MarketCycle Wealth Management
Spring Ramblings
This month, I will just give some brief comments on the markets and the economy.
INFLATION: MarketCycle correctly called both the beginning and then the top of the current inflationary spike. We said that inflation would increase for a brief period in mid-winter, which it did. We are now saying that it has begun falling again, and at a faster clip. This will allow the Federal Reserve to back off from their rate increases and that would be very stimulative for the stock, gold and bond markets, which is where MarketCycle is ‘pre-positioned’ in anticipation. Inflation is going to dissipate.
EMPLOYMENT: We remain in a long-term secular stock bull market that won’t end until sometime around 2029. This over-riding strength means that despite any cyclical bear markets or economic recessions, the economy will remain generally strong for the longer-term even though employment numbers may temporarily weaken in the near term.
FEDERAL RESERVE: The Fed should already be done raising rates. They may raise another 0.25% in May, but it would be a mistake to do so. Wall Street is giving 75% odds of a 0.25% rate increase in May, but I’m not so sure that we will even get a rate increase that month. Regardless, the end of rising interest rates is at hand.
RECESSION: A recession is a period of temporary economic weakness. Despite all recession indicators firing, our’s and other’s, I believe that the most that we will get is a prolonged rolling weakness that is likely to fully resolve by mid-Fall of 2023. If the economy were to move into a real recession, I am convinced that MarketCycle’s risk indicators would trigger all over again, giving us plently of advanced warning. As I’ve been saying for months now, we are likely to just get a weak and almost un-noticable recession and we might already be going through one right now even without it being officially called by the NBER.
BANKS: What problem? To save the banks/corporations, the powers that be will just pass the ‘bail-out burden’ onto the taxpayer, you and me, because what are tax dollars for other than bailing out unregulated corporations that repeatedly pervert the system toward their own greedy benefit. In the 2030’s, the uncomprehensible level of debt will create a truly major global problem, but not yet and not now. As Mad Magazine’s Alfred E. Neuman stated: “What, me worry?”
HOME PRICES: Home prices are likely to tag along with the lagging economy rather than the leading stock market. This means that home prices may remain weaker for longer before eventually fully recovering. Housing prices (and raw land prices) will likely be even lower a year from now. Despite the strong housing price gains in 2020 & 2021, it is normally a much weaker asset to hold than is the stock market. If you don’t believe me, just ask Warren Buffett. Houses normally appreciate by 3.5% per year and this is before subtracting the continual high costs of home ownership. This is roughly 85% lower than are annual S&P-500 stock market gains and over time this makes a big difference, especially after taking in the effects of annual compounding on growth rates.
STOCKS: MarketCycle still holds a barbell approach to stocks. This means that we hold half defensive stock-sectors/factors that can weather the current economic weakness and half early-cycle sectors/factors that do well beginning about six months before the economy shows any obvious improvement. (A “sector” is a stock niche such as ‘healthcare.’ A “factor” is a stock niche that represents a certain quality such as ‘oversold deep-value stocks.’) Right now we are clearly in a new cyclical stock bull market. For example, we are making a bullish series of higher-highs and higher-lows and market internals are very strong and have remained so for the past six months. The stock bull market is advancing at a slow motion pace only because of the Federal Reserve has been raising rates in response to a perceived inflation threat (that the Fed can’t seem to understand is now already dissipating).
BONDS: Bonds lose value when the Federal Reserve is rapidly raising rates. The speed of the Fed’s recent rate increases surprised me as much as anyone else. But rates have now peaked and the now oversold bonds have nowhere to go but up (bullish). The most gains will be seen in long-dated bonds such as the 30-year Treasury-bond or the 20-year quality corporate bond… and this is where MarketCycle is pre-positioned. This is as close to a no-lose position as one can currently hold in one’s portfolio and bonds offer much needed portfolio diversification plus protection against recession and falling stock prices. Treasury-bonds pay (U.S.) tax free interest, so it is insurance that pays you while you hold it.
GOLD: Gold will benefit from the Federal Reserve backing off from raising interest rates. As the USDollar weakens from the halt in rate increases, then gold will move higher. This is another high conviction trade.
BITCOIN: Bitcoin is a speculative asset. As such, MarketCycle goes in with a mere 1% of our portfolio (and we do not ‘rebalance’ along the way). It is, however, already up a large amount from our recent purchase date & price. Bitcoin, after correcting, always forms a prolonged sideways base (it gyrates sideways for many months), which it recently did, and then it moves up rapidly into a ‘spike.’ It looks a bit like an EKG hospital chart. MarketCycle, after years of testing, finally figured out how to capture the price spikes in crypto-currencies before they then begin to crater. The goal is to buy on a breakout from the base and then to sell near the apex of the spike and then repeat after the next prolonged sideways base has been completed.
MARKET CYCLE: The market cycle contains, according to MarketCycle’s model, three phases: Early-cycle with Fed accommodative, mid-&-late-cycle with Fed restrictive, and then a year long recession. The entire repeating market cycle usually takes around six years to complete. We are now at the transition between ‘recession’ and ‘early-cycle accommodative’ where it is important to hold positions that benefit from both weakness and renewed ‘spring-like’ early-cycle growth. MarketCycle holds a stock barbell approach. This doesn’t mean a ‘weak portfolio,’ rather it represents a strong & balanced yet lower-risk portfolio. MarketCycle holds deep-value, cash-rich small-caps and high-volatility stocks… counter-balanced with defensive sectors, healthcare, high-dividend payers and low-volatility stocks. We also hold a position in developed overseas stocks and emerging-market stocks. An example of ‘developed’ would be Germany or Canada and an example of ’emerging-market’ would be smaller economies such as Vietnam or Mexico.
WHAT TO DO NOW: In my opinion, investors should be positioned in stocks, long-dated quality bonds, gold bullion and some bitcoin; they should then just PATIENTLY WAIT OUT the current rolling recessionary process. Again, in my opinion, if we do go into a deeper recession, which is getting less likely with each passing day, then MarketCycle’s risk indicators should fire all over again (just as they did in late 2021), giving us advance warning.
So, I’m still bullish (“bearishly bullish”) after MarketCycle having made an unpopular but apparently correct prediction of the stock market bottom in early October of 2022, six months ago. I believe that we are attempting to enter the ‘early-cycle accommodative’ portion of the routine and normal and repeating market cycle. Because of the Federal Reserve, the process is slower than is usual, but still classical and fairly predictable in pattern.
Thanks for reading!
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