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CIO Thoughts: Don’t Wait Too Long

If you wait for all of your indicators to turn positive, you will miss the rally (as most did in November when the S&P 500 rallied 9%). Astoria has commented in this forum that the ultimate contrarian indicator this year was “T-Bill and Chill.” Everyone left the stock market to buy money markets and T bills. Who was left to sell?

As the year progressed, we marginally increased the risk of our ETF managed portfolios by buying international equities, tilting away from US market cap, going OW US midcaps, buying GARP strategies, etc.

Why?

  1. Stocks have been in a bear market for two years, and history has shown that buying equities in a bear market has compensated you.

  2. We noticed that many of our indicators were troughing.

  3. Sentiment was as bad as we have seen in years.

Improving indicators + negative sentiment + wide margin of safety is generally worthy of owning stocks relative to other asset classes. Below are a few indicators that we continue to watch.

  1. Un-inversion of US Treasury Yield Curve: When the spread between the 2-year and 10-year Treasury yield turns positive after it has inverted, it has historically signaled a recession is close.

  2. Leading economic indicators troughing: The Conference Board Leading Economic Index has declined for 19 straight months, the longest since the GFC.

  3. Profits recovery: Q3 S&P 500 earnings growth was positive; the prior three quarters saw declines.

  4. ISM Manufacturing/Services PMIs steady in expansionary territory (above 50): Manufacturing is at 46.7; services is at 51.8 but trending down.

  5. Improvement in credit/lending standards: These are likely to stay tight as long as rates are elevated.

  6. Increasing market breadth: The S&P 500 continues to outperform the S&P 500 Equal Weight.

  7. Reset in valuations: Further decreases could create buying opportunities.

There are better opportunities than a money market fund. You may want to consider nibbling on stocks with attractive valuations and catalysts for upside.

Best,

John Davi

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