Below, you will see some quick notes and observations made by our Founder and CIO, James Damschroder. Our hope is that you will find this blog post useful as you conduct your own research.
Conditions are short term bearish.
Expecting to see the market remain off over the next month and forming a base.
Id like to get long going into Q4, but not so eager to up equity exposure. I’ll be looking for signs of capitulation, but this is not possible now as the market has a long information tail and forecast turns need a little time to set up.
There was really not that much to set this thing off. Confirmatory signals are there: high volume, lots of breadth. so how much support will the market really find?
This will likely be the excuse to not raise rates. This dance could go on for years. Bet on low rates continuing. The Fed must take into account, directly or indirectly, the borrowing costs of our nation’s debt.
Risks are stacked to deflation, not inflation.
Oil isn’t really going anywhere as inventories are too high. No other commodity has the bullets to revitalize a commodity super cycle and incite inflation.
Low unemployment rates are unlikely, by themselves, to kick start inflation. We are too rich and the world is too global. The government desperately wants inflation to dilute the debt they have racked up, and we may not be done with the QE. Don’t expect this to come with alacrity, acting too fast makes the fed look desperate and weak. Stimulus is a dish best serves bored. If the market has not firmed in the next few months, or if a highly politically changed Q4 Debt ceiling debate cause a leg down, expect to see QE4.
I am forced to think about the earnings yield of the stock market, currently around 5%, which looks pretty good with 10 year notes @ 2% and corporates @ 3.33%. This is not exactly exciting. The immediate payoff is to the courageous. The intermediate payoff is to the creative. The long term payoff goes to the methodical. In the mid to long term, the conditions are a bit muddling and this should set the table for greater outperformance of active strategies and diversification strategies against conventional indices.
Days like Friday and Monday do not make for great diversification stories. It’s the days in between when the market is more mixed that diversification strategies shine.
A 5% Diversification Alpha(TM) starts to look even better in a low return environment.
CIO / Chief of Financial Engineering
Gravity Capital Partners