The markets are at a very interesting crossroads. On one hand, there is too much optimism as retail investors are getting bold, and on the other hand, there is unlimited support from the Federal Reserves. However, the retail action is very interesting and intriguing at the same time.
Retail investors missed out on the gains from 2009 bottom and are now joining the stock market to take advantage of the gains. There are so many anecdotes of this happening which I come across every day in the form of celebrities turn traders, comments on social media, and calls like "Stocks only go up" but recently I talked to an old friend who was never interested in the markets, and now he is talking market analysis and going into options. This is a classic sign of a market top based on my personal experience.
Now add the behavior of certain companies who have no future and no product but their stock prices shot higher. "Nikola (NKLA)" is one such company that just had a concept of an electric truck and it's stock went from $10 in March to $90 in June. It is now at $33. This is the kind of speculation that one normally sees at the peak. Other examples include companies like Hertz, which filed for bankruptcy, and afterward, it's stock jumped 1000%. Anyone with the slightest understanding of how bankruptcy works will never touch such a toxic stock but speculation was rampant here as well to the point that Hertz decided to sell more stocks to the public. SEC had to intervene to stop such an action.
Another dynamic that is playing out right now is the complete breakdown of the US Dollar. This is something that requires more explanation but to summarize ~2 months ago I wrote a white paper to understand the potential impact of the policy of the Federal Reserves and the Treasury, where they can print unlimited money to backstop the economy. One of the primary consequences was pressure on the US Dollar. We are now seeing it unfold in its earnest. Federal Reserves will be soon forced to interfere to stop the decline of the US Dollar. I think the flood gates have been opened, the China tensions will only exacerbate this situation. We could see a short-term spike in the US Dollar but should expect longer-term downward pressure.
As a result, different asset classes have been doing very well. If one sees stocks as performing well, they should look at the Precious Metals. They are blowing it out of the park on a daily basis. This will make the retail investors excited about Silver and Gold but there are risks appearing on the horizon for these instruments as well. If the US Dollar moves higher, it will pressure several asset classes.
That's why the next 2-3 months (into elections) will be very interesting/risky, as many risks are converging. Therefore, one should be prepared.
So what should investors do?
There are five fundamental questions that each investor should ask. Answers to these questions will help frame the next steps:
Is your portfolio positioned to take advantage of the macro themes like Gold rally, sharp US Dollar decline, volatility in the stock market, and the potential resurgence of the emerging markets? Creating a portfolio that does all of this is a unique skillset. The majority of the products that I have seen do some of these but don't create a holistic approach.
Will you be nervous with a sharp pullback (e.g. 20%) in stocks? If yes, you are probably overexposed to equities and need to re-evaluate. If no, are you positioned to take advantage of the growth opportunities?
Is your portfolio positioned to withstand volatility or is it overexposed to the risk areas? If you don't know, evaluate your portfolio and understand the construct before volatility strikes. Preparation is done before not later.
Is there a clear plan to allocate assets in different areas? If you don't know the answer, please ask
Will you be comfortable increasing exposure to the investing approach? If the answer is No then either the investing approach is not comprehensive enough or you don't have a full understanding. Regardless, it is time to re-evaluate. A good approach should be investment-ready under all circumstances or there should be a plan in place in case: Markets go down, or Markets go up
So what does this mean for our investment approach? Well, No change! Why?
Let me start by stating that we aspire to generate uncorrelated performance in all markets and circumstances. As a result, we try to eliminate emotions and follow a holistic approach inclusive of asset allocation, risk management, diversification, long/short positioning, and a proprietary combination of prop indicators. This keeps our emotions in check while we continuously aspire to learn from any new market developments and embed it into the investment models.
We also invest 100% of our personal assets into this approach and test new approaches with our own money before opening them for clients. The basic assumption is that if we cannot generate returns for ourselves, we do not deserve to manage anyone else's assets. Once we are comfortable with an approach, the strategy is customized for an individual's needs.
As for our positioning, we are not heavy in stocks. In fact, these gains that we have seen since April have been made with negligible allocation to stocks. We are positioned to take advantage of another round of volatility.
We aspire to not chase performance through hot assets rather build positions over time, and ensure that we maintain a portfolio that gives us the ability to think without emotions. This means that there are times when our portfolios underperform against a concentrated stock-only aggressive portfolio but will also carry a much lesser risk.
Hope this provides some additional perspective to the current market environment, our investment approach, and potential considerations for an effective portfolio positioning.