The Unsung Force Behind The Scene

Jul 21, 2022 | Blog

By: Greg Stewart, CIO

The first half of 2022 has been the roughest for equity markets in over 50 years.

The year to date return of the S&P 500 was negative 18.58% as of July 15. The NASDAQ is down 27.79% over that same period. The Dow Jones Industrial Average is down 14.64%. European markets are down. Asian markets are down. 

Bonds have also produced an all-time record low for the first half of the year, with even treasuries down 12.72% in that same time period. The standard “balanced portfolio” with 60% equities and 40% bonds had its worst return since 1932 – 90 years ago!

Commodities, which had produced positive returns in the first quarter, rolled over hard and ended the second quarter in negative territory. Even gold’s luster has been conspicuously absent.  

What, if anything, has worked? 

Interestingly, it is an asset class that we wouldn’t even have been discussing a year ago. That’s right… I’m talking about cash

I’m aware that thanks to inflation, cash on a real basis loses some value. But it hasn’t developed a negative return!

And fortunately, across the majority of our client portfolios we are currently sitting on a lot of cash (the US dollar has been very strong, and has also been a great place to have money parked during the first half of the year). 

The process through which we accumulated so much cash is interesting, but for purposes of this update, suffice it to say that since markets, like people, are always in motion, it’s important to keep a vigilant eye on where the trends are.

For example, going into the end of 2021 markets were, for various reasons, very highly priced. This overvaluation had been a large concern of mine for some time.

Fast forward a few months and we now see popular 2020 stocks, like Zoom, Peloton, and Roku, which provided connection, exercise, and entertainment for everyone staying at home, having, in some cases, corrected as much as 70%. 

The word “correction” is key here, because the pricing is now quite a bit closer to value. In other words, what these companies that had been so speculatively bid up were actually intrinsically worth all along.

Leading us to where we are now. 

It’s hard to know when a bear market will end, but one thing we do know is that they don’t end on their own. 

Historically, bear markets have ended when some kind of macroeconomic factor triggers a change in the trajectory. Possible triggers currently could include federal monetary policy, shifts in national and global economies, a reduction in inflation, and of course, geopolitics. 

At Topturn, our disciplined process involves, among many other things, maintaining a view of each of these potential triggers.

Inflation is probably the number one pressing factor in today’s economy. The way the federal reserve responds to this, including continued interest rate increases should impact inflation positively.

So, too, would an increase in the supply of products and services that have been in huge demand. Geopolitics plays into this, with the war in Ukraine impacting worldwide commodity prices and international business. In addition, covid related lockdowns in manufacturing countries such as China, and a tight labor market at home make it tough for businesses to produce enough to meet demand, which in turn drives prices higher. 

While these factors, coupled with the downward trend in the market, might easily conjure up concern about what might happen next, we know that historically, markets do recover, given enough time. 

As far back as WW2, markets that were down 15% or more in a quarter recovered positively within two quarters 100% of the time, with the median growth two quarters later being 13%. This includes the high inflation period of the 1970s, Black Monday in the 1980s, the 2002 decline, the Great Recession 10 years ago, and more. 

So, I don’t see it as much a question of “if”, as it is “when”.

We cannot time the market any better than anyone else (and we have yet to meet anyone that has been able to… consistently). However, we can continue to apply quantitative analysis to indicators designed to point us in the direction of current momentum and its reemergence.

And, what about the large sum of cash we are currently holding? As the tide discernibly begins to turn we plan to be prepared as to how, and where to employ it.


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