The "fog of war" is certainly something the world is dealing with. As I said last week, there is no sense speculating about what may or may not happen in Ukraine or what the fallout may or may not be. I have no idea how anybody can confidently predict what will happen. We are dealing with an unstable leader in Russia who has the support of a communist government who wants to control the world (China). You add in all the other humans making decision in Europe and you have nothing to base your predictions on.
I was coming back from a conference on Friday night. I'd spent most of the week during breaks checking in with our trading team and looking at our trading systems and getting my news from some independent (non-network) sources. On the plane they had DirectTV. CNBC and Bloomberg stop market coverage around 6pm on Friday night, so I was stuck flipping between CNN, MSNBC, and Fox. Everyone on those channels confidently provided their opinions about what would happen. After 45 minutes of frustration, I flipped back to Shark Tank.
My main message to everyone concerned about what might happen – NOBODY KNOWS. Taking action based on your (or somebody else's opinion) is not recommended. For advisors and clients of SEM, we have your back. We've successfully managed money for 30 years because of our strategy. Our trading systems do not need somebody's opinions – just data and decisions based on historical indicators that have been through all kinds of difficult situations. I watch the news more out of a curiosity and because advisors and clients turn to us for our take about what is happening, not because I need it to make any decisions.
For advisors and investors not part of SEM, we try to provide a voice of reason on this site, so you do not make decisions based on emotions. We of course would like you to work with SEM, but for whatever reason you aren't working with SEM, we want to see you succeed in your financial journey.
Be calm in the midst of uncertainty. Have a time-tested, pre-determined plan for whatever happens. Use trusted, independent sources for information and data. When in doubt, seek the counsel of somebody who has managed money through past crises.
Weekly Talking Points
- Nobody knows what will happen or what the impact will be on the economy, the markets, and the world. See discussion above.
- The worst-case scenario is this spirals out of control. We have already seen China directly supporting Russia. They have their own territorial desires. I'm no doomsayer, but the worst-case scenario is very ugly. Because of this I would remain cautious in taking on large amounts of risk unless your portfolio didn't have enough risk exposure going into the year. I had initially thought the sanctions were too weak, but the coordinated effort, especially the banking restrictions could help put significant pressure on Russia economically. These are obviously designed to end the war, but a study of history tells us a country under economic pressure can lead to very irrational actions.
- The best-case scenario is this goes away quickly. That would put us back to where we were at to start the year. Stocks are overvalued, inflation is running rampant, the Fed is going to be forced to hike rates and pull back stimulus, Congress won't add any more stimulus this year, and the economy will be left standing on its own. Because of this I would remain cautious in taking on large amounts of risk unless your portfolio didn't have enough risk exposure going into the year.
- MANY people's portfolios were significantly overweight stocks going into the year. This was either because they have not rebalanced back to their target asset allocation or worse, chose to jump into stocks late in 2021 simply because they wanted higher returns. Any bounce should be used as an opportunity to reduce risk in your portfolio. Even the best-case scenario is not too attractive for stocks over the shorter-term.
- SEM's lowest risk allocations have very little exposure at this time. They started reducing exposure in January and with last week's AmeriGuard/Cornerstone trend sell signal the downside in these portfolios is reduced significantly. The clients in these portfolios are usually the most risk-averse clients we have, so we understand they may be concerned about what is happening in the Ukraine. Our message to anybody in these lower risk allocations is simple – we already took action and are now in the comfortable position of being able to add risk at much lower levels whenever things stabilize.
The primary message is this – unless your financial plan or cash flow strategy has changed in the past 8 weeks you shouldn't be looking to change your allocation UNLESS you were in the group who ended up with too much stock exposure (because you haven't rebalanced your portfolio in a few years and/or wanted to generate higher returns.)
Markets move in cycles. When you are in the middle of the cycle it can seem a lot worse than when it's over. Stay calm. Stick to your plan. If you want a review of your portfolio, take our risk questionnaire.
Here are a few charts I have on my radar (again) this week:
The 5-minute chart of the S&P 500 continues to tell the story. The yellow arrows mark the direction of the last 2 hours of trading, when institutions are most active. The dashed lines show the areas the market has bounced around in.
The chart going out back to 2017 shows a different story. This can either be yet another correction following a huge parabolic move or the beginning of the market rolling over and starting a much overdue bear market. Remember, my definition of a bear market is not a 20% drop in stocks, but rather a market that not only drops 20-35%, but spends 18-24 months losing money. It's not the percentage drop that causes emotional reactions, but the TIME spent losing that wears investors down and causes them to capitulate on their stock holdings. Bear markets are a process, not a short-term event.
After jumping from 1.5% to above 2% in a couple of months, Treasury Yields are trying to create a new range. I've been surprised we haven't seen yields move significantly lower, which means the protection Treasury Bonds provide in a severe bear market may be different than most people have experienced in their careers. This will be something to watch closely.
Our AmeriGuard/Cornerstone trend indicators remain 50/50. The rally last week was not enough for the first one to reverse back to a "buy". The chart shows the historic signals of this system. The red boxes are the times the sell was a "false" one. This may end up being one of those times, but the system has a very good REAL-TIME track record.
The other AmeriGuard/Cornerstone Trend Indicator also has a very good REAL-TIME track record. It too will give false signals, but what we love about the combination of these is we don't have to speculate. If they are wrong, we know they will get back in. In everything we do we err on the side of caution. We'll willingly give up some upside return because our experience tells us most clients want SOME action taken when things get dicey. All of our trading systems are designed to do this.
Finally, for anybody who believes the 12-15% drop in stocks has created "value" in stocks, I'd encourage you to look at this chart. High P/Es are warranted if a.) growth is expected to be strong, and/or b.) interest rates are low. Regardless of what happens with Ukraine, it would take a huge leap of the imagination to believe a or b will be true.
This year has again shown us the value of SEM's disciplined, diversified approach. The trading systems inside each of our models and management styles (tactical, dynamic, and strategic) use completely different, independent strategies for allocation decisions. This allows a very dynamic approach to portfolio allocations.
The "Models" page of our re-designed website has all the details of how each model is currently allocated. Check it out here:
Stay tuned for additional updates.