Tuesday, July 5, 2022

Morning Note: Hubris, Humility and History

Bespoke Investment Group began their latest weekly report with a riff:

“Been dazed and confused for so long, it’s not true...Lotsa people talkin’, few of them know...Don’t know where you’re going, only know just where you’ve been…” - Dazed and Confused, Led Zeppelin
Then proceeded to explore the thus far perplexing 2022. Their opening paragraph speaks to the hubris (bolded by me) that infects the investment community:
"We can’t think of many songs that better encapsulate 2022, but if you can let us know. Confusing has been an understatement as investors are faced with a barrage of back and forth moves and policy decisions that would make most fair-minded people scratch their heads. Despite the cross-currents, we hear a lot of confidence from both sides about what will go down in the second half, but even in normal times, let alone one of the trickiest economic backdrops any of us have ever experienced, few of them know."

Clients have heard me -- in our portfolio review meetings -- acknowledge that this has to be the most challenging market setup of my 38-year career.

Now, to be clear, as said clients will attest, there's not the least bit of "shrinking" in my delivery of that statement. Meaning, it isn't intimidating, it's just challenging -- in that it demands the deepest probing of the data, the deepest thinking on historical analogs, and the deepest understanding of political and geopolitical incentives and constraints. 

My point being -- and make no mistake -- acknowledging the challenges, and embracing the demands of such an environment, is our job -- which, above all, requires humility. 

Our technical analyses (pointing to very short-term probabilities) aside, it pains me when I hear a contemporary come off uber-confident in his/her "knowing" of the near-term (say, next 6 months) future of markets.

On the bull side, there's (virtually always) Wall Street:

At first blush, clients and regular readers would likely think that we are at complete odds with Wall Street's consensus that stocks will end the year notably higher from here... Well, perhaps, but if we stated such with confidence, we wouldn't be all that humble, now would we?

In fact, the bears and the bulls could both be right, right? I mean, if our analysis of present probabilities is correct and stocks have lower to go before current conditions play themselves out, who's to say those lows can't be hit, say, this fall, only to then be met by the kind of year-end buying that investors are all-too-familiar with, making, say, Morgan Stanley (the bearish of the bunch [lowest year-end target] whose chief strategist, in spirit, presently shares our view of probabilities) the guru of the day.

While my "virtually always" remark reflects the snideness toward the establishment you'll find among many an investment veteran, Wall Street's go-forward bullishness can actually be forgiven this go-round: Per Bespoke's note which featured historical examples suggesting that when the first half's been this bad, the second half is likely (if not certain) to be quite good.

Such as:

Following calendar quarters where the SP500 suffered 15%+ drawdowns (Q2 was the 9th such since WW2), in only one instance did the index register a decline over the next quarter. As for the subsequent half and full-year periods, the market went up every single time:

Following two-quarter declines of 20%+ (just saw 8th such time since WW2) same thing, with actually more impressive returns:

So, per the above, history has generally not been kind to those who bail after stocks have taken 20%+ hits.

Now, all that said, this very young 21st Century has endured two bear markets that went on to more than double that initial 20% hit before all was said and done. Which -- along with what we view as quite the unique setup -- justifies our less than sanguine view of the next few months, despite what longer-term history may portend... 

Although we remain open to all possibilities...

Asian equities, while getting hammered in the futures market this morning, were mostly green overnight, with 11 of the 16 markets we track closing higher.

Europe's getting creamed so far this morning, with all but 1 of the 19 bourses we follow trading notably lower as I type.

US stocks are selling off to start the week: Dow down 557 points (1.75%), SP500 down 1.68%, SP500 Equal Weight down 1.84%, Nasdaq 100 down 1.17%, Nasdaq Comp down 1.25%, Russell 2000 down 2.14%.

The VIX sits at 29.28, up 9.66%.

Oil futures are down 4.91%, gold's down 1.02%, silver's down 1.75%, copper futures are down 4.07% and the ag complex (DBA) is down 1.60%.

The 10-year treasury is up (yield down) and the dollar is up a huge 1.28% (explaining the everything selloff so far this morning).

Among our 38 core positions (excluding options hedges, cash and short-term bond ETF), only treasury bonds are in the green so far this morning. The losers are being led lower by metals miners, MP Materials, Nokia, Eurozone equities and oil services stocks.


"Getting the market right, from here on out, is as much about the politics and geopolitics as it is about valuations, interest rates, and earnings. And yet, our epistemic community of financial professionals has no real framework with which to navigate this new paradigm."

--Papic, Marko. Geopolitical Alpha (p. 13). Wiley. Kindle Edition.

Have a great day!


  1. Thanks for your thoughts Marty. This market is nothing but unpredictable. We have high inflation, low unemployment, and consumer spending on food and traveling is still strong. We had a party of 16 people and spent over $1000 on food this past weekend. We had deep discount deals from Vons and brought everything in bulk from Costco. Everything added up and it is approximately $50 per person cooking out at home.

  2. Good insights Sam... appreciate that input