That Escalated Quickly

Monday was very ugly in markets. I am always leery of explanation fallacy but it seems like the market is weighing in on whatever is happening politically. All I can say about that part of it is that I can't begin to understand anything that we are doing right now, absolutely none of it. 

Moving to markets which hopefully we understand just a little better. 

The positive from this chart is that the decline seems kind of fast and fast declines tend to snap back quickly. Looking at the 2020 Pandemic Crash, that was a fast decline but it played out over several weeks and while in real time we could recognize it as more of a crash than a long slow bear market, it didn't feel that fast. 

The negative from the chart is that the market has been trading out sideways for three months without progress until moving quickly lower, breaching it's 50 day moving average a few days ago. 

Obviously there is no way to know what comes next. When these things start, I usually say something to effect of not knowing whether it's something serious or something that is soon to be forgotten. What I haven't said for the last couple of these is that I think the odds that this is a little more serious are greater than they have been in other recent dips. Treasury Secretary Bessent says success is measured now by a lower ten year Treasury yield where as the first go around, stock prices were were the scorecard.

That is a pretty fast move from 4.63% down to 4.18%, bordering on panic. Bob Elliot has Tweeted about bond yields going down right now, noting that they're going down for the wrong reason. If that's correct, ok but I don't know whether the administration views it that way. It might just be ten year yield is lower and that's good enough for them. 

As this has been brewing for the last however long, it clicked that I don't think selling is the best action here, at least not for now. The obvious flow from almost 20 years ago was that retail accessible products, mostly ETFs, would evolve to offer more sophisticated strategies making it easier to neutralize stock market volatility without necessarily having to sell to get more defensive. 

On Friday, I added gold to client accounts with GLDM. It's like GLD but quite a bit cheaper. Relative to a day or two, the timing was very lucky. 

BTAL and SH are clearly first responder defensives. I added SH for clients a little while and have been holding BTAL for them and personally since 2018. Gold can be a first responder, it often is but it's not quite as reliable as BTAL and SH. We've talked about client holdings CBOE and NOC as having some defensive tendencies. My theory has long been that CBOE can function as a proxy for VIX because the VIX trades at the CBOE. NOC as a defense contractor, quite a few of the names in that group were up today. The other three symbols are managed futures ETFs which are more like second responders, they may or may not help in a fast decline but I do have unyielding confidence in them for longer term, slower declines in case that's what this becomes. 

I'll throw in that staples and utilities were also up today which makes sense as historically defensive sectors but the story there could have been more about yields going down because it looks like REITs were up too. 

If things really get crazy (bad) for stocks then I would expect the first responders to continue to go up in price, growing to neutralize more of the portfolio and clients who take income out have enough to cash raised to get by for a while. 

All of this is my playbook for these types of events. What is yours? Your answer could be to just hold on no matter what and then rebalance at some threshold and that is absolutely valid as long as you can stick with it. 

I would get mentally ready for more deterioration in equities and be happy to be wrong. At this point, I don't know how much more defense I would want to add from here, I think I have most of what might be needed. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.