{"id":189520,"date":"2023-04-28T11:15:00","date_gmt":"2023-04-28T15:15:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=189520"},"modified":"2025-02-12T10:23:09","modified_gmt":"2025-02-12T15:23:09","slug":"above-the-noise-guideposts-on-the-path-to-a-new-cycle","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/above-the-noise-guideposts-on-the-path-to-a-new-cycle\/","title":{"rendered":"Above the Noise: Guideposts on the Path to a New Cycle"},"content":{"rendered":"\n

Key takeaways<\/h2>\n\n\n\n

Seasonal angst<\/h3>\n\n\n\n

I feel it\u2019s my annual responsibility to remind investors that the old adage to \u201csell in May and go away\u201d may not work. <\/p>\n\n\n\n

Dollar anxieties<\/h3>\n\n\n\n

While I favor some diversification into non-dollar assets, I believe the current anxieties about the US dollar are overblown.<\/p>\n\n\n\n

Banking news<\/h3>\n\n\n\n

Policymakers appear to have stabilized the situation with the small banks, as deposit flight has bottomed and loans have moved higher.<\/p>\n\n\n\n

\u201cWhat, me worry?\u201d The recent passing of Al Jaffee, the legendary cartoonist for the satirical magazine Mad, led me down a Mad Magazine rabbit hole. Nostalgia played a part, but it was the iconic cover photos of an untroubled Alfred E. Neuman with his famous catchphrase that kept me absorbed. The magazine\u2019s pop culture references and political insults changed over time, but Alfred\u2019s happy-go-lucky outlook (and impish grin) remained the same.   <\/p>\n\n\n\n

Alfred\u2019s relaxed attitude is just like that of investors, only the opposite. Between inflation and policy tightening and bank failures and recession fears and debt ceiling concerns and {insert fear du jour} the motto of investors is \u201cYes, I\u2019m worried.\u201d Time passes and crises come and go, but the worry remains the same \u2014 and that\u2019s precisely why too many investors miss the market recoveries that precede new business cycles.  <\/p>\n\n\n\n

Today\u2019s worries (policy tightening, slowing growth, bank failures) are just guideposts on the path to a new cycle. If we\u2019re thinking about what could go wrong, then so too has the market. That\u2019s why even when our biggest fears come true (for example, the bank failures in March), the market reaction may not be as expected. Or as Alfred E. Neuman would say, \u201cIn retrospect it becomes clear that hindsight is definitely overrated!\u201d<\/p>\n\n\n\n

As always, we attempt to rise above the noise and put all of it in perspective.<\/p>\n\n\n\n

A \u2018keep it simple\u2019 strategy<\/h2>\n\n\n\n

We start with three simple questions.<\/p>\n\n\n\n

1. Where are we in the cycle?<\/strong><\/h3>\n\n\n\n

It\u2019s late. There\u2019s almost as many economists predicting recession as there are dentists recommending Trident Gum for patients who chew gum.1<\/a><\/sup> Fortunately, the historical probability of markets posting negative returns in a recession is about as good as that of a coin flip.2<\/a><\/sup><\/p>\n\n\n\n

2. What\u2019s the market telling us about the direction of the economy?<\/strong><\/h3>\n\n\n\n

The market continues to point to weaker economic growth ahead. Higher quality stocks and bonds have generally been outperforming since the beginning of March.3<\/a><\/sup><\/p>\n\n\n\n

3. What will be the policy response?<\/strong><\/h3>\n\n\n\n

Policy tightening is coming to an end. The 6-month percent change in the US Consumer Price Index is 1.7%!4<\/a><\/sup><\/p>\n\n\n\n

Markets have historically performed well in the 1- and 2-years following peak inflation and the end of Federal Reserve tightening.5<\/a><\/sup> Why? That\u2019s how new cycles have tended to emerge.<\/p>\n\n\n\n

Seasonal angst<\/h2>\n\n\n\n

I feel it\u2019s my annual responsibility to remind investors that the old adage to \u201csell in May and go away\u201d may not work. It\u2019s not entirely clear to me why we are told to sell in May and get back into the markets in November. Some years it works (like 2022).6<\/a><\/sup> And sometimes I hit the fairway on a golf course. More often I don\u2019t. The problem with this seasonal strategy is that it doesn\u2019t work more often that it does, and over a long-term period it would have cost investors dearly.<\/p>\n\n\n\n

For example, a hypothetical $1000 investment held in the broad US stock market from January 1928 to December 2022 would have been worth $6.3 million. That same investment by an investor selling May 1 of each year to go into Treasury bills, only to get back into the market on November 1, would be worth $2.4 million, or nearly $4 million less!7<\/a><\/sup><\/p>\n\n\n\n

Maybe the adage should have been, \u201cIgnore that it\u2019s May and over time your investments will pay.\u201d<\/p>\n\n\n\n

It may be confirmation bias, but \u2026<\/h2>\n\n\n\n

\u2026 policymakers appear to have stabilized the situation with the small banks. Deposit flight has bottomed and loans from small commercial banks have moved higher since the middle of March.8<\/a><\/sup> Tighter lending conditions are still likely to weigh on the economy, but a systemic financial crisis appears to have been averted.<\/p>\n\n\n\n

Deposits and loans have started to rebound at small banks <\/h3>\n\n\n\n
\"Deposits<\/figure>\n\n\n\n

Source: US Federal Reserve, 4\/5\/23. Latest data available.<\/p>\n\n\n\n

Since you asked<\/h2>\n\n\n\n

I was informed by an investment professional that worries over the future status of the US dollar had caused \u201cmore inbound calls than many things I can remember in recent history.\u201d I\u2019m tempted to throw the red-challenge flag on that claim, but I don\u2019t want to risk losing my timeouts so early in the year.<\/p>\n\n\n\n

The recent dollar anxieties stem from A) concerns that China has asked oil producers to accept payments in yuan instead of dollars and B) a recent comment from Russian President Vladimir Putin stating that Russia, \u201cis in favor of using the Chinese yuan for settlements between Russia and the countries of Asia, Africa, and Latin America.\u201d9<\/a><\/sup><\/p>\n\n\n\n

Is the dollar about to become \u201ctoilet paper\u201d as \u201cRich Dad, Poor Dad\u201d author Robert Kiyosaki recently hyperbolized?<\/p>\n\n\n\n

No.<\/p>\n\n\n\n