Joel's note: Considering the recent volatility in the market, we're stepping aside from our normal format of the Altimetry Daily Authority today to focus on a broader view of the macro environment.
The volatility over the past week has a lot of investors spooked...
We spend a lot of our time with our institutional clients talking about the signals we see from not just an individual company perspective, but also from a macro perspective.
Those type of questions have become even more frequent in the past week, so we're sure many Altimetry Daily Authority readers are having the same thoughts. It's hard not to react when the financial carnival barkers are shouting at you every moment you're tuned into CNBC on TV.
As regular readers know, we have a systematic approach to macro analysis here at Altimetry. We don't just react to the headlines... unlike most pundits and (unfortunately) investors.
Instead, we start at a base of our Uniform Accounting and credit-cycle work. We build up from research we've done on centuries of economic cycles to understand where we are in the market cycle, and what it means for the broader environment.
If you follow a systematic approach likes this, it takes away the guessing game.
Coming into mid-late January and after the rally in February, we were at a point with extended investor sentiment levels and fewer incremental buyers. We could see this in our correlation analysis and our other short-term sentiment indicators.
When this occurs, it signals that investors aren't focused on risk, but rather on upside potential. Any negative news could cause a short-term reversal, as investors panic and run to the exits. And that's what we've seen over the past few days... on Monday, the S&P 500 Index fell more than 3% as investors were spooked over a rising number of coronavirus cases across the globe.
But is a sell-off like that a harbinger for the future of the market... or a buying opportunity? Of course the coronavirus outbreak will have an impact on Chinese and global economic growth for the first quarter of this year and likely the second quarter as well. But this is far more likely to be a transient issue rather than a structural impact on economic growth.
And more important than our opinion about the headlines is to step back and look at the overall macro environment. Let's consider credit cycles and corporate profitability cycles...
Today, credit cycles in the U.S. aren't flashing any warning signs:
These metrics don't point to an imminent risk of a credit crunch for either U.S. corporations or individuals. Without a credit crunch, we don't historically see a deep recession or a severe bear market... as one typically leads to the other.
And other key indicators for corporate earnings trends show positive signals...
Also, as we again touched all-time highs in February before this recent pullback, concerns arose over whether the market was getting too expensive. But when we look at market valuations in the context of the current inflation and tax environments, these look reasonable.
When the market is down 3% in a day – and down almost 5% from its highs only a handful of days beforehand – it's easy to ask whether it's time to head for the exits. Only by having a systematic approach can you stay confident in this type of market environment. This approach is what we aim to give you here at Altimetry, and what we plan on continuing to provide.
The signals from our approach tell us two things... Stay confident in the market, and buy the dips when they occur.
Could the market still go lower from here? Certainly. As legendary value investor Ben Graham said, "in the short run, the market is a voting machine." In this sense, the market behaves like a popularity contest in the short term. Stock prices change quickly based on the current sentiment and environment.
But averaging down into a down market lets you buy stocks you already like at a discount. Over the long term, Graham says that the market is a "weighing machine." The fundamentals will come through... which will drive this market higher.
In short, this is a "buy the dips" type of situation.
And it's worth noting that we aren't the only ones discussing these facts...
Our friend Steve Sjuggerud at Stansberry Research has been highlighting this same dynamic for years with his "Melt Up" thesis. In short, Steve believes this market has much more room to run... and you don't want to miss out on the biggest gains before the inevitable crash.
We have a lot of respect for Steve. When he makes big calls like this, we listen... and although his research process is different from ours, we often come to the same conclusions about the bigger market picture.
He recently sat down to discuss his thoughts on the Melt Up and what he thinks investors should be doing to take advantage right now. You can watch his interview – and find out how to get a massive discount on a subscription to his flagship True Wealth newsletter – right here.
February 26, 2020