Bonds Are Back And The Selloff May Just Be Getting Started - Issue #2
You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready. You won't do well in the markets. If you go to Minnesota in January, you should know it's gonna be cold. You don't panic when the thermometer falls below zero.
The Ivory Hill RiskSIGNAL is still firmly red, and we are still sitting on 60% cash and 4-5% Treasuries. The market will rip higher, we just don't know when, but we are in a very great position considering our cash levels. Our buy list three months back was one page, now its a scrolling document. Lots of great companies are getting hammered right now.
To name a few:
NVIDIA (NVDA): -41% YTD
Apple Inc. (AAPL): -22% YTD
Microsoft Corp. (MSFT): -24% YTD
Alphabet Inc. (GOOGL): -23% YTD
Amazon (AMZN): -35% YTD
Meta (FB): -43% YTD
Adobe (ADBE): -30% YTD
These are high quality companies with guardrails of strong balance sheets, abundant free cash flow, stable to improving margins, and real-organic revenue growth.
ARE WE GETTING CLOSE TO A BOTTOM?
I am not calling a bottom, but there are some very convincing statistics that make the case we are possibly approaching a near-term bottom.
Cash levels are stacking up to the highest levels in more than 20 years, signaling the 2022 market selloff is most likely in its late stages. The below chart from Bank of America's Fund Manager Survey shows that levels of cash amongst investment managers is at the highest levels since 2001, signaling the 2022 market selloff is most likely in its late stages.
21% of stocks are currently trading above their 200-day moving average and 79% are below their 200-DMA which means these numbers show an 89% chance that the market will be higher in the next 12 months. Historically speaking, when stocks have had this kind of selloff markets have tended to see a bottom.
Markets are not doing great, but companies are still making solid revenues: Of the 458 companies that have reported so far (92% of companies in the S&P 500), earnings results are beating their estimates by a 9% median, and 76% of those reporting are beating estimates in general.
WHAT WILL STOP THE SELLOFF?
While this sell-off may be entering a new phase, this does not alter what I estimated to be the “Worst Case” scenario for stocks based on our May Market Expectations Table and I am still comfortable with our range of 3,440-3,655 in the S&P 500.
If the S&P 500 does drop to that worst case level, we’ll likely view it as a generational buying opportunity (depending on our signals of course).
In the near term, we and a lot of others cautioned the rally of the past few days was likely only a bounce and that’s what it’s proven to be.
Bottom line, this market won't stop dropping until we actually get some good news. Inflation might be peaking (in fact it likely has peaked) but it's not declining much, yet. That's not good enough. Finally, commodity prices are not declining at all. That's not good enough.
BONDS ARE BACK AND THAT COULD MEAN A FURTHER SELLOFF
Stocks and bonds are normally negatively correlated. This shows investors can choose between risk and safety.
Over the past 18 months, stocks and bonds have spent more time being correlated than not. On some occasions, their positive correlation has been very strong.
In the middle of last year, stocks and bonds pushed higher together almost in perfect lock-step. This year, both bonds and stocks dropped together when markets started pricing in aggressive rate hikes from the Fed. This left market participants with few options for safety (we chose cash and I still stand by that decision).
It looks like the days of stocks and bonds falling in unison are over. Traditional market dynamics are back and that could be a threat to stocks.
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