What should I write about today? That the data suggests we are NOT on the verge of economic Armageddon? That the Federal Reserve does NOT appear poised to crush the economy in order to throttle inflation? That the stock market’s current valuation, as defined by the Price/Earnings ratio of the S&P 500, is as cheap as it has been in years? Would anyone believe this?
How about that the “core inflation” data will likely start to increase at a decreasing rate over the next several months? That industrial commodities prices, things like copper, aluminum, iron ore, nickel, and steel, has been falling sharply this quarter? That agricultural commodities have also shown signs of consolidating, if not cooling off? Whew.
Does any of this matter? The truth is, probably not.
As a whole, we are in a deep blue funk, one where investors view the world as though there is a hole in the bottom of the glass. When they take both the stock and bond markets behind the wood shed? When the reason for a rally one day is the reason for a sell-off the next? When all news is bad news, and any good news is instantly suspect? When pragmatism is mistaken for optimism, and when the perma-bears finally get to say: “See! I hate to say I told you so, but I did.”
It is enough to make one reach for 3 oz. of gin, a dash of vermouth, and 3 Manzanilla olives. At this point, I don’t really care if they have pimentos in them or not. Now, if you are willing and providing, please make the gin Plymouth, the vermouth Dolan (the dry kind with the green label), feel free to throw the olives into the shaker, and put it in the freezer for 15 minutes before serving it to me.
I digress.
Stepping back into reality, So, what does an investor do when stocks are down double-digits for the year to date (5/6/2022)? Go into bonds, right? Well, what does that investor do when those bonds are down double-digits as well? We are in an extremely bizarre environment where there really isn’t any place to hide other than cash under the mattress. However, even that doesn’t make much sense with inflation being what it has been in the recent past.
Heads I win; tails you lose.
Frankly, this is a market where it doesn’t pay to get too cute. To be sure, you make a move there and another one there to mitigate your downside. This would be things like getting out of highly cyclical names and economic sectors, and redeploying the proceeds into those things for which your college professor would have said there is “inelastic demand.” As I have told plenty of people this year: “When it looks like things are falling apart, you load up on alcohol, tobacco, firearms, aspirin, utilities, and lipstick. There will always be some sort of demand for those things.” Ha.
While it is always there, the urge to “time the market” always seems to be the strongest at the extremes, doesn’t it? People want to buy when the market is rallying like crazy and sell when it is, well, behaving like it has this year. This is called FOMO trading or the “fear of missing out,” and it is a completely emotional thing. While we usually use the term during a head-scratching rally, it is also appropriate during a sharp sell-off.
Consider this, as wild as it has been thus far in May, as I type here at 10:30 CDT on the 6th, the S&P 500 is actually slightly positive for the month. Of course, a lot can change between now and the end of the month, even the end of the day; but would you have believed that after yesterday’s rout? The point is pretty simple: trying to “time” the market when it is performing the way is has been is a thankless task. In fact, it can cost you a lot of money.
A writer named Sam Potter wrote an excellent article for Bloomberg this morning entitled “Billions in Wrong-Way ETF Bets Placed Just Before Thursday Rout.” It is a perfect example of what can happened when investors think too much and/or follow technical charts too closely. I won’t try to paraphrase his very good writing; so, let me just cut & paste some of the better parts here:
“For a measure of just how brutal Thursday’s reversal was in U.S. equities, take a look at where cash was moving in the ETF market earlier in the week.
In the three days through Wednesday, investors added $426 million to the ProShares UltraPro QQQ ETF (ticker TQQQ), a leveraged product that delivers three-times the return of the Nasdaq 100 Index. Caught in the tech stock selloff, it tumbled 15% for both the biggest drop and lowest close since 2020.
In the same time frame almost $1.8 billion poured into the iShares iBoxx High Yield Corporate Bond ETF (HYG), just in time for the fund’s worst day in nearly two years. Almost $600 million was plowed into the ARK Innovation ETF (ARKK), which slumped 8.9% for its biggest drop since the height of the Covid turmoil.
It’s possible investors managed to exit before the worst of the declines — maybe even retaining some of their gains from a day earlier, when stocks enjoyed a broad post-Fed rally. TQQQ and ARKK report flows with a one-day lag, meaning Thursday activity isn’t visible yet. HYG recorded a tiny $23 million outflow.
But flows elsewhere suggest a broad pattern of bets on a change in market sentiment after months of rotation toward value and economically sensitive shares at the expense of growth stocks. Those moves also look ill-timed.”
The reason for this topic today is pretty simple. There is a ton of cash “sitting on the sidelines,” literally trillions of dollars, trillions. According to the Federal Reserve’s weekly H.8 report, US banks had, get this, $18.082 trillion in deposits for the week ending April 20. That is right; that is trillion with a t. In no uncertain terms, that is a mountain of cash that will eventually have to go somewhere. Further, that doesn’t even include the recent sharp increases in money market mutual funds, which are now approaching another $4.5 trillion in balances.
Make no bones about it. Money is waiting on the sideline for the volatility to cool. Fair enough, Norris, but why is this important? If you have read this far, I think you can intuit my thinking.
After such a disastrous start to the year, and it has been, investors are going to start sniffing around for “value” at some point in the near future, if not sooner. This has always happened, and it always will. Once it does, the markets will start to stabilize, consolidate, and then recover. Once the recovery is well under way, the currently nervous retail investor will decide to jump back into the fray. With all of the fuel currently sitting on the sideline, the markets will start heading the opposite direction, probably pretty rapidly. I suppose you could call it a FOMO trade.
The question then is: how comfortable are you in timing the market? Understanding what the endgame likely is: higher. Do you put it in now? Or do you wait until the easy money has already been made, or even most of it? I can’t answer that for you. However, I can tell you, given everything we see in the market and economy, I would be willing to bet we are closer to the end of this current FOMO sell trade than the beginning.
…and that is my good news for today.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows not only on this day but on every day, and may the conflict and bloodshed in Ukraine end quickly.
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.