The equity markets appear to be in a similar position to where they were in September 2018, warns Landon Whaley.
Rudyard Kipling summed up the key to be a consistently great global macro investor when he wrote: “If you can keep your head when all about you are losing theirs …”
Everyone is losing their collective head over the latest rash of all-time highs being printed in the high growth U.S. equity sectors as well as the broader equity market. However, we’ve kept ours and used the recent pullback in utilities and REITs to increase exposure to those sectors we expect will outperform as we traverse a Winter Fundamental Gravity environment.
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 …”
I often say 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 beforethey occur.
I liken it to arriving at a party a little early, staking out the best vantage point, and getting acclimatized to my surroundings before things get into full swing. This philosophy means I do spend some time standing alone and looking awkward, but the awkwardness and solitude are rewarded because being early gives me two distinct advantages.
First, I’m able to survey the best spot to position myself for maximum social interaction, where people are naturally likely to gravitate. In other words, before other investors finally arrive, I have already positioned myself in the markets most likely to outperform.
Second, I’m able to chat up the bartender, while he sets up guaranteeing my bourbon pours are a little heavier than my fellow partygoers’. 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 are doubting you.
Last year, we were early in our call to be long Treasuries, U.S. utilities and REITs, and to short U.S. based market sectors like semiconductors, financials and industrials. Markets and men doubted our call 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.
If you’re new to our research, don’t let FOMO (fear of missing out) get the best of you here. I see the same set-up I saw on Sept. 17, 2018, when I made the call for a Winter FG in Q4 2018. The S&P 500 printed a brand new all-time high four days later and then proceeded to lose 20.2% of its value in three months.
Despite the clear message being sent by the data, most investors are ignoring the Fundamental Gravity and corporate earnings reality facing the U.S. economy, and they remain positioned in opposition to our call. Remember, being data dependent, process driven and risk-conscious allows you to see 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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