Category Cycles

Market Cycle Analysis: Mean Reversion to Identify Opportunity and Risk Market Cycle Analysis: Mean Reversion to Identify Opportunity and Risk

Market Cycle Analysis: Mean Reversion to Identify Opportunity and Risk

I made a decision to reduce my exposure to large-cap tech a few months ago. The decision wasn't an easy one... these are great stocks. For example, did I sell prematurely? The answer will be more obvious in 6-12 months when the cycle has had sufficient time to play out. For now (as was the case when I sold) - I think the downside risks meaningfully outweighed further upside gains. In this post, I explained how selling is a way of managing your risk. I was ensuring I banked the appreciable gains realized over the past few years. In light of the rotation out large-cap tech we've seen this week - I thought it was opportune to share some thoughts on (a) how I calibrate my portfolio in a changing environment; and (b) when to be aggressive and when to play defense. It all comes back to understand the economic cycle...

Wall Street Cheer a “Strong Jobs” Report…  Should They?

Wall St. cheered a perceived 'strong' monthly June jobs report. The economy added 206K jobs last month - however the unemployment rate moved to 4.1% - its highest level in 2 years. Here's the thing: there was a lot of weakness in the labor market - with most of the jobs coming from government. In addition, April's job gains were revised lower by 111K. And May was revised lower by almost 60K. I think there is material underlying weakness (reflected in slower Real GDP and PCE) and perhaps enough for the Fed to start cutting rates in September or November.

It’s Not If “Long & Variable Lags” Hit… It’s When

Milton Friedman coined the expression "monetary policy operates with long and variable lags". In the 1970s - he felt it was up to around two years before those effects are felt. Today it's believed to be sooner - given open transparency of Fed speak and data tools available. But is it? It's been two years since the Fed's first hike and we're just starting to see labor markets soften and consumer demand weaken. Have the full effects of tighter policy been absorbed? I don't think so.

Is it Still Going to be a “Soft Landing”?

2023 has been one of the more difficult years to navigate. For example, if you chose the wrong stocks, sectors or simply decided to hide in cash - you didn't fare well. However, what's also made it hard has been the various shifts in sentiment the past ~9 months. These shifts have 'whipped' traders around. Today, with the US 10-year yield challenging almost 5.0% - the "R" word is back in the vernacular. Much of this can be explained by understanding where we are in the economic cycle... and today it's "late cycle". The challenge is navigating this phase is the most difficult of any... as it will often last longer than many expect.