Recent data indicates a weakening market structure and traders—particularly young one, who have only known bull markets—better be prepared, writes Landon Whaley.
As we close the books on another month and set our sights on the final seven months of the year, I think it’s a fine time for a history lesson. Don’t worry; this isn’t going to be like your college freshman History 101 class; this is a history of the U.S. Fundamental Gravity.
Since Q1 1990, the U.S. has had 117 quarters of economic activity. Over those 117 quarters, the U.S. has spent 32 (27%) quarters in a Spring FG environment, 25 (21%) in Summer, 36 (31%) in Fall and 24 quarters in Winter (21%).
So historically speaking, the U.S. economy has spent its time roughly evenly split between periods of growth accelerating and regimes of growth slowing.
But those are averages, and we know that gleaning insight from averages can be ineffective and downright misleading. So, let’s look at this Fundamental Gravity history on a decade-by-decade basis.
During the 40 quarters of the 1990s, the FG breakdown was: 22 (55%) quarters in Spring or Summer, 11 (28%) in Fall, and (7) 18% in a Winter environment. During this decade, accelerating growth was more prevalent, and the instances of Winter were well below the average number of occurrences we’ve seen over the full 28 years.
During the 40 quarters of the 2000s, the FG breakdown is as follows: 15 (38%) quarters in Spring or Summer, 13 (33%) in a Fall environment, and 12 (30%) in the Winter. During this decade, growth slowing regimes had the upper hand, and Winter environments occurred at a rate well above their long-run average. This Winter deviation from the norm makes sense given the two recessions that occurred during the decade.
This brings us to the current decade of the 2010s. Over the 37 quarters so far, the FG breakdown is as follows: 20 (54%) quarters in Spring and Summer, 11 (30%) in Fall and 6 (16%) in a Winter environment. With three quarters left in this decade, the FG statistics are eerily similar to the1990s. Whether this means the 2020 decade will mirror the growth slowing dominance of the 2000s is anyone’s guess and not the point here today.
The point is this: not one U.S.-centric investor, professional or individual who began trading in the last decade has experienced a market “dip” that wasn’t immediately bought, much less a year of bad performance or, God forbid, an outright bear market. These folks and their processes for managing markets have only experienced one of the most favorable economic environments we’ve ever seen.
My professional market experience and the investing framework I use today all started during the 2000 equity market meltdown and the ensuing 2001 recession. My framework was further developed and successfully stress tested during the crux of the Financial Crisis in late 2008 and the subsequent rebound in 2009. More importantly, because of my global macro focus, that framework has been tested over the last 10 years as I traded all four major asset classes amid Winter environments across two dozen economies.
People who’ve entered the market over the last decade don’t know how to properly trade and risk manage growth slowing regimes, much less a Winter Fundamental Gravity characterized by both growth and inflation slowing together. Folks, nothing alters the risk and return landscape like a Winter environment.
Winter is Coming
As we discussed in Monday’s post, there have been three developments that lead me to believe inflation will slow over the next few months, ushering in another Winter Fundamental Gravity environment.
A couple of Winter months are not just probable, but likely, which is why last week we said, “…commodities are being added to the no-fly list as are all the markets associated with Rockin’ Reflation.” Energy-related commodities and equities are amongst the worst performers during Winter, so we are shutting down the Rockin’ Reflation macro theme until further notice.
But don’t worry, there are still plenty of attractive opportunities between U.S. Shift Work and Retail-iation as well as a brand-new emerging market-based macro theme to help you profitably short a few key international markets over the next few months.
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