For traders (as well as for individual investors who might not think of themselves as “traders” but nonetheless actively monitor their investment account and make adjustments based on prevailing market conditions), there’s a never-ending onslaught of market-related content… which has only increased exponentially since the start of the pandemic in early 2020. It’s a challenge to filter out the noise, and we’re often asked about the content and commentary that we find to be the most valuable as we navigate the market on a daily basis.
Accordingly, we’ve decided to launch a new weekly column called “Weekend Reading For Traders”. The goal isn’t to be yet another weekly market wrap-up, but rather a collection of interesting articles that may or may not be directly related to “the market”, but nonetheless are pertinent to traders and otherwise active investors.
We kick off this first installment with an article about Fed Chairman Powell backing up his hawkish comments from the Jackson Hole a couple of weeks ago and an article about why a slump in the economy might not be deemed to be a recession but is painful nonetheless. From there, we look at an article that discusses the dangers of trying to catch market bottoms and another that highlights some divergences between the energy sector and commodities. Lastly, since this column is all about reading, we wrap up with a couple of articles about strategies we can implement to read more!
And with that, we hope you enjoy this first installment of Weekend Reading For Traders.
Fed’s Powell Affirms Need to Act Strongly to Fight Inflation
(Nick Timiraos | The Wall Street Journal)
Of the many market adages that exist, probably the most powerful adage is “Don’t Fight the Fed”. Since the lows of 2009, there most reliable and important correlation in the market has been between the Fed’s balance sheet and the indices. Optimism that inflationary pressures may be easing (thus engendering hope that the Fed may pivot away from aggressive rate hikes) was a big driver of the bounce off June lows… despite consistent and unified hawkish rhetoric from the various Fed Presidents. However, Chairman Powell made it absolutely clear that the Fed was bound and determined to tamp out inflation even if that meant an economic slowdown and higher unemployment, and the market finally got the hint. This week, Powell reiterated the Fed’s position that they would continue to “act forthrightly” in order to prevent inflation from becoming entrenched, as was the case in the 1970s. Interestingly enough, the indices closed out the week with three consecutive days of solid gains, suggesting that market players are anticipating a soft CPI number next week and may be once again questioning whether or not the Fed is really as hawkish as it says it is.
Recession or Not, There Will Be Pain
(Sandy Ward | Morningstar)
There’s been plenty of debate over the past several weeks about whether or not the economy really is in a recession, and if it indeed isn’t, if one can be avoided. In this article, Sandy Ward argues that one likely scenario is what’s called a “rolling recession”, where different parts of the economy slump at different times, meaning that, while we may not quite get to a full-blown recession, it will still feel that way for businesses and households. Given that the Fed won’t be the proverbial tide that lifts all boats (which made index investing so popular for over a decade) and the prospect of a rolling recession, the great likelihood is that individual stock selection and disciplined risk management will be increasingly important as we move forward, creating a unique opportunity for those who understand and appreciate the fact that buy-and-hold, index investing isn’t the only game in town.
Why Buying the Dips Could Hurt Your Portfolio in a Bear Market
(Sandy Ward | Morningstar)
While most of the financial media exhort “staying the course” no matter what and continuing to buy, buy, buy even in a steep downtrend, this refreshing article from Ms. Ward swims against conventional wisdom. As while “buying the dip” was the rallying cry of market bulls throughout the era of QE, that strategy is fraught with danger in bear markets, where counter-trend rallies can tempt investors into thinking that the worst is over when, in reality, they’re opportunities to reduce risk exposure. In fact, Ms. Ward highlights research from Dan Suzuki, who notes that, when looking at past bear markets, portfolios that were 100% case until six months after(!!) a bear market bottom outperformed portfolios that were fully invested throughout. Moreover, Mr. Suzuki also notes (as we have so many times through the years) that while it’s tempting to look at past leaders (think FATMANN names), the leaders that emerge following bear markets will likely look very different. Most notably, the only times where investors were better off buying before a bottom were those bear markets where the Fed had already started lowering interest rates… which (obviously) isn’t what we’re dealing with right now.
Bullish Divergences Build in Energy Market
(Andrew Thrasher | athrasher.com)
The ever-astute and insightful Andrew Thrasher is out with another interesting article this week, in which he highlights some notable divergences within the energy sector. Although there’s usually a strong correlation between energy stocks and the price of oil, they’ve been moving in opposing directions over the past several weeks. Mr. Thrasher also notes that the so-called “crack spread” (i.e., the difference between oil prices and products that are refined from oil) has also become unmoored of late. While these breakdowns may be due to dislocations in the futures markets, the key point here is that the developing energy crisis in both Europe and the US (as well as OPEC’s recent production cut and Russia’s move to shut off natural gas supplies to Europe) and the relative undervaluation of energy stocks could mean that the recent divergences could drive the entire group higher.
How to Read More
(Ryan Holiday | ryanholiday.net)
Given that this new article is about reading, we thought it might be interesting to look at some ways we can get more reading time in. As while we can all probably agree that we should read more, the fact is that reading often gets pushed to the side amid all the things that life throws at us. However, if we feel that reading is important, then we can set up some habits to fit it into our daily routines. Specifically, Holiday offers some reasons why we should be reading more (including, among others, it’s a way to see what the future holds, it makes us informed citizens, and it prevents us from becoming functionally illiterate) as well as some strategies to read more (such as reading first thing in the morning, reading while you eat, re-reading the masters, etc.). However, probably the most salient point is Holiday’s assertion that we’re not really as busy as we think we are, and that, ultimately, by saying “no” to reading, you are saying “yes” to something else, and it’s up to you to decide which is more important to you!
4 Ways To Read More Books This Year
(Herbert Lui | Fast Company)
In keeping with the same theme, Herbert Liu offers his own advice on how we can read more. Accordingly, it’s important to realize that, just because we start a book, doesn’t mean we have to finish it. Sometimes it turns out that a book may not be worth our time, while others may only have a few key points that are pertinent to our lives. As such, it’s okay to stop reading a book when it’s just no good, and it’s okay to skim through others if you can get its key takeaways by reading just a few paragraphs from each chapter (or even the chapters that interest you). Most importantly, however, is that when you do find a book that really hits home, then it’s best to read slowly, take notes, and really savor the experience.
