Wednesday’s inflation print is further confirmation that inflation is here, it’s real, and it’s likely to continue at least into 2022. The ramifications of this are not fully grasped by most. But historical precedent gives solid clues about how this this may play out. Given the vulnerability of both core asset classes, advisors should not ignore clear signals.
The FED Put is Likely Kaput
For over a decade, the FED has made policy changes or adapted their language in response to stock routs. This response has skewed the way that investors view portfolios risks, and has driven us into a new era of stock market valuations, where 27 times trailing earnings is regarded as being largely benign.
However, with inflation high, GDP growing, and employment improving, we believe it is unlikely that the FED will act to halt a stock market fall, and least its initial stages. That means that we are in relatively unfamiliar terrain. But a potential inflection point for markets may come if investors realize that the FED put is gone, potentially increasing the ferocity of any market decline.
Risk Assets Burst the Last Two Bubbles
Exacerbating the risk landscape are digital tulip bulbs like Crypto Currency, whose market cap stands at $3 Trillion (14% of U.S. GDP) and is rapidly growing. With the advent of a Bitcoin ETF and growing adoption of crypto by institutions, one can imagine that Crypto Currency market cap exceeds the value of U.S. GDP within the not too distant future. Add to this to SPACS, NFTs, and Profitless Stocks, and it becomes clear that we’re creating massive wealth destroying instruments that may add to the vigor of market declines. The wider the adoption of these speculative bets become, the greater their effect will be.
The Next Bond Bear Market May Have Already Begun
Rising yields and inflation are causing real losses in bonds… right now. With the Aggregate Bond index down 2% (before fees) and inflation up 4% YTD, investors are down 6% real. But the 10 year is still yielding just 1.5%, lower than at any period prior to the pandemic. That means that losses in bonds may just be getting started.
Course Correct before the Bubble Bursts
We advocate what we call a behavioral portfolio that remains invested, but addresses contingencies. Place half of stocks into low cost indices, but allocate the other half to hedged equity funds that can attempt to uncorrelate from falling markets. For bonds, allocate to unconstrained, adaptive funds that can be positioned into TIPS, Short duration, High Yield Bonds, or investment grade bonds, to attempt to lessen the effects of rising interest rates or inflation.
Developed International Stocks: 100% Invested
High Yield Bonds: 100% Invested
US Stocks: 100% Invested
Investment Grade Bonds: 100% TIPS
Equity Portion of Defensive Alpha Models*:
100% Invested Posture†
*Exposure to vehicles invested in the listed asset classes
We’ll keep you updated if we make additional defensive moves over the weeks ahead.
Toews Management Team
All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.
This commentary is intended to provide general information only and should not be construed as an offer of specifically-tailored individualized advice, and no representation is being made as to whether the information provided herein would be beneficial for any or for a specific Employer Benefit Plan or investor.
For additional information about Toews, including fees and services, send for our disclosure statement as set forth on Form ADV by contacting Toews at Toews Corporation, 1750 Zion Road, Suite 201, Northfield, NJ 08225-1844 or (877) 863-972
(1) Our “Traditional Models” are the Toews Capital Preservation, Balanced, Balanced Income, Balanced Growth, Growth, and All Equity portfolios; however, their management is not “traditional” since they are tactically managed. They do not reflect the allocations of these strategies that are not allocated to Toews Funds.
(*) Exposure to vehicles invested in the listed asset classes
(†) Approximate Defensive Allocation