This "Clock" Says It's a Good Time to Invest  | | Robert Ross
Speculative Assets Specialist | Sometimes I wonder if the "yen carry trade" sell-off was a fever dream. I've mostly forgotten about it. And you probably have too. But if you read my column back on August 5, you should have made some money because I was practically begging you to buy... "These types of [VIX] spikes often mark the bottom of a market sell-off and presents a golden opportunity to buy stocks at discounted prices." This forecast has so far proven correct. In fact, it marked the exact bottom for the market pullback. 
View larger image The S&P 500 is up 12% since the August 2023 lows. That's a good year in the markets, let alone 60 days. But taking advantage of the pullback only worked if you tuned out the "sky is falling" narrative parroted by the lemmings in the mainstream press. It has been one thing after another with these fearmongers in 2024. Whether it's yield curve inversions, wars in the Middle East, a Kamala Crash, an AI bubble, high valuations, "only seven stocks," interest on the national debt, the Fed cutting rates, the SAHM Rule, employment figure revisions, insider selling, or a host of other supposed catalysts for a stock market crash... All of these have been proven wrong. Could they be proven correct eventually? Possibly. Even a broken clock is right twice a day. But if you want to know where markets are headed next, keep reading. This Is a Game of Probabilities Forecasting the markets is a game of probabilities. Anyone who claims to have certainty is selling a fantasy. Markets don't move because we know for sure - they move because clues like earnings, sentiment, and technicals guide us. But even when those align, there's no crystal ball. The economy, by design, is complex and chaotic. No one has all the answers, but what we do have are systems that improve the odds. A great example is the Merrill Lynch Investment Clock, which splits the market into four stages: reflation, recovery, overheat, and stagflation. 
View larger image Here's a breakdown of these phases: - Reflation: Growth and inflation are sluggish, the Fed steps in with lower rates, and bonds do well.
- Recovery: Low rates drive growth, inflation remains low, and stocks are the big winners - this is the "Goldilocks phase."
- Overheat: Inflation rises due to supply constraints. The Fed hikes rates, and commodities become the top-performing assets.
- Stagflation: Growth slows, inflation sticks around, and cash becomes king as the Fed keeps rates high to combat inflation.
So where are we now? - Inflation continues to cool, dropping from 4.3% in April 2023 to 2.5% in August 2024.
- GDP is on the rise, with the Atlanta Fed expecting 2.5% growth next quarter.
- The yield curve has just un-inverted after the longest inversion on record (783 days).
- The Fed is cutting rates, with 200 basis points expected over the next 12 months.
We're not fully in the Recovery phase yet, but all signs point toward it. This aligns with the idea that markets are entering a "Goldilocks phase" - steady growth, cooling inflation, and supportive monetary policy. This comes after the "overheat" phase in 2022 when commodities were the best-performing asset class, along with the "stagflation" phase in 2023. 
View larger image Other than the Magnificent Seven tech stocks, the rest of the S&P 500 performed poorly in 2023, with most sectors getting beaten by cash. Like Making Money? Do This Again, we're dealing with probabilities, not certainties. Every cycle is different, and this framework, while useful, isn't infallible. However, if the indicators continue to track, we could be moving into a favorable time for stocks, with inflation under control and the Fed cutting rates. Investing is about managing risks and making smart bets when the odds are in your favor. And based on these signals, the odds are looking good for growth. But no matter how you slice it, the fact is mainstream analysts have been 100% wrong this year. Wall Street had their lowest expected return for the S&P 500 in a decade coming into 2024. In fact, the average Wall Street bank expected the S&P 500 to rise only 2% this year. That was the lowest upside forecast in over a decade… And it was decisively wrong. In fact, the S&P 500 is up 20.3% in the first 187 days of 2024. That's the 15th best start ever for the S&P 500 since 1928 and the strongest start since 1997. So while the talking heads on financial news shows may make a compelling case for an imminent stock market crash, keep in mind all the times they've cried wolf. Because there are always things to worry about in the market. But knowing when to tune out the noise and hit the buy button is the difference between beating the market and sitting in cash. Stay safe out there, Robert Want more content like this? | | | | | |
No comments:
Post a Comment