Trick or Treat: Who’s getting treated, and who’s getting ticked?

Matthew Unger |

(Disclosure: we intentionally spelled it "ticked" not "tricked.")

We all remember Charlie Brown and The Great Pumpkin. With the writing of this research piece, we are looking to help you avoid coming away this Halloween with only rocks in your candy sack, and instead how to leave with a bag full of candy.

Volatility continued over the last week as the S&P continued to retest July 12th’s all-time high of 3,013.77. We won’t talk about Trump and the trade deals as we’ve already beat that horse into the ground (as have the pundits), and we believe the market has fully priced that in, but expect short-term volatility to continue. So who will be ticked (off) and treated going forward?

Looking at Bank of America Merrill Lynch’s Fund Manager Survey gives us a look into where investors have their money. Currently they’re long assets such as cash, REITs, bonds and utilities. Said differently, investors are bearish. Extremely bearish actually. So much so, they are the most bearish since 2016. Taking a look at the AAII Investor Sentiment Survey also paints a bleak picture of investors’ sentiment. They’re 21.4% bullish for the week ending 10/2/2019 results…wow are they ever bearish!

We believe this is incredibly bullish, as often the market does the opposite of what the herd thinks.

Additionally, when looking at the Conference Board Leading Economic Indicator Index shows that it is high and in a stable/slightly-rising trend. The LEI (for short) is a forward-looking index that when it historically drops below its six-month moving average, tends to do so 2-15 months before recession. The latest reading suggests no near-term recession risk.

In our view, there is no reason to risk-off from equities and into any type of “defensive” asset class or asset allocation. We believe those who will be getting candy are those that are thus invested in equities that are undervalued, and stick to their longterm goals and strategies. Folks who can expect getting tricked instead of treated, we believe will be those long cash, REITs, bonds and the like.

Many folks couldn’t bear the correction of 2016, and the one that followed in 2018 and flocked to US Treasuries, or even worse - the biggest thief-in-the-night of all: cash. Unfortunate for them, in the past 3 years, the risk-adjusted returns in Treasuries were worse than in every other asset class except commodities. Woof. Talk about getting tricked! This illustrates the importance of remaining disciplined in your investment approach and strategy. It also shows the near-PTSD levels of investor paranoia surrounding equity markets. Where exists a parody between expectations and reality is where investors can find opportunity.

We maintain that the US Equity Markets, while volatile, still present great opportunity for investors, and that global exposure will also help investors’ in a well-diversified strategy. We also remind investors to stay the course, and speak with their financial advisor before making any changes to their long-term focused plans.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Focus Asset Management to provide information on a topic that may be of interest. Copyright 2019 Focus Asset Management.