Commentary
It’s always risky to one’s reputation to call a market top, but given recent developments, I will step up to take the seat of Dionysius and be under Damocles’ sword. In my view, if we are not at a market top, we are at least most certainly in a “risk off” environment.
Since its close Nov. 8 at 15,982, the tech-heavy
NASDAQ has mostly run flat or down. Likewise, since its Nov. 8 close at 36,432, the Dow Jones Industrial Average (
DJIA) index has exceeded that close only twice, and then only by less than 500 points. Finally, the Standard & Poor’s 500 index (S&P 500) has largely followed that pattern, closing at 4,701 top, which was exceeded in the last week of December, but which has now settled back at or below the Nov. 8 top.
At the same time,
margin debt, while still at a record high, dropped slightly in the Third Quarter, 2021. While the Federal Reserve has not yet announced the
release date for the Fourth Quarter figure, the Financial Industry Regulatory Agency
(FINRA) statistics show that the amounts customers owe in their margin accounts topped out in August at $911.5 billion and has substantially declined so that, by January, the margin debt is just $798,605.
The
10-year Treasury has jumped 25 basis points (25/100th of a percentage point, or bps) since the end of 2021; the
Consumer Price Index for December printed up 7 percent, year-on-year; the
Producer Price Index printed up 9.7 percent, year-on-year; and December jobs printed at just 199,000, less than half the market expectation of 400,000.
On the Russia–Ukraine border, a
Russian buildup of an estimated 100,000 troops and thousands of Russian tanks and armored personnel carriers have forced NATO leaders, including President Joe Biden, into a potentially disastrous guessing game: Is the Russian buildup deterrence—a show of force—to inhibit Ukraine from joining NATO ? Or is it the precursor to a Russian invasion, at least into the more
Russophile territories of Eastern Ukraine, the nation’s industrial heartland?
Russia and NATO are at loggerheads. The Western bloc powers assert Ukraine’s right to self-determination in choosing it’s alliances—that is, NATO rejects “spheres of influence,” whereby a powerful nation (i.e., Russia) dominates its weaker neighbors. Russia, on the other hand, asserts that
Russia “cannot tolerate” Ukraine entering into the NATO alliance, and views NATO operations in Ukraine as a threat to its security.
But there is more.
I’m also sensing a lack of national confidence, the optimism of “can do” America that encourages risk and investment, brought about largely by the Biden-Harris administration’s multiple failures, from the Afghanistan withdrawal to its inability to lead on Capitol Hill.
A Quinnipiac Poll recently showed the Biden-Harris administration with a 33 percent approval rating, just
9 points higher than President Nixon had when he left the White House for San Clemente. (But instead of reading the poll and seeing it for what it is—and altering policies or personnel the way most presidents would—the Biden White House, incredulously, chose to
challenge the polling method!)
It seems now that the Biden-Harris administration is, effectively, a lame-duck presidency; it has squandered its ability to encourage or give hope to investors. Even if the Biden-Harris administration were to suddenly gain popularity, the policies it is pursuing tend to discourage investment: tax hikes, a radical alteration to the nation’s energy infrastructure, and a veritable war on fossil fuels alter the landscape, create uncertainty, and do little to encourage investment outside the narrow guardrails of the Green New Deal.
Add to this the Federal Reserve signaling rate hikes this quarter and there is a perfect storm of investment risk. While this is already largely priced into the market, the Fed may surprise to the upside or downside.
To go “
risk off,” investors might consider reducing their exposure to growth stocks in their portfolio and moving into more value stocks, like good performing consumer staples, transports, and utilities. The investment objective through the first half of the year should be the preservation of capital, with a modest real return of 10 to 12 percent (i.e., 3 to 5 percent after inflation). Retail investors should gird their portfolios with stop-loss orders and buy well out of the money puts, if the prices are reasonable.
The market is unsettled and uncertain. Investors have had a good run. And the old Wall Street maxim still applies: “Bulls make money, bears make money, pigs get slaughtered.”
Don’t be a pig. Preserve capital.
