With the election now over, I thought I’d share some updated market thoughts & observations. Based on recent market action, equities apparently loved the election result, but bonds not so much. We will see if this big jump in stocks has legs. Stocks in general have been overbought on a momentum basis for months, so there is the probability that this spike higher today could be a blow-off top which rolls over.
As for the decline in bonds, it could be due to investors believing that Trump’s agenda will be inflationary, perhaps stalling or eliminating any future rate cuts by the Fed.
The question now: Is it time to shift to a more aggressive stance? I would say no. I've shared thoughts in the past with the reasoning & charts of indicators explaining why a defensive stance was prudent. Although these indicators have a track record of being right more than wrong, this time around many have proven to be ineffective. It happens. The exact reason for their ineffectiveness remains somewhat elusive, but that's not overly surprising given that we have been living in unprecedented times since COVID appeared. Perhaps it was the $4-$5 trillion in COVID-related stimulus, combined with the rise in inflation due to supply disruptions resulting from the pandemic. Regardless, as shown below, many of these indicators remain bearish.
The following chart shows the relative return of high beta stocks vs. low beta/volatility stocks (green line) and the S&P 500 (red line):
Note that when the S&P 500 is rising but the relative return of high beta stocks vs. low beta (green line) is trending lower, it sets up a bearish divergence that typically sees stocks eventually heading lower. The orange lines identify these bearish divergences.
Our core models are overweight the health care sector (defensive), but as this next chart shows, the XLV (health care sector ETF) has underperformed the S&P 500 this year:
But note in the chart above that when the XLV underperforms the S&P 500 by two standard deviations or more (as is the case now), the XLV tends to revert upward and outperform (see the red arrows). In other words, now is not the time to reduce this overweight.
I've shared this next chart in the past:
When the momentum indicator in the lower inset (blue line) has reached the 1.7 level or higher (orange horizontal line), the market has become extremely overbought or overheated. Note the orange dotted lines on the S&P 500 (red line) marking these extreme overbought periods. Typically, meaningful equity corrections have followed. And see the red dotted circle, this indicator is currently at its highest level since 1980.
Finally, I’ve also shared the chart below in the past, whereby when the yield curve inverts & then un-inverts, it tends to be bearish for stocks (dotted orange lines). The yield curve is in the lower inset (green line), notice it is heading north as it un-inverts or normalizes from inversion (below the orange line = inversion).
As always, if you have any questions, please contact us. The entire team at Measured Wealth wishes to thank you for entrusting us to deliver on your financial goals.
Edward Miller, CFA, CMT
Chief Investment Officer
Measured Wealth Private Client Group
Important Disclosures
Historical data is not a guarantee that any of the events described will occur or that any strategy will be successful. Past performance is not indicative of future results.
Returns citied above are from various sources including Factset, Bloomberg, Russell Associates, S&P Dow Jones, MSCI Inc., The St. Louis Federal Reserve and Y-Charts, Inc. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investing involves risks, including possible loss of principal. Please consider the investment objectives, risks, charges, and expenses of any security carefully before investing.
In order to provide effective management of your account, it is important that we have current information regarding your financial status and circumstances. Please contact us in writing at 303 Islington Street, Portsmouth, NH 03801 if you have any changes in your financial situation or investment objectives, and whether you wish to impose any reasonable restrictions on the management of the account or reasonably modify existing restrictions.
Measured Wealth Private Client Group, LLC is an investment adviser located in Portsmouth, New Hampshire. Measured Wealth Private Client Group, LLC is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Measured Wealth Private Client Group, LLC only transacts business in states in which it is properly registered or is excluded or exempted from registration.
This publication is provided to clients and prospective clients of Measured Wealth Private Client Group, LLC for general informational and educational purposes only. It does not: (i) consider any person's individual needs, objectives, or circumstances; (ii) contain a recommendation, offer, or solicitation to buy or sell securities, or to enter into an agreement for investment advisory services; or (iii) constitute investment advice on which any person should or may rely. Past performance is no indication of future investment results. This publication is based on information obtained from third parties. While Measured Wealth Private Client Group, LLC seeks information from sources it believes to be reliable, Measured Wealth Private Client Group, LLC has not verified, and cannot guarantee the accuracy, timeliness, or completeness, of the third-party information used in preparing this publication. The third-party information and this publication are provided on an “as is” basis without warranty.
This publication may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “should,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio's operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of Measured Wealth Private Client Group, LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
