Quote of the Week
“Every opportunity has an obstacle and every obstacle has an opportunity.” – Unknown
Before I start this week’s market review, I found probably the best explanation of what is going on in the world as far as Ukraine, Russia, China, Europe, United States, and other incredibly interesting topics. Just Google “Global Macro Peter Zeihan”. If you are interested in what is going on in the world you won’t be disappointed. Just a word of caution, schedule enough time to listen as the interview lasts one hour and eighteen minutes.
The stock market rout is continuing as of the market close this Wednesday. The Nasdaq has lost -11.9% over the last five trading days. The S&P 500 over the last five days has lost -8.9%. There is an old Wall Street adage, risk first happens slowly, then all at once. I don’t see any positive facts or indicators that will hold this market from falling further. The math is saying the same thing.
The volatility index (VIX) for the Nasdaq and the small cap index (Russell 2000) is in the mid 30’s which is in the un-investible bucket. Last week on the Dow we had a one day rally of +800 points on Tuesday and an -1000 point loss the next day. We are treating this market like a rattlesnake, just staying away from it.
It is starting to look like our expectation on longer term interest rates falling is potentially starting to happen. Remember, when interest rates fall, bond valuations rise. This has confounded us so far this year. Under normal conditions interest rates fall when the economy declines. The U.S Gross Domestic Product was negative for the first quarter but interest rates still rose. It can most likely be blamed on Putin invading Ukraine and a suddenly very aggressive policy from the Fed. So, we think our exposure to bonds will probably start to pay off rather than hurting us.
We are currently positioned in cash, U.S. Treasury bonds, Municipal bonds, International bonds, the U.S. dollar, gold, and utilities. We sold our position in gold miners, and our small position in real estate.
For many, many weeks I have been talking about the four Quadrants of the economy. For review purposes I will be reviewing the Quadrants.
The process we use breaks the economy down using two factors: the rate of economic growth and the rate of inflation. The table below shows the direction of growth and inflation either up or down for each Quandrant.
In general, you can expect the different asset classes as follows to perform in each of the respective quadrants.
Quadrant I is a good for equites and for some bond positions.
Quadrant II is the best quadrant for equities and commodities, but bad for most bond positions
Quadrant III is what we call stagflation. Some equity sectors can perform but generally we are underweight equities. Quality bonds will work.
Quadrant IV is the death knell for equities. Cash and bonds are the best.
Next week I will get more specific as to what assets perform the best in each of the quadrants.
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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
The S&P 500 index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.
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