Brexit ‘Correction’ Signals Back to Basics of Prudent Investing
$DIA, $SPY, $QQQ, $VXX
The beginning for the long awaited correction in the US equity markets was fast and a shock to many participants, severe some called it. But it was just 3.4% for the S&P 500 which is now -0.3% YTD.
Brexit was not the cause of the decline but the catalyst or trigger, the prospect of negative rates and negative yields on a huge range of bonds, massive corporate leverage with worryingly rising delinquencies and of course expensive equity markets and falling profits is the real reason for the market action.
The political events are a distraction from the Key events, weak global economic growth and perverse asset markets. The problems are big, and history tells us all that they will be corrected, so be prudent, it is your money and your responsibility.
The markets have been drifting from one central bank speech or action to the next. The disregard for underlying fundamentals is something that is on seen at major market highs historically.
After Friday’s action it is assured the US Fed will not hike rates anytime soon, and perhaps not until Y 2018.
There are the big risks ahead as Money shifts from Europe to the safety of US Treasuries and Precious metals, they are, as follows;
- International and Emerging Market performance will suffer relative to domestic markets.
- USD will strengthen from currency inflows.
- Bond prices will rise as interest rates fall further
- Crude Oil prices will decline to 30 bbl and below
- Utilities, REIT’s, Healthcare, and Consumer Staples should outperform the S&P 500, meaning they will not dive as deep as the index
- Financials, Technology, Discretionary will lag as the next recession comes on.
- Imports / Exports will continue to suffer weighing on corporate profits, there will be not EPS recovery.
Those are just some of the outlooks.
Expect to see a globally coordinated central bank response to the financial markets over the next few days if the selling pressure picks up steam.
We can expect to see the following from the monetary policy makers:
- Further interest rate reductions
- Deeper moves into negative rate territories
- Increased/accelerate bond purchases by the ECB
- A short-term QE program by the US Fed
- A pick up of direct equity/bond buying by the BOJ.
- Liquidity supports through Forex swaps or direct intervention
- Plus lots of jawboning.
If and when the central banks intervene there is a possibility of a negative response by financial markets as the veil of “an improving economic backdrop” is removed
It is important to be cool in here and it is prudent to take portfolio and risk mitigation actions.
These are the steps, as follows:
- Tighten up stop-loss levels to current support levels for each position.
- Hedge portfolios against major market declines.
- Take profits in positions that have been big winners
- Sell laggards and losers
- Raise cash and rebalance portfolios to target weightings, cash is an asset
While the S&P 500 2040 support mark was broken Friday, it makes sense to wait and sell into the relief bounce. The markets very oversold near term, and a bounce this week would not be out of the norm. Again, use any bounce to rebalance positions.
The long term MA’s are now at 2020 up from 2000, so 2020 becomes a hedge mark, this is due to the recent rally that pulled the longer-term moving average up to that mark.
The savvy market participants have been prudent and moving to cash for the last 10 months or so. I you are a regular reader of this column you know I have been saying cash is a Key asset.
As Mohamed El-Erian said last week, ‘Investors cannot rely on correlations as a risk mitigator, making cash a very valuable thing to have.
It can give your portfolio resilience during stressful times, optionality, whether you use it for tactical or strategic purposes and flexibility to deploy it when necessary.’