Have we seen the lows yet?
Well, we’re oversold and due for a rally. Overdue, really. (Stop me if you’ve heard this before…)
Assuming we get a bounce, I’m still inclined to sell any rips higher that we see.
Someday we’ll buy this dip. Heck, we’ll back up our dividend truck. I just don’t think it’s time yet.
First, I’d like to see market breadth begin to improve under the surface. This is often what typically happens before markets bottom. We see individual stocks begin to “act better” than the Dow or S&P. These leaders quietly establish their lows and begin to rally.
Unfortunately, the market’s breadth still stinks. Just 14 stocks in the S&P 500 advanced last Thursday. (How about those odds…)
Betting on rebounds (buying dips) works well when markets are trending higher. But when crashing as they are now, these cute strategies get investors in big trouble.
Let’s be safe, hold cash, and wait until the other side of this mess.
I’ve been praising plain dough so often I’m sure you’re sick of it. We sold the May rip. And more recently we kicked off the month of June with another “cash is king in ‘22” reminder:
“We’ve been extolling cash in these pages since the start of this year. As the Federal Reserve prepared to pause its money printer, we contrarians booked profits and stacked dollar bills.
We need to be nimble and ready to buy. The best deals happen at the end of bear markets.”
I offered some space under my mattress for those that needed it. Anything to keep a fellow contrarian from buying a “safe” bond fund that was about to get popped in the face.
Since your income strategist began hawking mattresses:
- The S&P 500 dropped another 10%.
- “Safe” bond ETF TLT, from iShares, flopped 4%.
That column feels like forever ago, but it was only three weeks. Three weeks! Either we’re all aging in dog years, or stocks and bonds are also crashing. (Perhaps all of the above?)
The problem with a crash is that it’s like falling after the age of 40. Or 60. Or 80. Things break. (Contrast us with my kids, who take tumbles that would put me on the shelf for a year.) I’m concerned the economy has already suffered collateral damage that will become obvious down the road.
I hate to bring up 2008 but that was the last time the Fed Funds Rate was as high as it is projected to go next. That year started with a stock market tumble and ended with the financial system on the ropes.
I’m not saying that is going to happen again, but there are disturbing parallels. We need to be cautious.
Higher interest rates broke the economy back in ’08. And then other things broke. The initial setup is similar now. Federal Reserve Chair Jay Powell is finally tightening policy at a meaningful clip.
How high will rates need to go? Nobody knows. All I know is that this is a runaway rate train that we need to keep sidestepping.
This is tricky for income investors. We typically mix bonds and stocks together so that we can retire on dividends.
Problem for bonds is that rising interest rates tend to impact bond prices because of the “coupon competition” they provide. Income investors become impatient with their current holdings, which don’t appear as good compared to other options. They look elsewhere, and that selling lowers prices.
Problem for stocks is that higher rates make our stock’s future profits worth less. A stock is only as good as the sum of its future profits, less some discounted interest rate. The lower the rate, the more valuable those future cash flows.
The problem now is that the discount rate is soaring. Those future cash flows are less valuable. That’s why the market is sinking.
Cash is the best thing to hold today. This seems counterintuitive in a world where inflation is running 8.6%, but it is very difficult to pick winning stocks in a bear market.
And it is impossible to find a successful long strategy in a crashing market. Think back to 2008. The only assets that gained were the US dollar and US Treasuries.
But Treasuries are not the answer in 2022. The bond market in 2022 has had its worst start since 1788, according to a lead economist at Nasdaq.
Markets usually overshoot to the upside and downside. In hindsight, the S&P 500 doubling off its March 2020 was, to use a technical term, silly. But it’s what happens.
The end of this bear market will probably be equally absurd. The biggest losses are typically reserved for the end of a bear move. We call it “capitulation,” when everyone throws in the towel and sells.
Bonds will bottom before stocks if the Fed is able to get inflation under control. That would put a ceiling on rates and a floor under bond prices. I’ve been bearish on bonds for over two years now—I look forward to renewing our relationship with fixed income when the time is right.
When it is, you’ll hear from me. Until then, you are more than welcome to stash cash under my still-outperforming mattress.
Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.