Stephen Aust MarketCycle Wealth Management

Stephen Aust MarketCycle Wealth Management

Wile E Coyote’s Gravity Lessons

MarketCycle Wealth Management

 

 

When I was a kid, and unlike today, cartoons were works of art coupled with smart humor.  I remember repeatedly watching Wile E. Coyote slowly chasing the Road Runner up a steep incline, to then pass him and overshoot, resulting in a fall down a steep cliff face.  Of course, he got back up, still intact; then they did it all over again as some sort of perpetual cycle.

For several months now, and despite the presence of heightened risk levels, I’ve been writing about the possibility of a “melt-up” in stock prices.  This happened in late 2017 (and the market eventually dropped almost 20%) and it appears to be happening again.  And who’s doing all of the frantic buying?  Once again it is inexperienced retail investors that are late to the parade, as well as hedge funds… and unlike institutional investors, the majority of ‘sophisticated’ hedge funds appear to be run by imbeciles.  Sorry, but it’s true. 

We have to remember that one of the basic laws of investing is that excesses in one direction (melt-up) always lead to excesses in the opposite direction.  

Right now investors are chasing the stock market up a steep incline.  It will have the same result.  As I often tell clients, the stock market takes an escalator up and an elevator down; it slowly climbs a “wall of worry” and then plummets off a cliff; it rises slowly and then falls rapidly… and this always occurs when the majority of investors least expect it.  In a melt-up it sprints-up.  Just like Wile E Coyote, markets always fall after running up the steep incline, but we always forget the ending even though the ending never changes.

Even without a concurrent economic recession, we are likely to get a big drop sometime in 2020.  Investors must be prepared in advance because gravity always wins.  MarketCycle is still bullish on stocks, and especially bullish about U.S. stocks and especially longer-term, but the current high risk level continues to warrant the holding of protection within investment accounts.  Right now, investors need to be willing to give up a smallish portion of potential “melt-up” gains in order to protect their hard earned money from the inevitable opposite result.  And when the next big drop is over, then investors will need to use quantifiable data to determine if it is a safe time to remove any temporary protective assets from investment accounts.

Remember, a big drop (bear market) does not require a concurrent recession and it will arrive when the majority of investors believe that it simply cannot happen at all this time around… and we are almost at that precipice.

MarketCycle has had a lot of new global clients coming on-board (and current clients adding additional money to their accounts).  The question is always the same:  “The market is at new record highs, is it safe to begin investing now?”   The answer is this:  “If accounts are appropriately hedged against a near-term market fall during today’s higher risk scenario, then yes, of course it is safe on a relative basis… regardless, between now and 2029, we are likely to see 1000 new record highs.”   So far during this advancing late cycle, MarketCycle has been capturing around 75% of the up day profits (which is good enough) and nearly 0% of the down day losses (which allows for sound sleep at night).

When the Dow was still at 9000, I bought the domain name of “Dow80000” with the year 2029 in mind; I still stand by that prediction.  Anyone without an investment account will regret not taking advantage of this last great bull market of our generation… and it still likely has almost a decade to run.  But how do you play safe?  The idea is to hedge during high risk periods by holding some protective assets that are bullish in their own right (but not by shorting the market) and then to fully protect during full blown economic recessions.  But if you are not eventually very bullish during actual lower-risk bull markets, then you are not using logic to your advantage.

 

One of MarketCycle’s least accurate (and too early) indicators is based on investor sentiment.  Basically, when all of the passengers on a boat run to one side (too bullish) then the boat tips over.  We are presently getting closer to a bigger correction as the stock markets continue their melt-up.  This particular indicator offered no warning in 2018 because the big 20% correction was caused by President Trump’s Trade War rather than too many people being excessively bullish at the same time.  But as I said above:  “Excesses in one direction (melt-up) always lead to excesses in the opposite direction.”

 

 

 

SUMMARY:  MarketCycle Wealth Management has been bullish since April 2, 2009.  We’re still bullish, and the Dow naturally wants to climb toward 30,000 since it loves round numbers, but our proprietary indicators predict the likelihood of a bigger than normal stock market pullback being in the works.  It is possible that we get a series of lesser drops rather than one big one, enough to let off the pent up steam in the stock market, but one bigger drop is the more likely scenario.  To repeat for the third time:  “Excesses in one direction (melt-up) always lead to excesses in the opposite direction.” 

Economic recession probabilities 3 months out remains below 7%, which is still extremely low, but when this eventually changes, it will change quickly.  And when our indicators tell us that risk has abated, only then will we remove our currently held protective assets.  We continue to perform quite well, so I’m in no hurry to change anything.  Simply put, MarketCycle’s near-term goal is to avoid participating in the next cliff fall.

 

 

 

Highly recommended (Netflix, 1.5 hours) documentary on improving one’s health and fitness through dietary changes; good for those who are not adverse to listening to what might be new concepts:   The Game Changers 

 

Thanks for reading!  If you like what we do, then please help to spread the word.  We do not advertise; we depend on referrals from people like you.

MarketCycle Wealth Management is in the business of safely navigating your investment account through rough waters.  We have clients all across the globe; our fees are low; the first 3 months are at no charge.  We earn our keep!

SUBSCRIBE    to this free, no spam monthly blog via the signup on the website.  There is no catch to doing this.

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MARKET CYCLE  —  DUAL MOMENTUM  —  TREND FOLLOWING  —  LOW VOLATILITY  —  HEDGE FUNDS

Institutional Predictions for 2020

MarketCycle Wealth Management

 

 

Before I start, I’d like to let clients know that the age at which Traditional-IRA holders have to start withdrawing their yearly minimum distribution has just moved up to age 72 and this allows Traditional-IRA and SEP accounts to compound tax-free for longer… and this is a major benefit.

PUBLISHED ON January 1, 2020

The following is a synopsis of what the larger professional institutions and their research departments are expecting for 2020; their opinions do not necessarily coincide with MarketCycle’s stance or predictions.  The following is our condensed version extracted from literally hundreds of pages and dozens of videos and podcasts.  I do this at the start of each year… and this year I find that there is less consensus than usual although a common thread is still woven throughout.  Please note that if they say “recession in 2021,” this likely means that stocks are in trouble in 2020, since most stocks normally begin their drop many months before recession begins.

 

 

GOLDMAN SACHS:

  1. U.S. recession risk is limited to a 20% chance in 2020
  2. Federal Reserve to remain on hold, not raising or cutting rates in 2020
  3. The U.S. will lead in relative strength
  4. China weakens further
  5. Limited inflation because of limited wage growth
  6. Lower, but positive stock market gains in 2020… with a better first half than second half of the year
  7. Growth above consensus at 2.5%
  8. Year-end close of 3400 for the S&P-500 in 2020 but only if we get a divided U.S. Government after the 2020 elections, and yet…
  9. A full 100% of Goldman Sachs’ sophisticated private equity clients expect a recession in 2020
  10. Central Banks across the globe are holding real (inflation subtracted) rates in negative territory, showing persistent global economic weakness

 

 

 

CHARLES SCHWAB:

  1. Key risks for 2020 are manufacturing weakness and business investment fatigue hurting consumer spending and job growth… unemployment claims are already starting to build even as employment levels rise
  2. Federal reserve to remain on hold
  3. USDollar remains strong but moves mostly sideways
  4. Inflation may slightly rise, helping TIPS (Treasuries that are inflation protected)
  5. Buy extended-duration Treasury-bonds over shorter-duration
  6. Buy investment-grade over high-yield corporate bonds
  7. United States continues to lead in relative strength
  8. Market volatility to be higher than usual
  9. Buy quality, low-volatility large-cap stocks
  10. Small-cap stocks continue their weakness

 

EVERCORE (Ed Hyman, voted #1 Economist for the past 39 straight years via Institutional Investor’s Annual Survey):

  1. The big stock market drop in December of 2018, followed by the Federal Reserve response, prolonged the market cycle
  2. Lower growth in 2020, unless corporate earnings pick up
  3. Gold is an important part of any portfolio because of the massive amount of money-printing by all world governments
  4. No recession in 2020
  5. Low inflation continues
  6. Interest rates low for longer
  7. Way down the road, the government deficit and high corporate debt will eventually create stagflation

 

FIDELITY:

  1. The Federal Reserve is unlikely to raise interest rates in 2020, all Central Banks will want their economies to run hotter than normal
  2. For 2020, hold a mix of investment-grade and high-yield corporate bonds even though there will be a deterioration in high-yields as the late-cycle advances
  3. Expect increased volatility over the next two years

Jurrien Timmer, Head of Global Macro at Fidelity (and one of my favorite analysts), suggests that stocks may continue to run up until the end of summer in 2020 (dark black line below continuing up to the upper-right corner of chart), with a possible recession starting in early 2021:

 

 

BANK of AMERICA:

  1. 8% corporate earnings growth (because it will be easy to move up from the flat earnings growth of 2019) and this leads to an 8% stock market gain for 2020
  2. Manufacturing weakness may have already bottomed
  3. The financials sector will be the strongest
  4. Several under-valued and beaten down sectors will rotate to the top (IE, energy)
  5. There will be increased volatility and greater draw-downs
  6. Hedge funds will get killed chasing momentum stocks
  7. Pension funds are now holding mostly illiquid (un-sellable) investments and if forced to sell during a major downturn, they will be forced to sell their (liquid) S&P-500 stock positions, further driving down the market

 

BLACKSTONE:

  1. The stock market is risky and perhaps topping and the Federal Reserve is in a too weak position to offer support
  2. Weaker earnings growth than ‘The Street’ expects
  3. Volatility should increase in 2020
  4. Yields will move slightly higher in response to rising wages and this will cause a slight uptick in inflation
  5. Mid-cap stocks may offer superior gains over large caps

 

BLACKROCK:

  1. Decent growth for the global economy
  2. Suggest a current mix of cyclicals (especially technology) with defensives (such as healthcare & staples)… and high quality stocks
  3. Positive on U.S. stocks
  4. Negative on European stocks
  5. Positive on Japanese stocks
  6. Very positive on Emerging Market stocks, except…
  7. China weakens further
  8. Positive on gold, especially as a portfolio hedge
  9. Best bonds = high-yield corporates and TIPS (Treasuries that are inflation protected)

 

GUGGENHEIM PARTNERS:

  1. Economic indicators will continue to weaken
  2. Odds of a recession in the U.S. during 2020 have increased to 50% (which is high)
  3. Pickup in job layoffs to increase in 2020
  4. Both Treasuries and gold should perform well in 2020
  5. There is danger in high-yield corporate bonds because of improper risk ratings
  6. Possible 40%-50% pullback for stocks if recession occurs… 20% pullback if no concurrent recession

 

Yes, it keeps going…

 

NEUBERGER BERMAN:

  1. Possible recession in 2020, but more likely in 2021 with stocks falling 6-9 months before recession starts (stocks starting to fall in 2020)
  2. More Fed rate cuts likely during late 2020 and into 2021
  3. There will be increased and more prolonged market volatility
  4. Investment-grade corporate bonds to beat high-yield corporate bonds
  5. Expect a 20% correction sometime in 2020 regardless of recession occurrence

 

YARDENI RESEARCH:

  1. Main worry is that the S&P-500 could rapidly “melt up” toward 3500… and then crater into a prolonged recession
  2. If bull market continues, then expect better earnings growth at 5.2% in 2020 and 4.7% in 2021
  3. Continued subdued inflation in 2020
  4. Trade War Phase 1 (fluff) likely completed sooner rather than later in order to calm financial markets
  5. Trade War Phase 2 (real deal) likely to be postponed to after the elections with China wanting to ‘wait-and-see’ if President Trump wins a second term

 

FUNDSTRAT:

  1. Stock market up in 2020 because corporate earnings will grow by 10%
  2. >10% gain in the S&P-500… to 3450
  3. There will be mild inflation that increases in the second half of the year
  4. Best sectors are technology, industrials, financials and energy
  5. U.S. will lead in relative strength

 

INVESCO:

  1. No recession in 2020
  2. Weak, low growth economy
  3. Rates on hold
  4. No full resolution to Trade War
  5. Growth stocks continue to beat value stocks
  6. U.S. stocks continue to lead in relative strength
  7. Strong USDollar
  8. Favor high-yield over investment-grade corporate bonds
  9. Favor corporate bonds of all types over Treasuries
  10. Positive on Real Estate Investment Trusts (REITs)
  11. Expect low but positive returns for gold
  12. Bearish on commodities in general
  13. Volatility rises in second half of 2020

 

WISDOM TREE (via their senior strategist Jeremy Siegel of Warton School of Finance):

  1. Interest rates will stay low and float between 2.5% and 1.5%
  2. Holding U.S. Treasury-bonds will hedge against stock market losses
  3. Expect an S&P-500 gain of 8% (that includes a 2% dividend)
  4. Dividend-paying stocks should excel in relative strength
  5. The two biggest threats to the stock market are a continued Trade War and the possible election of either Bernie Sanders or Elizabeth Warren
  6. Recession probability is at 40% during the next two years (and this is fairly high)

 

(David) ROSENBERG RESEARCH and ASSOCIATES:

  1. A recession is imminent, most likely in 2020, and the problem is that…
  2. The high government deficit means a potential weak government stimulus and…
  3. Low interest rates means a potential ‘too weak’ Central Bank stimulus
  4.  The stock market is simply running out of steam
  5. Residential housing has contracted for 6 quarters
  6. Commercial building is now contracting
  7. U.S. exports down for past 6 months
  8. Business capital spending already in recession
  9. Employment data is starting to weaken
  10. Consumer data is weakening
  11. GDP breadth is weakening with 30% of GDP already in contraction
  12. Leading Economic Indicators have recently moved into contraction
  13. Most of globe is ahead of the U.S. in the weakening of economic data

 

LAZARD:

  1. Slow growth, but no recession in 2020
  2. Extremely accommodative monetary policy
  3. Equities = 5% gain in 2020
  4. Bonds = 5% gain in 2020

 

BTIG:

  1. More clarity on trade and Brexit would be bullish for stocks
  2. Cyclical stocks beat defensive stocks
  3. Leadership will be found in financials and energy
  4. Neutral on technology, however tech still likely moves up
  5. Bond yields have bottomed, however Fed unlikely to raise rates

 

FIRST TRUST:

  1. Bullish with the S&P-500 heading to 3650 in 2020
  2. No recession within next 12 months
  3. Interest rates begin to head back up because of increasing inflation
  4. Greatest risk to the market is a far left Democrat winning the White House

 

FRANKLIN TEMPLETON:

  1. Modestly cautious going into 2020
  2. Risk is still skewed to the downside
  3. Moderate risk of recession in 2020
  4. Mild inflation may cause out-performance by Emerging Markets, in both stocks and bonds

 

JP MORGAN:

  1. Target of S&P-500 @ 3400
  2. Choose cyclicals (tech) over defensive (utilities)
  3. Choose late-stage sectors such as energy and industrials
  4. Muted inflation despite expected wage growth

 

LEUTHOLD GROUP:

  1. No recession in 2020
  2. Emerging Market stocks will be the big global winner
  3. In the United States, cyclicals will beat defensives
  4. Mid-cap stocks to be stronger than large-caps
  5. Late-stage assets such as industrials and energy may excel

 

UBS:

  1. Strong U.S. economy in 2020
  2. No rate hikes
  3. Increased volatility creating deeper pullbacks

 

MERRILL LYNCH:

  1. Bullish on stocks with a 20% expected gain in 2020
  2. Mom-&-Pop retail investors to drive market higher
  3. Bond risk is increasing, so keep portfolio total bond level @ 20%
  4. U.S. stocks continue to lead in relative strength
  5. Best stocks will be found in the high-quality-large-cap area

 

RUSSELL INVESTMENTS:

  1. Central Bank easing coupled with the cooling China-U.S. trade war have set the scene for a modest global economic rebound in 2020
  2. Recession in 2021
  3. Low inflation… no Fed rate changes
  4. Sluggish growth in Australia… they will likely implement income tax cuts
  5. Modest growth in the Euro-zone, including U.K.
  6. Minimal growth in China and Emerging Markets
  7. Bullish on U.S. stocks, but they are already expensive
  8. Both high-yield and investment-grade corporate bonds are expensive
  9. Treasury bonds offer the most attractive relative value

 

DOUBLELINE:

  1. The Federal Reserve is already secretly doing QE-4, as if we are already in a recession
  2. Debt is higher and yet GDP is worse
  3. Manufacturing is now worsening
  4. If no recession in 2020, then President Trump wins another 4 years

 

LPL RESEARCH:

  1. Economic data, such as earnings, will exceed the current lowered expectations (low hurdle)
  2. Possible recession in late 2020
  3. Solid U.S. equity performance benefiting cyclical sectors (such as tech) and large-cap stocks in general
  4. Weakness in Europe, Japan and China
  5. Stick with high-quality bonds
  6. Low inflation continues
  7. Strong USDollar

 

 

QUOTE OF THE MONTH…  Larry Kudlow, head of Trump’s National Economic Council (via Forbes Business Magazine):  “Tax cuts impose restraints on the size of government.  Tax cuts will starve the beast.  Specifically, tax cuts provide a policy incentive to starve Social Security, Medicare, education and the environment.”

 

 

There is a strong incentive for the bigger institutions to give high “end of year” targets… they want people to enthusiastically give them more money to manage.  So, shown above is the 2020 year end S&P-500 forecast (courtesy of MarketWatch).  Regarding the 14 analysts shown, I normally pay the most attention to market commentary coming from Brian Belski, Savita Subramanian and Francois Trahan.  The truth is that not a single person on this list knows where the stock market will end in 2020.  Someone’s prediction might get lucky, merely by chance.

 

 

MarketCycle’s PREDICTIONS:  We are in the late-stage of the bull market that started in early 2009.   

  1. STOCKS:  There is the possibility of a bullish melt-up that could even persist into Fall.  We could see the S&P-500 @ 3330 by late spring.  This boiling pot has to be watched.
  2. RECESSION:  There is almost no possibility of a U.S. recession in the next six months.  If there is no U.S. recession or late-in-year bear market drop in 2020, then President Trump likely wins a second 4 year term.
  3. RISK:  With each passing day, there is an increasing chance of a temporary yet strong & scary stock market pullback of perhaps close to 20%.
  4. BONDS:  The Fed is unlikely to raise interest rates in the near or intermediate term and this may benefit interest and dividend paying assets.    
  5. USDollar:  Likely to remain strong with price drifting sideways.
  6. INFLATION:  Non-stop money-printing and government spending coupled with low unemployment could translate to inflation slightly rising from extremely low current levels.  In 15 years, inflation could be quite high.
  7. GOLD & COMMODITIES:  Typical late-stage assets; likely to benefit from any increase in inflation.  Gold is a good portfolio hedge when used in the late-stage of the market cycle.
  8. TRADE WAR:  As I predicted months ago, the end of Phase-1 Trade War didn’t move the needle much, at least not in the right direction.  The major import by China has always been farm products and they just moved backwards from the #2 importer to the #5 importer of food from the United States.  The key feature of the Phase-1 agreement is that China will buy food imports from the United States.  The problem is that they just agreed to buy much less than they were already buying.  Farmers are really getting hurt.  President Trump now seems to be on the attack against Europe, especially after the recent NATO trip where world leaders directly insulted him.  He just added 100% tariffs on many European items and this is during a period when much of Europe is already in recession.  
  9. RELATIVE STRENGTH:  The U.S. continues to lead in strength relative to other countries, although Emerging Markets may get a boost as 2020 progresses.  
  10. Stock “buybacks” are starting to rapidly decrease and the Mom-&-Pop retail investor is stepping up to the plate.  Normally, Mom-&-Pop arriving on the scene is a late-stage phenomenon that occurs in conjunction with the final bullish melt-up of stocks in an advancing market cycle. 
  11. What would make me think that the market cycle may be prolonged this time around?  A strong and beneficial stock market correction coupled with a concurrent & rapid positive change in our risk indicators.  Our risk indicators showed minimal risk from April 2, 2009 until just before the big 20% stock market drop in December of 2018… almost 10 years.  Now, instead of clearing out after that big correction as they normally would have, they have only shown even higher risk levels, so we are positioned to benefit from any market direction.  If the market goes up, MarketCycle’s clients should reap about 75% of the gain but if the market drops substantially, we are likely to also make profits.  This is a good position in which to be.
  12. LONG TERM:  After we reap our eventual and overdue recession, we then continue our journey into the ROARING 20’s decade which will merely be the second half of the current Secular Stock Bull Market that technically began in October of 2011.  As I’ve stated several times, I bought the domain name of DOW80000 with the year 2029 in mind.  And I am amazed by the magnitude of forces that are due to come to a head or to completion in 2029.  Hummm… could 2029 mimic 1929?  Could the years after 2029 mimic the difficult years that followed 1929??  Will the cycle repeat all over again?

Although we recently took a small position in global stocks, MarketCycle has been correctly holding almost entirely U.S. stocks since the start of this bull market in 2009.  From the below chart, you can see (via the gold line) how important this type of decision is and why ‘relative strength analysis’ is so critical to investing.  Always hold strength and avoid weakness.  (Chart courtesy of Factset & CNBC)

 

 

******************************

2020 CHARITY:  Each year, MarketCycle Wealth Management gives a chunk of our profits to a charity.  This year it goes to the Ocean Conservancy.

  1. Three years ago, we gave to (the non-political) Nature Conservancy that offers to buy and then protect ecologically important land/water areas that are being offered for sale by private landowners across the globe.
  2. Two years ago, we gave to the Natural Resources Defense Council that works to ensure the rights of all people to clean air, clean water and healthy communities.
  3. Last year our donation went to KaBOOM! that provides playground equipment for children in underprivileged communities.
  4. This year, we’re giving to (the non-political) Ocean Conservancy whose purpose is to clean up plastic and trash in the ocean and on the world’s beaches.

 

 

Thanks for reading!  If you like what we do, then please help to spread the word.  We do not advertise; we depend on referrals from people like you.  

MarketCycle Wealth Management is in the business of safely navigating your investment account through rough waters.  We have clients all across the globe; our fees are low; the first 3 months are at no charge.  We earn our keep!

SUBSCRIBE     to this free, no spam monthly blog via the signup on the website.

SUBSCRIBE    to our paid members daily REPORT via the link on the website.

 

MARKET CYCLE  —  HEDGE FUND  —  DUAL MOMENTUM  —  TREND FOLLOWING  — LOW VOLATILITY

 

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MarketCycle Wealth Management | Stephen Aust
MarketCycle Wealth Management, LLC is a Registered Investment Advisor. Information presented is for educational purposes only, is not considered an individualized recommendation or personalized investment advice, may not be suitable for everyone and does not intend to make an offer or solicitation for the sale or purchase of any securities. All investments involve risk and unless otherwise stated, are not guaranteed. Past performance or performance charts are not a guarantee of future performance. Portfolio performance charts are shown net of fees so the management fee, brokerage fees, trading fees and ETF fees have already been subtracted. Current performance may be higher or lower than that shown and differing accounts may show different results. Investment returns and principal value in client accounts will fluctuate. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Be sure to consult with a tax professional before implementing any investment strategy.