We have recently moved from the Yellow into the Green Zone in our Stoplight. The market had a decent run through January, but in February there was volatility and the signals had us raising cash in portfolios. This week Markets have been showing the improvements we had been looking for to get invested. Therefore, earlier today we began to move to fully invest the portfolios.
From a seasonal viewpoint, March usually starts out weak but finishes strong. The soothsayers warning to Caesar probably does not apply here. We refer to the comments from the tech site at EquityClock.com:
“Altogether, there is nothing particularly enticing of the technicals to be aggressive on either side of the spectrum, bullish or bearish, but we suspect that at some point in the days/weeks ahead, the desire will be present to look to take on greater risk (stocks) in portfolios given the positive tendency that is average between the middle of March through to the middle of April, resulting in one of the strongest timeframes of the year for the market before the offseason for stocks begins in May. Further weakness attributed to this rollover in prices that began early in February could lead to ideal buying opportunities for the spring ramp in prices ahead.”
Even though the seasonal norm may be positive, there is still reason for concern. The most important is the inflation numbers. A lot will depend on whether central banks around the world will continue to push rates higher, and for longer. Also, will the potential effect of trying to slow inflation, instead push the global economies into recession? And finally, should there be a recession, will it be the “hard or soft landing”? The reason for the latest pullback, is that markets are still unsure, and that confusion creates volatility.
The US fed central bank closely watches the Job numbers and they continue to be stronger. Thus, inflation has crept up, although very incrementally, but remains stubbornly higher. Here is the bottom line comment from one of our BMO economists; Sal Guateri on Friday:
“The economy might avoid a recession for another quarter or longer, but not if the Fed has to move much more aggressively, which, after today's heated report, could well be the case. We'll see if demand and inflation cool off in February...if not, the Fed will come out swinging both in banter and action.” Full report: U.S. Consumers and Prices Ring in the New Year
One of the charts we watch closely is the rate on the U.S. 10 year bond. It is back to its recent highs. We had moved back into longer bonds on expecting lower rates in January but have since reversed that trade as rates instead moved higher. The expectation now, is higher rates for longer. In the U.S., we can expect to see at least three more 0.25% rate hikes. How high and how fast, will be the make or break on the point above regard a soft or hard landing.
Other concerns still remain. The war and invasion of Russia into Ukraine is ongoing without any sign of any immediate resolution. Further, China has increased its aggression and rhetoric, and they, Iran and North Korea are all cozying up to Russia. That all creates more volatility.
On the positive side, markets like that the U.S. congress is mostly in a stalemate and any major changes or taxes are limited. We consider that we have probably seen the worst as the bottoming process continues to stabilize.
For now, the markets are in the Green Zone due to the recent market improvements. However, we remain cautious given some of the fundamental concerns. If markets look ahead and perceive a harder landing for the economy (and a return to the Yellow or Neutral Zone), we will not hesitate to return to defensive positions. Longer term we are also positive on the longer-term outlook and the second half of the year.
Should you have questions or concerns regarding the markets, your portfolios or financial planning questions, please contact us anytime for a call, Video or in person meeting.
Best regards,
John and Megan