Every now and then I scan various Exchange Traded Fund (ETF) options to find out what is working to determine if new trends are emerging. During this scanning process I recently came across a very interesting industry that looked quite promising to me. It has been wise for investment professionals to ignore this industry over the past six years, but this year could be different. Fair warning: Before I proceed, you need to leave your opinion at the door.
Just two days ago the 4th quarter GDP came out as a negative number, which was much worse than expected. In fact, not one of 83 analysts had anticipated a negative number, meaning they were all too bullish on the 4th quarter growth number. But yesterday the Chicago Purchasing manager’s index, a growth barometer, was way above expectations for growth, and not one of 48 analyst estimates was in the ballpark, meaning they were all too bearish on growth.
Most Pinnacle Advisory Group clients are familiar with our view of secular (or very long-term) market cycles. My partner, Michael Kitces, and I first published a paper on secular bear markets in the Journal of Financial Planning in 2006, where we predicted correctly that stock prices were likely to deliver much less than average returns for years to come. In my 2009 book, Buy and Hold is Dead (AGAIN): The Case for Active Portfolio Management in Dangerous Markets, I reviewed in some detail the rationale for why stock prices can disappoint investors ‘on average’ for decades. (In fact, the “(AGAIN)” in the book title referred to the fact that we’re currently laboring through the fourth secular bear market since the 1900’s.)
It is commonplace in the business news community to talk about ‘Golden Crosses’ and ‘Death Crosses’. If you’re unfamiliar with these terms, they refer to moving averages (MA) crossing each other. More specifically they describe the movement of a security’s short term MA moving above the long term MA (Golden Cross) and the short term MA moving below the long term MA (Death Cross). A strong signal is issued when using the 50 day MA and the 200 day MA as it is generally considered a move away from bears to bulls or bulls to bears (respectively).
Markets are volatile and in corrective mode, and investors are nervous. Are we witnessing the start of a cyclical bear market, or is this just another correction within a bull market and an opportunity to add risk assets to our portfolios? These are the questions the Pinnacle Investment Team is wrestling with right now, and they’re critical as we position portfolios for our clients.
The 2012 election is over and we now know who our president will be for the next four years. We’ve received questions from clients asking what we think the market is likely to do in light of the election. While we don’t pretend to be political pundits, it appears that the balance of power in Washington has not changed: The Republicans hold the majority in the House, the Democrats hold the majority in the Senate, and President Obama will remain for another term. The stock market is likely to refocus on what kinds of policies may actually be implemented going forward. Campaign rhetoric is mostly just that – rhetoric. Now comes the reality of trying to pass specific pieces of legislation. Given a still divided Congress, that will likely entail a fair amount of compromise on both sides. The question is whether compromise is even possible considering that the people who couldn’t cut a deal last year are still in office.
The chart below shows two ‘safe haven’ investments over the last few years: treasuries in green and the dollar in red. During periods of risk off, these positions benefited from fear as investors rushed to them for safety as they exited risky assets. But I think these two markets are sending signals that risk is the place to be right now.
Pinnacle Advisory Group’s Chief Investment Officer Ken Solow looks at the firm’s performance in bear and bull markets. The keynote presentation from our February 25 Inside the Investment Committee event.