Welcome to the latest edition of “Weekend Reading For Traders”. We kick things off with an article that helps pinpoint the crux of how (and why) the primary market narrative seemed to do a “180” this past week.
From there, we highlight an article that discusses several reasons that the bulls may not be in as bad a position as it may seem as we head into the new year… despite the fact that the bears seem to have started to grumble once again, and then move on to an article that discusses why many investors’ true risk exposure may actually be quite different than they think.
We wrap up with a pair of articles about what it means to be an optimist, and why the most successful investors understand that the real opportunities for true wealth creation in the market will almost always be created by bear markets.
And with that, we hope you enjoy this latest installment of Weekend Reading For Traders.
(Rita Nazareth | Bloomberg)
Anyone who’s battled the market beast for long enough understands how it’s the pricing action that drives the market narrative, and not the other way around, and we’ve seen a textbook example of that over the past several weeks. After the big hammer off October lows, the narrative that took shape was peak inflation combined with a slightly less hawkish Fed was the driving force behind the strong multiweek uptrend. Last week, Jerome Powell reinforced that thinking when he suggested that the December rate hike would be 50bps and that his colleagues didn’t want to overdo things and find that they had to start lowering rates down the road. However, with the S&P 500 once again running smack dab into its 200-day moving average, as well as its descending trendline off December highs, technical conditions were ripe for some selling, and that’s exactly what we saw over the past several days. Of course, the narrative has dutifully shifted once again, as the focus has now turned away from peak inflation and towards the continued upward pressure on wages, which suggests that the only way for the Fed to get inflation back to its target level is to soften employment and explains why the media has been busy highlighting recent recession warnings. Of course, the narrative could shift once again next week as the market digests another CPI report and FOMC meeting, and the hope is that once these two events are out of the way, conditions may support some better trading action into the end of the year.
(Ryan Detrick | Carson Group)
Although the uptrend off October lows has stalled and seemingly everyone is certain that the economy will enter a recession next year, investors should always remain open to (and game plan for) all outcomes… even one that might favor the bulls. In this article, Detrick points out several reasons to look towards next year through an optimist’s lens, including the fact that it’s quite rare for the S&P 500 to post negative returns two years in a row (something that’s only happened twice in the past 50 years), that years after a negative midterm election year have been “extremely strong” and have a perfect track record over the past 50 years and a 24.6% average return, that a recession in 2023 isn’t a certainty (as one has never started in the third year of the presidential cycle), and that although the S&P 500 once again fell back under its 200-day moving average this past week, it did poke its head back above that key moving average for the first time in seven months, which (after similar streaks in the past) has led to solid returns.
(Charlie Ellis | Financial Times)
During the years-long, relentless, liquidity-driven uptrend that started in 2009, investors didn’t need to think much about their tolerance for risk, but the poor action this year has many reassessing just how comfortable (or not!) they are with volatile action. However, in this article, Ellis suggests that investors too often compartmentalize their total financial portfolio (TFP), and subsequently fail to appreciate just how little risk they are taking with their investments, especially in the midst of a downtrending market and concerns about short-term price fluctuations are at their highest. Rather, Ellis recommends that investors consider their combined exposure to equities (and other risky assets) and bonds not in isolation, but as part of their whole financial picture, including any real estate as well as the present value of future cash flow streams from social security, which means that many investors may have more room than they think to commit more to equities and be more apt to take drawdowns in stride.
(Jonathan Clements | Humble Dollar)
It’s often the case, even in a strong market, that a bearish take on market conditions is often compelling and extremely logical, and it’s the wide-eyed optimist bulls who seem like they have some alternate view of reality, a dynamic that’s all the more pronounced in a downtrending market. However, the reality is that an optimist isn’t someone who simply whistles past the proverbial graveyard and denies reality. Indeed, an optimistic view of the market means that, although there will be rough patches, the cycle will surely turn once again, and it’s by plugging away day after day that will put investors in a position to take advantage of the tremendous opportunities to build long-term wealth that bear markets create. Accordingly, in this article, Clements identifies several reasons for investors to be optimistic about moving forward as the year winds down, including the fact that the “irrational exuberance” around things like meme stocks, SPACs, NFTs, and (maybe?) cryptos has been squashed, expected returns for both bonds and equities are rising, the cost of investing for individuals is lower than ever, the tax code still favors investments, and (at the end of the day) humans will human (i.e., we all continue to push forward in our search for innovation and efficiency). So while there’s no doubt that the bear market action we’ve seen has worn on all of us, process and execution will leave disciplined investors and traders prepared for better times ahead!
(Steve Mueller | Planet Of Success)
Riffing on the article above, this article offers a deeper dive into what it really means to be an optimist. According to Mueller, an optimist, at the core, is someone who seeks (and is able to identify) the opportunities that result from negative developments. And it’s within that primary mindset that an optimists approach to the world we all encounter is framed by some common characteristics, including the fact that optimists understand that outside forces don’t determine their happiness, are naturally drawn towards others who are optimistic about life, don’t need attention from others to be satisfied, take action, are grateful and forgiving, and understand the value of perseverance and hard work. Ultimately, the key point is that these are the same characteristics of the most successful investors and should be ideals that we all strive towards as we continue our battle with the market beast.