Timing the markets

Investment Analysis Clubs Macro Economic Trends and Risks
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I know, I know, we aren’t supposed to try to time the markets. But I’d like to tap into the METAR “hive mind” to solicit opinions from across the bull-bear spectrum.

I’m interested in Treasury and TIPS yields and inflation projections. The chart shows that the stock market is in a historic bubble and so I have relatively little of my portfolio invested in stocks at this time. (Of course, others disagree, but that’s what makes markets.)

The proportion of my portfolio in stocks is my estimation of the risk that I could be wrong. (I also don’t need to take risks since my assets and income cover my needs.) An exception to my aversion for stocks would be dividend-yielding stocks whose businesses are not sensitive to the business cycle and whose prices are stable in a market-wide drawdown. A historic drawdown that could last longer than I expect to live. (10 - 15 years) However, I would buy back into the stock market if it fell, say, 35% or more. I expect that to be about 9 months to a year and a half from now, based on the Fed’s program of raising interest rates and the time it ususally takes for the stock market to hit bottom after a crash begins.

https://www.multpl.com/shiller-pe

I have a lot of cash in bank accounts from CDs that have matured recently.

While Treasury yields are rising, bank CD yields are not rising because the banks have more than enough money from deposits. (People saved about half of the 2020-2021 federal fiscal stimulus “Economic Impact Payments.”)

https://www.wsj.com/articles/flattening-yield-curve-stirs-re…

**Flattening Yield Curve Stirs Recession Debate**
**Yields have climbed more quickly on short-term Treasurys than on longer-term bonds, reflecting expectations for a rapid series of interest-rate rises**
**by Sam Goldfarb, The Wall Street Journal, March 22, 2022**

**Yields on shorter-term and longer-term U.S. government bonds have been converging rapidly, stirring fears—along with skepticism—that the bond market is close to signaling a looming recession....**

**Today’s yield curve isn’t exactly downward sloping, but it has been heading in that direction. The gap between two- and 10-year yields has shrunk to around 0.2 percentage point from 0.9 percentage point in early January. Yields on three-, five-, and 10-year notes are all now just under 2.4%....** [end quote]

https://fred.stlouisfed.org/series/T10Y2Y

The yield curve has already climbed due to the Fed’s announcements that it will raise interest rates. Rates of all debts are in a climbing trend.

https://stockcharts.com/freecharts/yieldcurve.php

https://stockcharts.com/freecharts/candleglance.html?$IRX,$U…

After the 1990 recession, the Fed cut the fed funds rate, then raised it until it reached a stable level that was maintained until the 1999 stock market bubble. Then they raised the rate, popped the bubble and changed policy. Since 2000, the Fed has a practice of keeping the fed funds rate far too low, far too long after recessions, then raising the fed funds rate rapidly and crashing the market. This has addicted the markets to free money while making them more fragile.

https://fred.stlouisfed.org/series/FEDFUNDS

From 1990 - 2020, inflation was kept around 2%. That is no longer the case.

Inflation and " Sticky Price Consumer Price Index less Food and Energy" are climbing. If they continue to rise, TIPS might be a good alternative.
https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=p…
https://fred.stlouisfed.org/series/CORESTICKM159SFRBATL
https://fred.stlouisfed.org/series/DFII10

Junk bonds aren’t yielding much more than AAA so I prefer to stick to quality.
https://fred.stlouisfed.org/series/BAMLH0A3HYC

From Fidelity research:


	               3mo	6mo	9mo	1yr	2yr	3yr	5yr	10yr
CDs (New Issues) 	0.50%  	0.85%  	1.00%  	1.35%  	2.15%  	2.15%  	2.40%  	2.40%  
BONDS								
U.S. Treasury	        0.65%  	1.05%  	1.41%  	1.75%  	2.33%  	2.52%  	2.56%  	2.48%  
U.S. Treasury Zeros	--	--	--	1.55%  	2.25%  	2.42%  	2.56%  	2.60%  
Agency/GSE	0.46%  	1.00%  	1.44%  	1.76%  	2.34%  	2.62%  	2.89%  	3.28%  
Corporate (Aaa/AAA)	--	1.09%  	1.57%  	1.67%  	2.19%  	2.63%  	2.79%  	3.17%

This compares with Discover Bank CDs.


12-month term	0.70%APY 
18-month term	0.70%APY 
24-month term	0.80%APY 
30-month term	0.80%APY

I have been, and will continue to, buy I-Bonds for myself and DH but those are limited to only $10,000 each per year. (Currently yielding 7.3%.)

Question:
How to best ladder bonds to maximize yield in the short term while being poised to buy bonds when the Fed’s rate raising cycle reaches its maximum and the stock market crashes? How would the timing look?

Wendy

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How to best ladder bonds to maximize yield in the short term while being poised to buy bonds when the Fed’s rate raising cycle reaches its maximum and the stock market crashes? How would the timing look?

Not sure why you would want to buy any fixed income near the top of a 40-year bull market in bonds. Not to mention that interest rates are rising. I would be very much surprised if anything along those lines had any possibility of a positive real return.

Cash or stock or private businesses.

If you have enough to live on then you can keep your powder dry as cash. The return on cash isn’t the interest. The return on cash is what you get from having it ready (not a close substitute) when a good opportunity arises. Such opportunities are like streetcars.
(a) there’s always another one coming along.
(b) …even though there are fewer of them than there used to be.
So, you can make a case for a lot of cash or a little cash, depending on how much you’d like to pounce on a good opportunity.

But I don’t think you can make any case for a fixed income allocation at these rates.

“Return-free risk”.

DB2

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I too would worry about buying bonds as rates go up. However, I am only just beginning to learn about bond investing, so there’s that caveat. Have you considered large cap dividend paying stocks instead? VYM yields 2.7% and is nearly flat for the year.

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< VYM yields 2.7%>
Thanks, I already own some of this.
Wendy

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Have you considered large cap dividend paying stocks instead?

Here’s one of many lists?

10 Dividend Stocks with Over 20 Years of Dividend Increases

https://finance.yahoo.com/news/10-dividend-stocks-over-20-17…

Desert (CVX, XOM, T, BNS, BKH, ED, ATGFF, NI, NWN, TRP, ENB, WRE, WGL, XEL, DUK, SO & KO) Dave

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I have stocks and cash. I see no reason to seek yield from bonds in this market. If rates go up and stocks crash and yields rise, I will start deploying my excess cash.

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Beware. I cannot recall the last time I agreed with drbob.

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Since 2000, the Fed has a practice of keeping the Fed Funds rate far too low, far too long after recessions, then raising the Fed Funds rate rapidly and crashing the market. This has addicted the markets to free money while making them more fragile.

Yes they haven’t played their conflicting objectives well, nor their less than 100% accurate foresight.

Right now the interest rate market is pricing in 3% Fed Funds mid next year then declining; the Fed seems to want to front-load the hikes, so maybe it will happen a bit earlier. The bull and bear views on this are:

  1. Larry Summers says that with 7% inflation, a 3% fed Funds rate is still a minus 4% real rate, still adding fuel to the fire, rates will have to go much higher. We had the biggest fiscal stimulus since WWII and even if it’s slowing, that spending power is still recirculating around the economy. (And because of excess demand from fiscal stimulus, there is no need to keep the stockmarket up to add incremental wealth effect demand) He’s been right to date, but …

  2. The stockmarket is addicted to zero funding costs, cash sloshing about, No Alternatives etc so even a small increase in the nominal rate will be a negative. Fiscal stimulus is last year’s story. Supply chains will normalise. Once the stockmarket drops back to more normal valuations, the Fed will take fright. To quote a chap on Real Money a couple of weeks ago “buy bonds, there’s no way rates are going up to 2%” … oops, hard selloff since right then … but he may be correct in the end once sharper (50 bp) hikes actually hit investors in the face.

Well neither scenario is good for stocks … though animal spirits have a habit of lasting too long into Fed tightening cycles … as in late 2007 when it was clear the Fed was being deliberately restrictive (not just planning to be like now). Right now though we are seeing the move from growth to value - ARKK under the weather for example and BRK hitting new all time highs.

On bonds.

With 7% inflation, a bond ladder even capturing the 3% rate for a short while, is losing real value. So I agree totally that the reason to hold cash is its optionality (as Mungofitch describes it) so you can buy stuff when you see bargains - in stocks or anything else. You don’t want to lock much in to specific maturity dates unless you see interest rates declining (deriving a capital gain) and the investments are marketable.

But it might be a bit early for that, the Fed is still today too accommodative and restraint hasn’t even started, hence the varied forecasts for how high interest rates will go - economic data is likely to remain perky until the Fed’s restraint kicks in - with its lag.

Any thoughts on gold? Selloff along with stocks in the end … or maintain its value in real terms … even rally as a FOMO / TINA?

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Beware. I cannot recall the last time I agreed with drbob.

Yeah, it seems almost everybody is running to this side of the ship. What typically happens when everybody runs to one side of a ship?

What if the economy starts to slow a bit, supply chain wows ease up and inflation starts slowing down? What if the Fed only manages to get 3 or 4 rate hikes in this year, even if the next one is fifty basis points? I’ve been buying some corporate bonds with 2028 maturities to fill out my bond ladder. Not a lot, but some.

Jim

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Beware. I cannot recall the last time I agreed with drbob.
—
Yeah, it seems almost everybody is running to this side of the ship. What typically happens when everybody runs to one side of a ship? What if the economy starts to slow a bit, supply chain wows ease up and inflation starts slowing down? What if the Fed only manages to get 3 or 4 rate hikes in this year, even if the next one is fifty basis points? I’ve been buying some corporate bonds with 2028 maturities to fill out my bond ladder. Not a lot, but some.

True, it is always a good idea to ask ‘what if I am wrong?’ and ‘what would cause me to change my mind?’

So, what are the scenarios where bonds do well but equities don’t?

DB2

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Yes they haven’t played their conflicting objectives well, nor their less than 100% accurate foresight.

I am very thankful for this. It should turn out to be profitable.

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Here’s one of many lists?
10 Dividend Stocks with Over 20 Years of Dividend Increases

It does no good to get a 6% dividend if the stock goes down 6%, we all know that.

And lord knows what I don’t know about bonds would fill a bathtub or twelve, but I don’t think buying bonds in a rising interest rate environment (which is happening, right?) is a very good idea. Even if you plan to hold the bond to maturity, there’s no guarantee that the rates available now will match, much less outpace inflation, at least for a couple years. (And soft landing or no, it’s going to take a couple years to even things out given what’s baked in: rents, supply chains, Ukraine wheat, covid, bubble.)

There are sectors of the market which hold up well no matter what. They’re not get-rich-quick sectors, but then they’re not get-poor-fast either. Consumer staples, medical (both pharma and reits), dollar store retail, and so on.

My guess: bonds are going to be underwater for a long time, both nominally and losing to rising rates. But then, I refer you back to the bathtub analogy, so I might just punt for a little while on the good ship wait-and-see.

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So, what are the scenarios where bonds do well but equities don’t?

The economy slows (due to high engergy costs, Fed rate increases, etc…), corporate profits decelerate, inflation cools and the jobs market tightens up. and the Fed has to stop raising and maybe even retreat a bit.

So now those sitting on the sidelines waiting for rates to go higher are left with good old TINA again.

I’m not saying this is going to happen, but you never know. I’m hedging my bet a little. If I can get the return I need via a high quality corporate bond with a 4-8 year maturity, I’ll take a bit of that now.

Jim

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Any thoughts on gold? Selloff along with stocks in the end … or maintain its value in real terms … even rally as a FOMO / TINA?

Maybe all of the above?

Lagarde’s stance on rate hikes appears to be “sound slightly hawkish while cling on to any excuse not to hike”, as to not bust the Club Med. It used to be the “mandate of acting against climate change”, now Ukraine just gave her and the board another excuse. Not for nothing did TPTB appoint a politician rather than a central banker to the post. The ECB says they will taper though:
ECB won’t raise rates until some time after net bond buying ends -Lagarde
https://www.reuters.com/business/ecb-wont-raise-rates-until-… (needless to say, there is no talk of actually SELLING all that paper the ECB has acquired)

Whether Powell has the backbone to keep hiking once faced with a severe selloff is yet to be seen.

So, shouldn’t likely negative real rates provide a strong tailwaing for precious metals?
Or crypto, the “new gold” for the youngsters

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I know, I know, we aren’t supposed to try to time the markets.

That’s why I’m not changing long term positions but I’m starting to sell covered calls again – they don’t work in down markets but Feb 28 is looking like a bottom.

The Captain

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<So, what are the scenarios where bonds do well but equities don’t?>

In a free financial market, bonds do well during recessions. During a recession, demand for borrowing (especially corporate borrowing) slackens so interest rates fall. Since bond prices move inversely to interest rates, bonds do well but equities don’t during recessions.

The late, lamented Louis Rukeyser used to talk about “bond ghouls” because the bond holder wanted a recession since the value of their bonds would rise.

In my OP, I showed a chart showing how (since 2000) the Federal Reserve has raised the fed funds rate from too-low levels until they cause a recession. In those earlier cycles, they did not have a huge book of long-term bonds as they do now, which they are planning to stop buying (and allow to run off). That will raise long-term interest rates along with short-term rates.

My thought process is this:

  1. Due to unrelenting inflation, the Fed will raise the fed funds rate a few times this year and also stop Quantitative Easing.

  2. The economy is already slowing.
    https://www.atlantafed.org/cqer/research/gdpnow

  3. Raising interest rates will probably push the economy into recession (hard landing) by the end of the year. The stock market is in a bubble that will burst but that may take a few weeks or months to reach bottom. (See 2000-2002 and 2007-2009 on interactive chart.)

https://www.youtube.com/watch?v=8iBv5DK-8o4

tinyurl.com/2u78acd6

  1. If I ladder my cash into short-term Treasuries (2 years and under) they will pick up a little extra interest and mature as the interest rates are rising and the stock market is cratering.

  2. This is a deeply bearish bet. I also hold some stocks outright in case I’m wrong. However, I’m very risk-averse so not too many.

I am so pleased that you, DrBob and iampops agree about your bullish strategy even though you don’t agree on anything else. This shows that the METAR board is a place where people can politely disagree on many things, avoiding information cascades.

Today’s information cascade is that everyone, except me, is in a cascade on the bullish side. I’m the only contrarian left standing. (At least today.) Always remembering that the market can stay irrational longer than many of us can stay solvent.

Only time will tell what will actually happen. :slight_smile:

Wendy

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I have a very high cash allocation in fdic insured accounts. Just not bonds which I think will get cheaper and yield more as rates rise, and not treasury’s which yield little more than cash, are subject to federal income tax, and have limited ’optionality’. I am far from bullish. I am just more bearish on bonds than stocks.

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Wendy, you are not the only contrarian left standing. I have been so pleased with my “out of that crazy TINA securities market” choices (undervalued real estate and resources) that my head is getting fat. But then, I shoulda coulda woulda been in Tesla and Apple but oh well…

I think your analysis as to recession blues coming is quite reasonable.

david fb

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I agree with the sentiment here. Bonds are currently a losing proposition over the next few months (or longer if interest rates continue to rise). Stocks are generally frothy. I see benefit in long term holdings of mineral companies and Hohum’s shipping guys.

The major risk to world trade is not the Ukraine war, but that China will be slammed by a COVID variant that they can’t rope in.

At current stock and bond prices there is no compelling need to rush to deploy cash at this point.

Jeff

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Whether Powell has the backbone to keep hiking once faced with a severe selloff is yet to be seen.

Powell said that price stability is the priority, and so the Fed will raise rates until inflation is under control, even if it causes a recession. The open question is how long it will take to get inflation to 2%. A recession looks possible, maybe like 1970.

— links ----
Recessions have had little effect on corporate 5 to 10 year yields. https://fred.stlouisfed.org/graph/?id=HQMCB5YRP,HQMCB10YRP,

“My wild speculation is that some time in the next few months we will see market movements consistent with a large number of forced sellers. I’m not betting on that, but I think I’ll be prepared for it.”
https://discussion.fool.com/is-today-the-end-of-the-bounce-from-…

“I’ll go out on a limb with a prediction: An index short opened now, closed on my next major bottom signal, will be nicely profitable. I’m not sure what index would be best. Russell 2000 maybe? It’s at 2067.”
https://discussion.fool.com/you-implied-the-13d-ema-was-negative…

Opinion: The Fed is charting a course to stagflation and recession, March 15, 2022
“overheating conditions of high inflation and low unemployment are usually followed, in short order, by recession”
https://www.washingtonpost.com/opinions/2022/03/15/fed-powel…

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