A Sell-Off with Nowhere Left to Hide: Market Commentary from Cabana’s CEO – January 19, 2022

5 months ago

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The long weekend did not soothe bond or stock markets as evidenced by the continued sell-off yesterday. The correction in equities continues coincident with the ongoing drop in bond prices and jump in yields. I like to take things day by day and do not enjoy or value predictions as a rule, but it appears that the technical damage done to markets during November and early December may have put the writing on the wall.  

Below I have provided a short and approximate summary of the pullback (as of this writing) across all major asset classes since late November. I think this is instructive as it relates to what is going on (and maybe why).  

  • S&P 500 (SPY): -4.4%.  
  • Small Cap (IWM): -13% 
  • Nasdaq 100 (QQQ): -9% 
  • Real Estate (IYR): -7% 
  • Gold (GLD): -5% since its high; -2.5% since November 
  • Corporate Grade Bonds (LQD): -5% 
  • 20-Year Treasury Bond (TLT): -8% 
  • U.S. Dollar: -1% 
  • Bitcoin v. U.S. Dollar: -38% 

As you can see, this recent sell-off has left no place to hide. All of the above assets are currently being sold. So, where does all that money go? Based on the fact that no assets are rising in price, it appears all that cash must be sitting in money market accounts waiting for the dust to settle. This is a very important thing to think about. Eventually that money has to be deployed somewhere. It sure can’t keep up with inflation sitting in a money market account earning next to nothing. Of course, for some period of time it is reasonable to park that cash on the side and avoid further downside in everything else. Eventually, however, the basic fundamentals of life, economics and investing kick in.  

The fact of the matter is that some assets will suddenly become relatively attractive when compared to others. As the famous Jim Cramer says, “there is always a bull market somewhere”. I think this is what he is talking about. Right now, investors perceive all primary asset classes to be either overpriced or risky, given multi-year inflation and the impending tightening of monetary policy by the Federal Reserve. By the way, I believe being overpriced is the same as being risky. At some point, however, prices will have dropped, and investors will have factored in the negative effects of inflation and foreseeable interest rate increases. At exactly that time, one or more of the broad asset classes listed above will become attractive. Money will be deployed in search of a new opportunity to obtain a favorable return relative to risk. And the world keeps turning.  

So, when will this occur? How long will this correction last? No one knows. I can tell you what I think, but not much more – and neither can anyone else. I think those assets that began dropping first and have fallen the furthest will be the first to turn. I also think the assets that have not dropped as far, may have further room to fall. As an example, small-caps and other growth assets (NASDAQ) typically lead other stocks on the way up and on the way down. This current correction is no different. Next, I would look for bond prices to stabilize and then improve. This all started with interest rates, and in my opinion will end with interest rates.  

What do we do in the meantime? Engage in a process of risk management. Try and protect the drawdown limits you have in place and remember what I believe to be the most important of all rules in investing. Number one is to avoid large losses (this is simple arithmetic), and number two is to stay invested. As stated above, no one knows for sure when things are going to turn around. It sounds simple but it is not so easy to do. I believe you must have a process that allows you the opportunity to accomplish these basic tenants and can be repeated and relied upon between your own two ears.  

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June 22, 2022

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