My formative years of investing began in the bull market of 2003.
Investing from 2000 to 2010 was a fascinating period. There were many themes in that decade. There was no dominant theme. Real estate would work, as would the BRICs (not sure how many of you remember). If you’re not investing in emerging markets, there’s something wrong with you.
Strangely, the actions of the last two months reminded me of that period. This weekend, most of the financial content I consume seems to remind me of that as well.
The graph below shows us the performance of selected indices over the past two months:
They all outperform the S&P 500, a large-cap US index, for both months. This is the shit that got it right, then.
If you use simple fundamental logic, you would be very confused. European banks suck, Europe sucks, so how can they do well? Isn’t gold supposed to cover inflation? How come it only starts to do better when the signs of inflation subside?
Here are some more results:
I think almost all of them are beneficiaries of the weak US dollar:
Many people believe that the US dollar can only go higher. Since the US dollar hit the magazines, the US dollar has gone through one of the steepest and longest corrections in its history.
Those who gambled their money on short-term US Treasury bills would feel the pain.
International stocks, emerging market stocks, gold, and precious metals tend to do well when the dollar weakens.
That’s what we experienced over the period 2000 to 2010. The S&P 500 underperformed relative to international stocks, but a Singaporean investor would fare worse against the US dollar.
JC Parets highlighted the following two graphs in the show composed this week:
The graphs show the performance of the best sector (in 2022 it was energy) versus the worst sector (in 2022 it was communications). In 2022, we saw the widest dispersion between the best and worst sectors in the US in 17 years. If we extend the period to the last 30 years, we can see that the last time we had such a situation was during the dotcom period.
Gold, relative to US stocks, appears to be on the verge of a significant breakout.
I think cycle analyst Larry Williams was the first to observe that… gold only works well when inflation is declining. No reason was given, but if he checks enough historical charts, that was the observation.
So gold is doing well when inflation dips are not new.
Perhaps the reason the rest did well relative to US large cap is that… valuation is so rich relative to history. The table above shows the valuation of Fixed Income, Stocks, Real Assets relative to their 20-year history and December 2021.
As an investor, you should be happy to have plenty of fixed income and stock options at cheap valuations. If you’re diversified enough, you should do just fine.
The Bank of America team, led by Michael Hartnett, justifies where we’re headed with the summary above. What is fascinating is the potential effect of regulation and taxes on buybacks.
Here is his call by the way:
The last three years lead me to conclude that…you can consistently position yourself on momentum or…you have to be more contrary and identify the underserved places. That is where the most significant value lies.
If everyone is crowding into something, then the assets will trade at prices closer to fair value. There is less premium to earn.
But… sloppy things usually look very bad and therefore require you to be able to sit back comfortably with investments that went nowhere.
This is difficult for 99% of people.
Sloppy things didn’t work out so well in the era of quantitative easing, where money was abandoned and money flows amplified momentum effects and dampened mean reversion.
With less money available, perhaps mean reversion can look like more.
Josh Brown, CEO of Ritholtz Wealth Management, had this to say about how portfolio managers or advisors position their clients’ portfolios:
When most financial advisors and portfolio managers decide what to overweight for new leads based on what has worked best in recent years, this is because you can get very strong recent backtesting. Typically in the portfolio you will have a 15% hedge for alternatives, including gold. Since gold was flat last year, meaning it did well relative to everything else except energy, gold will be allocated.
While this gives a reason for gold to perform well, it also shows that YOUR behavior and stance lead advisors and managers to offer you investments that have already run their course.
This is because you only feel comfortable investing when you see excellent past performance.
But perhaps the best inversions are the most uncomfortable, which is uncomfortable for most.
If you want to trade these stocks I mentioned, you can open an account with interactive corridors. Interactive Brokers is the leading low cost and efficient broker that I use and trust to invest and trade my shares in Singapore, the United States, the London Stock Exchange and the Hong Kong Stock Exchange. They allow you to trade stocks, ETFs, options, futures, forex, bonds, and funds around the world from a single, integrated account.
You can read more about my views on Interactive Brokers at this deep-dive series from Interactive Brokers, starting with how to easily create and fund your Interactive Brokers account.
Leave a Reply