With Wall Street continuing to push the endless bull market, investors should watch the data.
In last week’s “Headline Risk,” we discussed the assertions by Andy Sieg, head of Merrill Lynch’s wealth management division, that the S&P 500 will rise another 20% during the first six months of 2020 and that the 60/40 stock-to-bond portfolio is dead.
This week, we’ve got USA Today’s Jessica Menton quoting various Wall Street sources in an attempt to tell us “How to shield your 401(k) against a Trump impeachment, recession, and trade war.”
I could have written this article in a single sentence, “Don’t worry about it.”
Outside of a few sarcastic jabs, I haven’t written one word about the trade war. In fact, I haven’t read one article or research piece about the ongoing trade war for the last two years. Yet, miraculously enough, we’ve managed to catch every significant turn in macro markets over that same time frame. That’s the beauty of the Gravitational Framework, and specifically the Fundamental Gravity component of our process. We don’t have to worry about political gyrations, media catnip like trade war headlines, or even the speculative gloom and doom of a recession that may or may not occur.
We must pay attention to what the data is telling us about what’s occurring right now, contextualize that data into a Fundamental Gravity reading, and then align our portfolio accordingly. Wash, rinse repeat. It is not that those things don’t matter, but their affect will be revealed in the data.
Menton assures us that “a partial trade accord with China, clarity on a long-delayed Brexit deal and steady interest rates in 2020 – have removed some angst that was hovering over the market.” She goes on, “Plus, Wall Street's outlook on the economy is rosier. Robust consumer spending has helped offset weak manufacturing and muted business investment.”
I’m not sure what kind of data feed they’ve got at USA Today, but the consumer data I’ve been evaluating is anything but “robust.”
Retail sales have been accelerating for most of 2019, but that stopped when sales growth peaked at +4.4% back in August. Not only has retail sales slowed for two of the last three months, but the supposed “rebound” in October’s sales was actually a 100-basis point drop in the annual growth rate. To be clear, retail sales growth doesn’t make an elevator shaft move like this in a single month unless the consumer is in full hibernation mode. What’s more, this magnitude of decline is rare outside of recessionary environments.
The control group’s annual growth rate is the most critical aspect of any U.S. retail sales report because it’s used in the actual calculation of U.S. GDP. Despite the high information ratio embedded in the control group’s growth, the Old Institution routinely ignores it. Luckily for you, we don’t and can report that the control group’s growth rate has slowed for two consecutive months and is now residing at the lowest level in five months.
Now we reach the crux of the article, “Where to invest in 2020?” Please do tell!
The first sentence and I couldn’t make this up, says: “It depends on your financial circumstances.”
Folks, we’ve written extensively about how ignorant it is to invest your portfolio based on a Wall Street-dictated “age-appropriate” asset allocation, and the same goes for a portfolio based on “financial circumstances.”
I don’t care if you’re a 15-year old investing a hundred dollars from a paper route, an early 40’s liability expert with a $1 million liquid net worth, or a soon-to-be retiring baby boomer with several million in the bank. Your portfolio should always, always, always be aligned with the prevailing Fundamental Gravity. Period.
Menton then channels her inner Andy Sieg by saying, “The conventional idea of allocating 60% toward stocks and 40% toward bonds might not work for everyone next year, experts say.” One such expert is Patrick Healey, founder and president of Caliber Financial Partners. As Patrick tells us, “You have to stay invested and continue to make money off your investments in retirement, if your strategy is to run out the clock or play defense, you may run out of money."
What does Patrick recommend to ensure you don’t find yourself eating cat food in retirement?
“Healey recommends having roughly 70% to 80% toward stocks in a portfolio and about 20% to 30% toward alternative assets including commercial real estate, oil & gas investments or private equity.”
Holy shnikes! Not only does this guy want you to invest 80% of your hard-earned shekels in stocks, but he wants you to take the remaining 20% of your portfolio and 1) Buy a shopping center amidst a retail-apocalypse, 2) Allocate money to the biggest bubble (private equity) on Earth, and finally, 3) Try your hand at wildcatting!
The cherry on the top of this bullish narrative sundae is the final line of the article, a quote from Charles Lemonides, portfolio manager at ValueWorks: “You should position your portfolio for good news, not just for bad news, you want to be greedy when others are fearful. People are fearful right now.”
Folks, we track Behavioral Gravity indices for over two hundred markets worldwide and several thousand companies. The only thing people are “fearful” of right now is missing out on the upside; FOMO is real! There is a reason why the Behavioral Gravity Risk component of our What the Health global market risk monitor has been in “smallpox” territory for the last six months. People are frothing at the mouth for more equity and risk asset exposure; it's like Sharknado films; they simply cannot get enough!
The headline risk bottom line is that we need to pump the brakes. Let’s collectively take a deep breath; if I’ve learned nothing else over the last 20 years, it's that being a consistently successful investor is simple, but not easy.
To be successful, you simply focus on what the economic and financial market data are telling you about the prevailing Fundamental Gravity environment. This isn’t easy to accomplish with our 24-7-365 news cycle and a president that likes tweeting as much as he likes fake tanner.
To be successful, you simply align your portfolio with the favorable asset classes given the prevailing Fundamental Gravity and adjust course only when the data tells you it’s time to do so. This isn’t easy to accomplish when everyone, including the head of a Wall Street wealth management division, is telling you to buy stocks and let it ride!
As we enter the first real trading week of the year, the Fundamental Gravity remains in the Fall cycle in the United States; stay long energy stocks, broad-based commodities, Treasury Inflation-Protected Securities (TIPS) and crude oil. If, and when, that Playbook changes, we’ll let you know!
Please click here and sign up to receive the latest edition our research reports as well as to participate in a four-week free trial of our research offering, which consists of two weekly reports: Gravitational Edge and The Weekender.
