Markets are getting frothy but here are profits to be made if you follow what the market environment is telling you, reports Landon Whaley.
Rudyard Kipling once summed up the key to being a consistently great global macro investor: “If you can keep your head when all about you are losing theirs and blaming it on you … Yours is the Earth and everything that’s in it,…”
Everyone is losing their collective head and piling into the growth-ier U.S. equity sectors as well as the broader equity market as new all-time highs dramatically increase the FOMO (fear of missing out). However, we’ve kept our head about us and maintained our call to be long those assets that work in both a Fall and Winter (coming in Q2 2020) Fundamental Gravity environment, including utilities, REITs, long-dated Treasuries, and gold.
Watching the recent headline risks and accompanying market reactions reminds me of another line from Kipling’s “If” poem: “If you can trust yourself when all men doubt you …”
You can’t earn extraordinary risk-adjusted returns by analyzing and trading markets the same way everyone else does. If you’re going to do things differently in markets, you must be willing to spend time standing apart from the crowd.
Our willingness to trust our process and stand apart from the crowd is a critical element of our ability to consistently be on the right side of market moves before they occur.
It’s like arriving at a party a little early, staking out the best vantage point, and getting acclimatized to the surroundings before things get into full swing. This approach requires standing alone and looking awkward, but the awkwardness and solitude are rewarded because being early provides two distinct advantages.
First, your able to survey the best spot to position yourself for maximum social interaction, where people are naturally likely to gravitate. In other words, before other investors arrive, your positioned in the markets most likely to outperform. Second, your able to chat up the bartender, Steve, while he sets up the bar. A first-name-basis rapport guarantees bourbon pours are a little heavier. You might say my evening has a better reward-to-risk set-up than that of investors who arrive fashionably late.
In Kipling terms, you must trust your process when markets and men doubt you, which is precisely what we’ve done for the last few years.
In 2018, we were a few months early in our bullish call for Treasuries, utilities and REITs, and our bearish call on semiconductors, financials and industrials. Markets and men doubted us while we stood awkwardly alone for some time (still profiting along the way). But once U.S. markets aligned with the prevailing Fundamental Gravity during Q4 2018, we were handsomely rewarded, while the doubters got the woodshed treatment.
Last year, we maintained our call to be long utilities, REITs, and Treasuries while everyone and their mother ran into things like the S&P 500 and U.S. small caps. The result? Our Focus Markets earned the same returns, or better, with half as much drawdown risk. We were also among the first to put a bullish bias on gold and gold miners last January, beforethe17.9% gain in gold and the market-beating 39.8% rally in miners 2019.
Beginning in December, we arrived early to the bullish emerging market equity party. We started things off by nailing calls to be long Russian and Canadian equities, which are now up 12.3% and 4.9%, respectively. Three weeks ago, we initiated South Korean equities as a bullish Focus Market, and they’ve already gained 3.2%.
Today, most investors are ignoring the Fundamental Gravity and corporate earnings reality facing the United States, and they remain poorly positioned if our call for a Winter Fundamental Gravity in Q2 comes to pass. While investors are driving up the price of tech stocks, the S&P 500, and small caps, we’ll continue owning utilities, REITs, and gold. We will opportunistically take shots being long Treasuries and as well as building positions in South Korean and South African equities.
Remember, being data-dependent, process-driven, and risk-conscious allows you to see both risks most investors never see coming and opportunities most investors miss, and that, my friends, is the name of the game.
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