Liz Looks at: The In-Between Times

By: Liz Young · April 19, 2023 · Reading Time: 5 minutes

Whistle While You Wait

Stop me if you’ve heard this before: Sentiment is bearish. Even some of the most bullish voices have turned down the volume. Positioning on speculative S&P 500 futures contracts is the most bearish in over a decade. If the market went down, it seems as if it would come as a surprise to absolutely no one.

Yet with unimpressive breadth, stocks have continued to fight their way higher this year, and the volatility index (VIX) trotted its way lower.

What gives? Is this the calm before the storm, or durable momentum to the upside? The reality is, no one truly knows the answer. The best we can do is use the information we have about the current environment and our knowledge of previous cycles. Unfortunately, that doesn’t make this much easier, nor does it stop the constant, “is this time different?” chatter.

It’s always a little bit different. The catalysts that take us into downturns are of a new flavor each time, and the sectors that suffer most tend to differ. So what might the catalyst be, if one materializes?

Looking for the Poison Apple

As we know, the culprit is rarely found in the places we expect. Right now, the most obvious possibilities would be further stress in the banking system, disappointing earnings results, or upside surprises to inflation. So far, none of these have concretely materialized. Nor has any new unforeseen shock, but the sense in markets is that something is lurking out there.

If this were the beginning of a new bull market and a new economic expansion, there are certain signals we’d expect to see. One of which is small caps at least participating in the rally, if not leading other indices. No such luck.

Another signal of cyclical strength could be found in the copper to gold ratio. In times of expansion, copper tends to handily outperform gold (which is seen as a safe haven store of value). As such, if this were the beginning of an expansion in concert with an increase in stock prices, we would expect this ratio to be moving up. Again, no such luck.

Despite a sleepy VIX index and resilient stock valuations, it’s contradictory signals like these that keep myself, and likely others, consistent in our cautious tone. If I have to try too hard to find the fundamental reasons that support a technical market move, I don’t trust the move.

Mirror, Mirror, on the Wall

Nevertheless, extended periods of sanguine markets that make bearish sentiment look misguided can feel as if we’re staring into a magic mirror that’s telling us lies. A frustrating time at best, downright inexplicable at worst. But such is life in the land of markets.

What to do in the meantime? Many assume that the most bearish investors are simply not invested in anything at the moment, and I think that’s quite untrue. I’ll speak for myself in saying that over the course of the past few months, the places I’ve suggested rotating money into are ones that I don’t typically tout as big upside opportunities, but this is a unique environment.

The message — while we watch earnings data, economic data, and headlines roll in — is to be invested, but at these valuations, not overly exposed to rate-sensitive or economically sensitive sectors. Instead, take the benefits of yield and stores of value in instruments such as short-term Treasuries, gold, utilities, and money market funds. I’d think of these investments as things I’m in “for a good time, not a long time.” Although they don’t seem incredibly interesting, I’d call a 4% yield in cash-like instruments, and a 9% YTD return in gold a decent way to bide our time until equities offer a more compelling risk/reward tradeoff.


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