Stocks bounced sharply, then fell last week, ending the week up slightly.
We do not believe this bear market is over because:
1. Core inflation is running at an unacceptably high level.
2. Medium-term forward-looking measures of inflation are inconsistent with the Fed’s 2% inflation target.
3. Because of the inflation problem, the Fed has to stay hawkish. And higher interest rates = lower valuations for stocks.
4. The average bear market lasts 1.5-2 years, during which stocks fall 40%. The current bear market has lasted for less than a year and stocks have only fallen 25%. twitter.com/Mayhem4Markets/status/1578689770795900929
In the current circumstances, cash looks like a pretty good investment. Notes Bob Elliott on Twitter: “Typically cash is trash. Assets outperform cash over time. Its a fundamental truth of investing. But during tightenings cash outperforms.”
Yields on inflation-linked bonds ($TIP) are now positive, and as a result, investors can protect their assets from inflation without taking any risk at all (provided the bonds are held to maturity). Thus, there is now an alternative to stocks, and for stocks to become attractive again, their valuations need to fall.
Because we believe stocks are overvalued compared to alternatives, we hold the majority of the portfolio in cash and wait for lower valuations, which we believe are fundamentally justified.