So Bad, It’s Good?
We highlighted Bank of America’s 0.0 bull/bear ratio several weeks ago — noting that the absolute nadir of bearish sentiment is not a sell indicator.The global fund manager survey (above) from the same analytical team, showing managers to be even more pessimistic than they were the the first stage of the pandemic, is similar. Many analysts are jumping on this wagon to say that “it’s so bad, it’s good.”
A similar mindset was perhaps apparent in yesterday’s auction of 20-year U.S. Treasury bonds, which was extremely strong. Global investors exhibiting high demand for long-dated U.S. Treasuries is a pretty clear statement of a growing conviction that a tough recession lies ahead and that the Fed will be forced to cave on rate increases and QT sooner rather than later.
We are skeptical, and believe the Fed will have more staying power in its tightening course than the hive mind is beginning to believe. Our base case is that we are already in a recession; that it is likely to be a relatively shallow one; that it is likely to be followed by a rebound, and then by another recession when inflation rears its head again — modeling the double-dip recession of the early 1980s. We do not have a crystal ball, but this seems to us a likely eventuality. In these next few weeks, we will be listening to many companies give their quarterly earnings assessments and their outlook, which is very helpful in painting a picture of where the economy is headed and where the better opportunities going forward can be found. Of course, we’ll also be listening closely to next week’s very important Fed meeting.
While stocks and bonds have been punished year-to-date, private equity valuations have only just started to be exposed to the mark-to-market light. One thing that we’ve noted consistently for months is that this is not the time to be locking yourself into long-term, illiquid investments if you can avoid it. When an investment is not marked to market on the daily, the way stocks and liquid bonds are, its seeming stability in your portfolio is more a psychological than a financial reality. For our clients, we hold only liquid assets, and in times like these, we believe that flexibility can be of paramount importance — particularly when it comes to the ability to take advantage of opportunities created by irrational and highly volatile price movements.
In our June 30 Zoom call, we discussed why it is good to continue to hold certain investments even when things are not pretty for markets; we highlighted that the markets usually bottom long before things start to look better. So, while having cash balances during declines is important, it is also important to look past the nadir. We have been holding investments in select areas for our clients these past few months that we believe can have a lot of upside potential. We have also used the sharp decline of the second quarter to work on our buy list and do some opportunistic buying at what we believe are attractively low prices.
Thanks for listening; we welcome your calls and questions. If you missed our June 30 Zoom call, you can listen to it here.
