Houston We Have a Market Problem: The Rise and Fall of Investor Confidence

From fear of missing out to fear of losing it all. Investor emotions have been taken on a roller coaster ride. David decodes the recent market action and goes right to the heart of what is forcing traders to the sidelines
00:00 Rough Week
01:05 Houston We Have a Problem
02:02 Living below the 200-day moving avg
02:46 Surrounded
03:19 Geopolitical Tensions
04:24 Bond Supply and Demand
05:40 You have choices

Transcript

0:03

It's been a rough week for markets and I wanted to share my thoughts before heading out. Look all in. This was a pivotal week on a lot of levels. One look at a price chart, will tell you the ship is taking on water. And as of the close Friday, we are now in correction territory. In the space of a few weeks, sentiment has shifted from fear of missing out to fear of losing it all. While the truth rarely lives on the extreme. So let's take a step back, take an unemotional view of the market, the data, your investments, and finally come up with a strategy that can safely get us through this storm. Welcome to the Money Runner. I'm David Nelson. Houston, we have a problem. A lot of controversy about who said at first on that fateful voyage, of Apollo 13. As it turned out, it was actually the command module pilot, Jack Swigert, who said, okay, Houston, we've had a problem here. Shortly after Jim Lovell, the mission commander, repeated it, and the rest is history. Those words set in motion a mad scramble back at NASA's mission control center in Houston to identify the cause of the malfunction and figure out how bad it was. And finally, what were they going to do to help bring these three men home safely? Well, the first thing Gene Kranz, the chief flight director, did was throw away the flight plan. It was whole new ballgame. In some ways, that's what we're facing here. While it isn't life and death losing money can feel that way. So where are we? Well, there's no way to say we're in an uptrend anymore. Since the market peak in late July, we've had lower highs and lower lows. And as of Friday, stocks are starting to live below the 200 day moving average a couple of rallies in August and September. But now we're in correction territory, down more than 10% from the recent highs. Look, corrections happen even in bull markets, but the job in front of us right now is to identify the catalyst for all the selling. On last week's podcast, I focused on all the challenges in front of us. Surrounded was the operative term. Here's what I said. On the high ground, we have the Federal Reserve slamming the brakes, hoping to push the inflation genie back in the bottle. Behind us is a dysfunctional Washington flooding the system with money in part cancelling those efforts by the Fed and finally on either flank geopolitical tensions so grave the balance of power is shifting under our feet. I know the enemy seems to have the advantage, but trust me, you have weapons, gear up. It's time to fight back. Geopolitical conflict is everywhere, and we are knee deep in a rapidly escalating war in the Middle East that offers grave consequences for the region and the world. Yes, the Fed is keeping conditions very tight, but I really don't think Jay Powell is the problem anymore. I expect them to remain tighter for longer, but I don't believe they will hike this month. In fact, given conditions around the world, I think the Fed is on pause for the foreseeable future. While all of the above are issues that weigh market sentiment, the elephant in the room is still the long end of the yield curve. The ten year rate. When I wake up in the morning, I used to grab my iPhone to see how some of my favorite stocks were trading in the free market gave me a sense of what the trading day was going to look like. Well, no more. Today I look at ten year rates and oil in that order tells me all I need to know. You tell me which way rates are headed and I'll tell you which way the market is going. Bonds are the same as other asset classes. The laws of supply and demand apply here too. The truth is, the US Treasury is selling a massive amount of bonds and having trouble finding buyers. Don’t get me wrong, there are buyers out there, but at what price? Recent auctions have been disappointing, with new bonds issued often a few basis points above where the market was trading. Former buyers are now net sellers. Israel is selling U.S. bonds to help fund the war. China is selling U.S. bonds. Not surprising given conditions there. The reasons why don't matter. All that matters to equity investors is that each step higher in yields forces institutions out of the equity markets. Why do I say that? Insurance companies and pension plans can now match future liabilities with high grade corporate bonds. They don't need stocks as much as they used to. The good news is that we have choices. We talked about it on last week's podcast, so it bears repeating. Here's what I said. I said, You have weapons, you have many. But let's focus on the most important one. A defensive weapon so large, it's like having Delta Force and Navy SEALs ready to back you up. Your weapon of choice. The U.S. T-bill. I know it's simple, but too many aren't using it. If you're 50 years old or younger, ignore what I'm saying. But if you're approaching or in retirement, listen to that message. Strategy mix a short duration. T-bills and equity is a good risk reward balance. Especially now with short rates well above 5%. That's it for this week. I hope you enjoyed today's podcast and if you didn't, you know the drill and if you didn't tell me why in comments below. Thanks for joining. I'm David Nelson.