“Risk is good. Not properly managing your risk is a dangerous leap.” – Evel Knievel
We believe the strategic case for risk assets remains favorable, with ongoing support from: 1) economic reopening and normalization, 2) fiscal support, 3) pent-up savings, and 4) historically easy financial conditions. As we move into the post-COVID-19 world, we believe the recovery will be non-linear and the opportunity set highly dynamic. We expect the economy to show superior growth for the balance of 2021, while the financial markets have already priced in a good deal of this growth. The financial markets will need to contend with the potential for rising inflation driven by the economic growth and the potential for the FED to reduce monetary accommodation to fight inflation. Come 2022, we expect economic activity to fall back into a normal range of 2%-3% per year.
On the investing front, we are on alert as despite a barrage of positive economic data recently and amazingly positive corporate earnings reports, there has been a pattern of sell-the-news profit taking in the past two weeks of April. It also comes at a time when defensive assets are showing relative strength compared to growth assets. The move isn’t large enough to break through recent support, but it was significant enough to establish a divergence between the movement of major market benchmarks and their volatility measures. This kind of price movement is typical when markets are faltering near highs. It implies that institutional investors often want to quietly slip out of their positions before the demand for stocks becomes too weak and creates a rush of sellers.
The chart below shows that the S&P 500 Index and the Nasdaq 100 Index, have both showed a subtle pattern of higher highs over the past two weeks. Meanwhile, the Cboe Volatility Index (VIX), and the Cboe Nasdaq Volatility Index(VXN) are showing a pattern of higher lows (they should be showing a pattern of lower lows). This makes a subtle implication that market makers are a bit worried about the potential for falling prices.
That seems incongruous given the excessively positive data from both the private and the public sector that the economic recovery is progressing rapidly. But this is the kind of clue that experienced investors look for. When price action doesn’t follow what seems to be obvious for a given narrative, then we start to wonder if a larger, less obvious dynamic is building. It may not materialize into a full blown change of trend, but if it does do so, this is the kind of subtle warning the market might give.
Therefore we have tightened our risk management thresholds while simultaneously shifting our portfolio allocations into areas that continue to show strength.
We hope you find this report informative. Feel free to call us with any questions or concerns. Please share this report with anyone you feel will benefit from it.
May Calendar of Events (comments and additions for future months are always welcome)
· May is National Mental Health awareness month. Nearly 44 million American adults, and millions of children, experience mental health conditions each year. Let’s all get educated on this issue and work towards acceptance and inclusion of people dealing with mental health issues.
May 5th Cinco De Mayo – stay thirsty my friends
May 9th Mother’s Day – wishing all mom’s, grandmothers, and great grandmothers a wonderful day. Hopefully soon we can get together to celebrate.
May 15th Armed Forces Day. Dedicated to recognizing those presently serving in our armed forces
May 23rd My daughter Caryn’s birthday
May 31st Memorial Day – let’s remember and give thanks to all who served our country
Jim
Sources: Investopedia, Bespoke Investment Group, Goldman Sachs
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