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Discussion Starter · #1 ·
I know it's impossible to tell until well after the fact, but I'm wondering if we might be in an actual bear market now. Looking at VT for world stocks, it looks to me like a down-trend. I think the more worrying part is that the MSCI EAFE is falling sharply due to the war and worsening business conditions in Europe.

Normally one would say "don't worry, the Federal Reserve will juice the markets and rescue stocks any moment" but they should be raising rates soon.

Or maybe the Fed will now give up, and leave rates alone? It would really be "out of character" for the Fed to actually go ahead with ending QE, while stocks are declining. But if they actually go ahead with rate hikes and ending QE, I cannot see how stocks can possibly go up.


What I'm doing: sticking with my existing asset allocation plan. I'm still 31% stocks today, more or less on target. However I do have a strong Canadian equity bias, and they've been holding up very well so far.
 

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Discussion Starter · #4 ·
I would expect that with all his great posts and obvious intellect that J4B would not think that part of the Fed's job is to prop up the stock market.
What they did in 2008 (starting QE) and again in 2020 (buying corporate bonds, and amping up QE) came across to me like propping up the market. But the QE programs also benefit the economy, so it's hard to distinguish the two.

To me the more telling one was 2018, when the Fed only suggested they would taper QE. The stock market fell very sharply. There wasn't a recession, and yet Powell immediately back tracked. The only explanation I have of that one is that the Fed was concerned about the stock market.

This idea of the Fed rescuing the stock market started back with Greenspan, and is called the "Greenspan Put". Since then, Bernanke, Yellen, and Powell all seem to be following the same general idea, as far as I can tell.

I don't think I'm the only one who thinks that the Fed routinely rescues the stock market.

I thought the economy and the recovery was sound.
Yes Canada remains strong, but consumer sentiment in the US is increasingly looking bad and the war in Europe is worsening business conditions over there. So I think an argument can be made that the combination of high inflation + supply shocks + war fears is starting to point things towards a global recession.

6 months ago, everything looked great and the economy was super strong. But things might be changing very rapidly now, and in the efficient market, stocks might be re-pricing for an imminent recession. Look at the US yield curve, it's also very close to inverting.
 

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Discussion Starter · #12 ·
Stability of bond market is where I'm focused.
And that's deteriorating too. There is virtually no junk debt issuance happening any more -- it's completely ground to a halt. That's not a healthy indication for credit markets.

In Europe, various CDS contracts have started going a bit nuts as there is uncertainty about what constitutes defaults. And many European banks have exposures to markets which are in turmoil.

It wouldn't surprise me in the least if the Federal Reserve abandons hawkishness and instead comes to the rescue. Maybe they'll keep QE going for example.
 

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Discussion Starter · #14 ·
I thought Powell all but confirmed an increase next week. Going back now would definitely come as a surprise.
Sure, no question there's at least one or two increases coming. But what's a 0.50% or 0.75% rate, when inflation is running at close to 10% per year?

I also hope they end QE. This stimulus has been happening since 2008, so that's 14 years now. I'll believe they end QE when I actually see them shrink their balance sheet.
 

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Discussion Starter · #19 ·
In all seriousness though, the US reports CPI tomorrow. It could be as high as 8% or 9% inflation.

Generally the market movements in the days before a big announcement tend to be pretty meaningless. There's both US inflation and an ECB announcement coming imminently. The market is going to react to this stuff, probably by early next week.

And then there's the big one, March 16 announcement by the Federal Reserve. That's only a week away.

So the market could be pretty wild this month. As they say, "beware the ides of March".
 

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Discussion Starter · #33 ·
In order to tell bear market, how can we tell market "overbought"?
There really is no clear way to know. This is more of an art than a science, and it's bit of a game.

Personally I still think stocks will be weak this year. I don't think the current rally will continue much longer. But who knows!

My bond mutual fund lose 50%
Are you sure? From what I can see, bond funds are down maybe 15% to 30% in the most extreme cases of "long term" bond funds.
 

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Discussion Starter · #35 ·
I think the down-market has resumed. I think we now get the next leg down.

Concentrated in US / tech / momentum stocks as before.

I also think ZWU (BMO's US low volatility index) has done a good job picking stocks that aren't vulnerable to this bear market. Year to date, ZWU is +7.5% compared to ZSP -7% which is incredibly good.
 

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Discussion Starter · #37 ·
They are selling volatility and the up-side return potential of their stocks (covered call strategy). So they are actually just betting the stocks they own will go down, or increase less than predicted in the option market.
Sorry my mistake, I meant ZLU: the BMO Low Volatility US Equity ETF

Top holdings are: NEM, ED, NOC, CTRA, LMT, JNJ, AEP, AZO, PGR, BMY

In the charts you'll see that these have been completely immune to the selloff in the US. Here's a chart of ZLU (the low volatility strategy) versus ZSP for the S&P 500.

Rectangle Azure Slope Plot Purple
 

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Discussion Starter · #42 ·
That's a flamboyant statement but is just stating the obvious and sometimes it's hard to take those people seriously. It's not their true objective of course, which is fighting inflation, but is an outcome none the less. The whole point of raising rates and QT is to reduce demand in the economy. If it is successful it will at minimum reduce pricing pressure on goods and services sold in the economy.
Yes and I actually agree with Dudley. It makes sense: tightening liquidity means stocks will fall.

If stocks haven't fallen yet, it's an indicator that liquidity hasn't been tightened enough. He recognizes (as many other economists do) that excessive liquidity has induced all kinds of wacky things.

Here's a good piece from Josh Brown. He's reminding us: yes, the Fed is your friend. They want to tighten liquidity because it's healthy for all of us. Jump to 2:40

"The Fed is your friend. The nonsense [in stocks and risk assets] has to stop."

 

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Discussion Starter · #43 ·
I still think this could be an awful year in stocks.

In a few hours, the US will report their latest inflation numbers. Economists think they will be the worst numbers in 41 years. And when inflation numbers are that high, it forces the Federal Reserve to raise rates and start QT. So basically, the high inflation readings force the Fed to drain liquidity out of global markets.

And draining liquidity makes the price of everything drop. This is a good effect, but it probably takes stocks with it.

I think American and European stocks are going to drop a lot more. I'm not selling any of my US stocks though, because I could be wrong.
 

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Discussion Starter · #48 ·
What a bloodbath! This is for sure a bear market.

I'm sticking with all my existing positions of course. No point in trying to time this kind of thing.

I will also remind people that bonds are generally less volatile than stocks. So if stocks continue to tank, there will likely be some safety in bonds. Certainly is safety in GICs... in case anyone wondered why there's any point to holding GICs.
 

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Discussion Starter · #50 ·
This S&P 500 chart is not encouraging. It just made a "lower low" and might break below 4000.
If it falls below that psychological support level, then many timid investors will sell. Then it could go down towards 3000.
Could be a 38% drop in the cards.

Rectangle Slope Plot Font Line
 

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Discussion Starter · #66 ·
Why be unnecessarily active when buy and hold works long term?

Added: I get that there are times when it is wise to part with something when it no longer measures up to expectations and buy something else that looks better. I do that every now and then, but that is a matter of the cash going from holding A to holding B. It is not a net new purchase.
I still don't understand Tom's method. I don't mean to offend anyone, I'm just trying to figure out the mechanics of what he's doing.

Does this mean Tom is holding a large amount of uninvested cash, waiting for investment opportunities? Or is he trading XXX for YYY ?

My foot remains heavily on the accelerator of the investment car. That is how I mitigate risk.

The WBI has been 210 recently so I have been letting cash build for quite some time.
Apologies, I'm just confused by this. Foot "heavily on the accelerator" makes it sound like you're fully invested at all times. But then you say you've been letting cash build up.

So as I understand it, you accumulate cash and then wait to jump on opportunities? Is that the method?
 

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Discussion Starter · #69 ·
There's some significant damage showing in fund returns, and even balanced funds.

Year to Date returns to May 13 are
-14% Mawer Balanced Fund
-12% PH&N Balanced Fund
-11% VBAL and XBAL

With Mawer showing the worse decline because of their heavier growth stock exposure.

I crunched my end of week numbers and my YTD drawdown is only 6%, not too bad yet but I suspect it's going to get worse.
 
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