not be as much fun, but I can promise you that unlike those worry walls and math-law-bending market divergences, the Fundamental Gravity will have your portfolio positioned correctly more times than not.
How did we call the 2018 crashes in Chinese, Brazilian and South Korean equities? Fundamental Gravity.
How did we call the -18.4% correction in eurozone equities? Fundamental Gravity.
How did we know to have you out of all emerging market asset classes this year while firms like Goldman Sachs continually doubled down on long EM as their number one trade idea? You guessed it, Fundamental Gravity.
And yes, our trusted Fundamental Gravity is how we nailed the “FG4 in Q4” call at the same time the S&P was making a brand new all-time high and people were buying it.
It’s not easy to measure and map the slopes and extremes across 27 economies and over 200 markets globally. It’s also not easy to contextualize all that data and generate a playbook that consistently positions you correctly before the moves happen.
Luckily, my team and I don’t mind a challenge, and we love the daily macro grind.
Tomorrow, we will release Part 1 of an update to our “U.S. Shift Work” macro theme. This macro theme outlines the first changes in 27 months to the playbook for profitable trading here in the U.S.
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Watch Landon Whaley’s 3 Ideas for Investing and the meaning of coddiwomple in a short video here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:42.
Watch Landon Whaley discuss When Markets Cycle in a short video here.
Landon Whaley: We have a generation of investors and asset managers who know only one market. The reality is markets and economies cycle and catch people off guard.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:51.
Landon Whaley interviews Adrian Manz: How I approach stocks here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 7:48.
Landon Whaley interviews trader Jackie Ann Patterson: How I got started trading and how I approach it with my Truth about ETF Rotation here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:14.
Landon Whaley interviews John Carter: How I started trading here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:37.
