Markets for the Second Half of the Year

Someone asked me recently when the next stock market dip is expected. Their thought was that it should be pretty easy to anticipate the next correction, sell, and then buy back in at the bottom of the dip. Let’s just say, that is a lot more difficult to do that it sounds on the surface. It’s our position that trying to predict the future is not a good way to run your portfolio. For one, it’s based on an emotional response, which has been shown time and time again to be a poor predictor of what ends up happening. Secondly, most individuals are wired to be either risk-oriented or fear oriented. Neither approach is particularly bad. We need people to run into fires and save others and we need people who worry about fires to reduce the number of fires. The problem is that while risk-oriented people are great for getting back into a market, they tend to stay in markets way too long on the way down. Similarly, worriers are great for getting out of markets, but take forever to make the decision to get back in, after most of the bounce has passed by. Finally, cycles can vary dramatically and our human brains tend to look for patterns over short periods.

At Eagle West Group, we use algorithms or math formulas to estimate the level of risk in markets over time. We are not trying to predict markets as much as understanding the odds of a particular bet. So let’s address the earlier question looking through the EWG filter and how we decide to react. We think market volatility should increase through the second half of 2019; however, current projections are for S&P500 to move towards 3150 over the next 8 -12 months. We appear to be in a consolidation, range-bound market. Here is where a traditional market approach and the momentum pundits seem to differ in perspective.

Traditional analysis would put us in the last few innings of this market cycle, before going into a recession. Partly, that is why markets get more volatile in late cycle, because people fear getting left behind, creating a herd mentality. The indication here is to be more conservative in your stock pics and perhaps start to decrease stock exposure slightly. However, the charting approach spells out a very different picture and projects a growth curve out for another 2-4 years, after this consolidation ends. Additionally, charting make the argument that bonds are overvalued. With interest rates rising, bonds should be approached with caution.

So far, our EWG investment models, each running independently on different algorithms, are all fully invested and leaning into this market. That all our models independently coming up with the same answer says something. It means that a decision to defend now must be based at some level on emotion and that is something that EWG works to avoid. A portfolio manager visiting our office once said that there is a difference between volatility and permanent loss. We should not seek to avoid volatility, that’s just part of the ride, going after higher average returns. We should work to avoid long term loss, and our Layered Investment Models (LIM) process works to layer several investment strategies to more broadly diversify our clients’ portfolios.

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