Healthy markets don't rally 2% in one day as they did on Tuesday. This week, the market was faced with President Trump launching trade wars against Mexico and India while the US GDP is slowing, Europe's de facto economic leader Germany's manufacturing is collapsing, global trade bell weather South Korea saw its exports collapse further, and global bond yields crashed. Copper is down 8 weeks in a row and oil is now in a bear market down 20%. So, what changed? The Federal Reserve went fully into the dovish camp - again. Buy The Dip is back! Problem is the Fed won't cut rates until the market plunges and that won't happen because the market expects the Fed to cut if it plunges.
It seems as though everyone in the industry is prepared for a move lower in stocks. Algos and corporate buybacks have held equity prices above where they should be while investors got out and collected dry powder in the face of a slowing global economy. If the Fed cuts here, it will look like 1998 all over again. When everyone expects something to happen - something else will.
I have been saying in my letters and blog posts for over a year now that I expected choppy sideways markets and it's been my experience over the years that trying too hard in these types of markets only ends up costing you money. Markets go down and investors chase it lower and sell. The market reverses and investors chase it higher and buy. Like a roller coaster, you go around and around - you get nowhere - and it only costs you money.
Where does this market go next? When markets find themselves in a sideways trend, they tend to break out the same way that they came in. In this case, markets are digesting the gains earned in the late 2016-17 time frame. The more time that passes, the less likely the equity market is to head meaningfully lower. Markets rarely trade sideways for years and then suddenly crash (never say never). This market has taken everything thrown at it and stayed close to all-time highs and investing professionals have taken down risk meaningfully. That means that pros are ready and have cash at their disposal to meet a strong sell off.
We talk of seasonal periods from time to time and find that the most helpful information is when something that performs well when it is in a seasonally weak period may be in for further strength. That asset right now is gold. Gold historically performs poorly in the summer months. The start to June has been quite different and precious metals may be having their day in the sun. While precious metals cannot be valued by their cash flow and pay no dividends, they are subject to more technical market risk, having said that, a further allocation into the precious metals market may need to be thought of in a short-term nature.
For the last 18 months, our assessment has been correct as the path in the equity market has been sideways and it has been advantageous to sit and collect our dividends while we took down risk. We will sit until we see a clear direction to take advantage of, but, with each month ticking by, we get closer to putting more risk back into the portfolio. Precious metals currently have our rapt attention.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.