The Greatest Generation lived through the Great Depression and a world war. While history doesn’t repeat itself exactly, its general contours can be eerily similar. With this perspective, consider the following that we are experiencing today.
Long-Term Market Cycles: Often Overlooked
Just as history repeats in patterns, so does the stock market. Markets move in cycles, some longer than others. In today’s environment of instant information, most focus on shorter cycles, leaving longer cycles overlooked until it’s too late.
There are warning signs in the market today, many coming from some of the most revered investors, economists and businessmen in modern times. And what I find interesting is the bevy of prominent investors, economists, and business leaders who through word or deed are signaling caution, yet being ignored. Here are just a few notable examples:
- Warren Buffett is accumulating cash. The scale of a potential deal he might be waiting for could delay his investments.
- Jamie Dimon is preparing JP Morgan for an interest rate environment between 2% and 8%.
- Ray Dalio warns that extreme events, such as a second American Civil War, are more likely now than in the past fifty years.
Markets Facing a Wide Range of Outcomes
Technical analysis can be a crucial tool for understanding market dynamics. The book The Fourth Turning is Here sets the stage for a wide range of outcomes. Elliot Wave technical analysis aligns with the roughly 90-year cycle discussed in the book, predicting a specific pattern signaling the end of a previous cycle and the start of a new one. And the end of the previous cycle will be preceded by a very specific pattern marking the termination of the previous cycle and the beginning of a new cycle.
Recent market indicators raising concern include:
- Bill Ackman selling ownership in Pershing Square to the public.
- Extreme outperformance of the momentum investing style.
- Rampant speculation in meme stocks, zero-day options, crypto, private equity, and private credit.
- Investor sentiment suggesting everyone is on one side of the market.
- The increasing number of global billionaires, indicating excess liquidity.
These would all suggest there is excess in the system today – excess risk, excess capital, and excess optimism.
Potential Downturn Triggers: Signals to Watch
Despite persistent market strength, four signals could indicate a peak:
- US Treasury Debt: Difficulty selling except at higher interest rates.
- Geopolitical Event: A significant unexpected Black Swan event.
- Corporate Debt Maturities: Firms struggling to operate with higher interest rates.
- Banks’ Bond Portfolios: Valuation adjustments to market value.
What Should Investors Do?
Staying invested over the long run is crucial. With uncertain timing of potential events, it’s not prudent to withdraw from the market. Instead, remain invested and strategically hedge equity risk as signals occur. Customized structured notes can help investors maintain equity exposure while controlling downside losses. Discuss these strategies with your advisor to learn more.
ENDNOTES
Disclosures
This commentary reflects the personal opinions, viewpoints and analyses of the author providing such comments, and should not be regarded as a description of advisory services provided by Defiant Capital Group or performance returns of any Defiant Capital Group client. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Defiant Capital Group manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
