Double, double toil and trouble: Fire burn, and cauldron bubble.
By the pricking of my thumbs,
Something wicked this way comes.
Macbeth, William Shakespeare
It has been a whole month since our last Insights. This somewhat extended hiatus has been partly due to my family’s summer vacation schedule, partly due to my awesome team onboarding several new clients this month, and partly due to my just wanting to let our last few notes marinate a little bit.
I rarely want for material to write about, and this month was no different. Assassination attempt on Trump. Biden dropped out. Crowdstrike. National debt hit $35 trillion. Maduro. Hezbollah’s #2 assassinated in Beirut, and then Hamas’s #1 in Tehran. And since that was all so mundane, we decided to spice things up a bit and send Ukraine some F-16s.
Bombs away!-- for all the wrong reasons, Northrop Grumman (NOC), Raytheon (RTX) and Lockheed Martin (LMT) were all up more than 13% last week. Rest assured, the military industrial complex is alive and well.
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The fact is that any one of these aforementioned stories would be huge news on its own, but for so many such events to occur in less than four weeks is a lot to process, and by “a lot to process,” I mean akin to the Iran hostage crisis, the fall of the Berlin Wall, the Cuban Missile Crisis or even 9/11. According to the volatility index (VIX), this is the third worst crisis ever, right behind Lehman and Covid.
Historically, the first stage of the market’s reaction to this sort of geopolitical malaise is typically to risk off, and sure enough US Treasuries were on fire all of last week. Gold is likely to go higher. The Swiss Franc, the Japanese Yen and the US dollar should benefit from this kind of backdrop, too.
The second stage of the market’s reaction is to buy energy. Oil prices moved slightly higher on the first assassination in Beirut, and again on the second in Tehran. This week’s headlines suggest more of the same-- and much more if missiles start flying in earnest, which they did to some extent on Thursday afternoon when Hezbollah fired 60 rockets into Galilee. The question now is, how bad will things get?
Thursday saw all kinds of awful macroeconomic news as jobless claims surged, manufacturing surveys slumped and construction spending tanked, and on the microeconomic front, Goldman Sachs trader Brian Garrett pointed out in a note to clients, “If it’s felt like a volatile earnings season, that's because it is. In fact, this has been the most volatile earnings season since the financial crisis.”
On Friday, Goldman said, "We now price 200bps of cuts though year end 2025, and over 75bps of cuts through the end of this year." Apparently, they saw the slowdown in hiring and the surge in the unemployment rate to 4.3% as pretty dire.
JP Morgan last week: "With the benefit of hindsight, it’s easy to say the Fed should have cut this week." If only someone had pointed out to them that all the recent strong jobs reports were bogus and manipulated…
There remains a hope that, by the end of this week, we will mostly be through earnings reports and onto a relatively quiet August, yet we maintain that hope is not a strategy and that volatility is likely to remain elevated over the next couple of months.
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Financial markets like Donald Trump. As he catapulted up the polls, the stock market moved up in lockstep. Yet one of the major events of last week was that Kamala Harris took the lead on Predictit.org.
What we see from this chart is that the odds of a Trump victory peaked on July 16th, which happens to be the same day that the S&P 500 peaked.
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There’s a big difference between long term financial planning and short-term tactical allocations, of course, but suffice it to say that, tactically speaking, we’re not buying the current dip. August is typically the worst month for outflows from passive equity ETFs and mutual funds, so we see weak seasonality and still-stretched positioning.
As for long-term financial planning, it’s significant to note that 94% of all years see at least one 5% drawdown in the stock market, so this is all pretty normal.
Heck, a double-digit drawdown happens around two-thirds of the time. From 1928 through 2023, the S&P 500 was up 70 out of the 96 years (73% of the time). Out of those 70 years with positive returns, there was a double-digit correction in 35 of them. In other words, half of all years with a gain experienced double-digit losses along the way.
The average intra-year drawdown from 1928 to 2023 was -16.4, and so far this century, it’s been -16.2%. … If anything, the current correction is still pretty weak based on historical data.
But make no mistake about it; we’re now in a bear market and for all the reasons we mentioned in our last couple of Insights (on June 19th and on July 1st)-- messy election-related events, geopolitical tensions and a poor macroeconomic backdrop. Macro data related to housing, loan delinquencies, commercial real estate, and personal savings have collapsed, which is not surprising when you consider that we have piled 5.5% interest rates on top of the largest debt bubble in history.
The current problem is that markets are puking while they’ve already got rate cuts priced in. The big bats on Wall Street all came out swinging on Friday for half-point rate cuts. Economists at Bank of America, Barclays, Citigroup, Goldman Sachs and JP Morgan all revamped their forecasts for US monetary policy, and they’re now all calling for earlier, bigger or more interest-rate cuts. They’re throwing the “soft landing” scenario out the window this week, and that’s new.
In the current environment, we recommend adding “boring” names from:
· defense stocks
· consumer staples
· utilities
Click here to invest with Chad.
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