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Teetering On A Ledge

CAMS Weekly View from the Corner – Week ending 3/11/2022

March 14, 2022

As we were rounding out 2021 we began to look out into 2022 for what the general market and economic landscapes may look like as the year unfolded. The glaring concern was the bond market. This brought a wealth of follow-on concerns through markets and society at large in light of how important the bond market – think interest rates – is in the broad socioeconomic landscape. It became a plethora of forward developing issues as we viewed the bond market through the landscape of FED policy/money printing, non-transitory price inflation, budget deficits/overall debt, geo-politics just to name a few. The bond market concern, with all of its constituent topics pointing to said concern, would always walk us over to the backdrop of the stock market. A backdrop which was (and remains) historically highly valued while the businesses comprising said market were (and continue) facing a plethora of issues that can be, in the name of brevity, wrapped up in three words – declining profit margins. The declining profit margin risk arrive via on-going rising input costs, labor challenges/costs and questionable abilities to pass through those costs to consumers without losing their time honored market share within their respective industries. In months prior to the closing of 2021 and throughout 2022 we have attempted to succinctly share the seemingly endless perspectives and issues facing these markets coming from the broad socioeconomic backdrop with each passing edition. Within various editions we have consistently offered “…..caution is warranted….” or a tone of such as a way to succinctly share we are in anything but normal socioeconomic times and hence market times. In order to emphasize the point, we offer again here midstream in this edition: caution. is. warranted. Safe Haven Bid The proverbial “safe haven bid” is simply where capital historically goes searching in times of economic/geo-political/market stress. Similar to a ship searching out a safe harbor in turbulent seas collective market participant capital goes searching for market “safe harbors” in what are often viewed as safe havens within broad market landscapes. Historically, the bond market is such a market that is generally viewed as a safe harbor – that is, until it isn’t. Along this theme in the guidance of assets under our management we attempted to participate in what we expected to be some safe haven bids coming into the bond market – specifically the Treasury bond market. We waited – and waited – and…. – expected bids were not showing up so we left quickly. A Tell from market participants is when something should be happening (think Treasury market safe haven bids) and doesn’t that silence is a deafening message that something is really not right in X market. Hence, our quick exit.

Click for Larger View:  https://schrts.co/spYtzXUR

Having various options on how to give a general visual of the 2022 bond market story – none of them uplifting by-the-way – we chose the above in light of its brevity in telling the story.  The above is simply a year-to-date performance chart. We included vehicles representing various areas of the bond market – from various Treasury instruments to corporate junk bonds to high grade corporate investment instruments.  They all tell the same story and that is they all are in various stages of downtrends and all have been negative in performance in 2022. This means their respective interest rates (yields) are moving higher as sellers rather than bidders have been showing up – underlining the disinterest in these as a safe haven. Most notably is the high grade corporate investment bonds (often parroted as safe investments) actually leading the way lower as they approach near double digit losses already in 2022.  Stock Market Rising interest rates via a bond market that is trending down in price is not a favorable backdrop for a stock market that is historically highly valued.  Historically highly valued stocks and rising interest rate bond markets do not get along well as shared above. In addition to the visual above we are applying the same approach below only using stock market inputs in order to share so we can see both bond and stock markets in a similar manner. 

Click For Larger View:  https://schrts.co/BgFPJKIH

Using three mainstream indices as stock market proxies we see the year-to-date performance of said indices.  They are the well recognized Dow Jones Industrial Average, S&P 500 and the Nasdaq 100.  Generally speaking the worst case performer for the bond market as depicted previously is the beginning point for the stock market.  That is, near double digit losses for the worst bond performer above is the starting point for the stock market.  The Dow Jones is nearing double digit losses while, for example, the Nasdaq 100 is nearing 20% losses. Realizing we are just over the two month line in 2022 these are harsh downtrends for such a short time.  Concerning is the fact that the bond market has gotten worse this past week and is suggesting more pain to come.  If this occurs it will be quite a challenge for the stock market to evade additional downside. As we sit here it is as though these various markets are sitting on a ledge trying not to topple over from here.  The bond market’s performance in recent days is not a comforting message that these proverbial ledges will be able to hold though.  With this as well as all of the above, yet again, we offer caution is warranted. I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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