October 7, 2019
The Jury is Still Out
Last week saw more of the same volatility that has plagued equity markets since April. Over the past six months there have been no less than five trends encompassing moves up/down in stock prices greater than 5%. These wild swings in stocks have been accompanied by similar moves in bond yields and bond prices. All of this “noise” in stocks and bonds has resulted in the U.S. stock market going nowhere since April 30. In fact, the S&P 500 is slightly down from that point in time.
I am a big believer in the market being a very efficient arbiter of price. Especially the price of major asset classes like broad U.S. equities, bonds, real estate and commodities. As a trial lawyer (and judge) in my former life, I can tell you that twelve people on a jury are amazingly good at seeing through the mud and getting to the truth. Investors worldwide are kind of like a huge jury working together to sort through what is real and what is not in the never-ending quest to find the best return on an investment relative to risk. The past six months seem a lot like the jury going back to the jury room to deliberate and think through all the back and forth that has occurred during a trial. The goal being to sift through what was said, what evidence was presented, and then determine what bears on the issue at hand. In comparing investing to a trial, the lawyers are the economists, market analysts, the Federal Reserve, trade tariffs, the President, politicians here and abroad, and the omnipresent talking heads on CNBC. The evidence is data like interest rates, unemployment numbers, housing, GDP, manufacturing output as well as import and export numbers. Lastly, think of price as the jury’s verdict.
When we take a step back and look at all this, it is clear that the jury is still fighting it out among themselves and trying to reach a verdict. For those who have watched the movie “Twelve Angry Men,” you know what I mean. The verdict that our jury of worldwide investors is trying to reach is whether this bull market is over, and a recession is upon us. The sharp waves up and down in stock prices evidence a moment or two (or a month) of compelling facts being discussed that lead to a conclusion one way or another.
Unfortunately, we don’t have the all-needed unanimous decision yet that will dictate the performance of asset classes over the medium to longer term. The good news is that the longer the jury stays in the room and prices stay rangebound, the more certain the verdict will be when they break out. For those keeping track, the high end of the range is 3000 on the S&P500 and the low end is 2720.
At Cabana, we don’t predict when the answer will come. We remain prepared for either outcome while we wait. In response to the sharp sell-off that began at the end of September we have reallocated, notably removing risk in our more conservative Target Drawdown Portfolios. We are now moderately bullish.
This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.
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