We wrote about phase transitions in July while the markets were still in a bullish period. Times have changed and the equity market leaders, Tech and Momentum, peaked in late August. Look no further than the highs of the Russell 2000 and Nasdaq for confirmation. The root cause of this behavior is likely peak earnings and inflation. Remember the market is generally a forward looking mechanism and is now focused on Q4 and the first half of 2019. The data and earnings comparisons will be difficult to match and exceed those of prior quarters. This will continue to place pressure on multiples and cause lower and choppy equity prices. The late cycle jump in wage growth will also affect corporate profit margins.
We have also experienced peaks in the CRB index and most base commodities as the result of a strong Dollar. The global breakdown in Emerging Markets and currencies has been the primary driver of U.S. Dollar trends. Global funds have flocked to the U.S. Dollar for safety. Many Emerging Market currencies have been in crash mode since January. Global equity markets have retreated over the
course of 2018, too. China, as an example, is down 25-30% since its January peak on the Shanghai Composite.
What does all this mean? As investors we have been accustomed to a relatively smooth equity growth curve the last few years particularly in the U.S. markets. Recent price behavior is signaling a change or phase transition. It is time to re- evaluate your portfolio and make some adjustments. We believe alternative investments will play a key role in portfolio performance in the next phase. Now is the time to position and/or increase allocations to this sector, of course there is never a guarantee that alternatives will protect you from investment losses or increase protection against market declines.
Remember hope is not a plan. Speak with your advisor/broker to create a strategy with the potential to capitalize on opportunities as we enter a new phase.
The content of this article is based upon the research and opinions of Robert Spears, Managing Partner, Optimized Trading LLC.