- We are still in Sector 4, which indicates slowing growth and slowing inflation.
- Our portfolios are allocated in a defensive position.
- Why? Global liquidity is a concern. Recently, the U.S. Federal Reserve ventured into the repo market in order to provide liquidity. Here is a good video that explains what is happening. The other reason is that the global economy has been slowing for a while. The math is not adding up.
Market Trends–Risk Management
In my opinion, the Rate of Change is the most important factor to look at when reading a chart.
The Rate of Change (ROC) is a forward-looking indicator. Based on price, volume, and volatility, the ROC is one of a handful of indicators we consider when determining our Risk On/Risk Off approach to asset allocation. Risk On can indicate a higher risk level is appropriate, while Risk Off signals a more conservative approach.
S&P 500 Update:
- Earnings season is in play.
- So far, we haven't seen a break above previous highs.
- Volume has declined over the last three weeks.
The global bond market is the largest market and yet is rarely discussed by the talking heads. In the equity market, there is an index called the VIX. The VIX is a real-time market index that represents the market's expectation of 30-day forward-looking volatility. It measures the volatility of the S&P 500. When the VIX spikes, volatility goes up and often throws the S&P 500 into chaos. Keep an eye on the global bond market. This is often where the money goes when people, institutions, and countries get nervous.
Similar to the VIX, the MOVE index measures the volatility of the 10-year U.S. Treasury Bond. Below is a 10-year chart of the MOVE index. Recently, the MOVE index has made an aggressive move and jumped above 60. The U.S. 10-year Treasury yield dropped from 3.13% in November 2018 to a low of 1.48% in August of this year.
Think of bond yield and bond values like a teeter totter. When bond yields go up, bond values go down. Alternatively, when bond yields go down, bond values increase. You can see there has been a massive move to secure, safe investments in the bond market.
My partner, Valerie Leonard, and I have been asking ourselves, "If global equity markets start to fall, where does the 'smart money' go?" We believe we will see moves to the U.S. Treasury market, German 10-year bunds (the German version of the U.S. 10-year Treasury bond), precious metals, and U.S. dollars.
What Does This All Mean?
Simply put, the global economy is slowing. We are starting to see that in the behavior of the markets. Consumers are slowing their spending. It's getting harder and harder to go higher.
Here are some things you should consider doing:
- Review your risk tolerance. You can use our risk tolerance analyzer below to help determine if your investments are in line with your risk tolerance. If your score isn't in line with the level of risk you are comfortable with taking, you should consider adjusting your investments.
- Determine how long you have until you need the money you are investing and make adjustments as needed.
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