What Washington and Wall Street are STILL Missing (But You Don’t Have to!)

To figure out where we’re going, you have to understand where we came from.

Many on Wall Street and in Washington D.C. still don’t grasp that concept. But as an investor, you shouldn’t make that same mistake. And I’m going to do my best today to help you avoid doing so.

Let’s start with the conventional market narrative: Everything was fine until the virus struck. The economy was great. Growth was strong. The credit and stock markets were healthy. There were no bubbles anywhere. It was one big trip down Easy Street.

Federal Reserve Chairman Jay Powell recently reiterated that party line when announcing another round of bailout programs:

We entered this turbulent period on a strong economic footing, and that should help support the recovery... In the meantime, we are using our tools to help build a bridge from the solid economic foundation on which we entered this crisis to a position of regained economic strength on the other side.

And this outlook has been repeated everywhere from the White House to Wall Street.

But that’s just wrong… dead wrong.

There was evidence all over the place that the credit cycle was turning and that many asset markets were starting to leak air long before the virus turmoil struck in February.

Evidence like…

• Interest rates peaking and starting to fall in the fourth quarter of 2018…

• The yield curve flattening by the second-biggest margin in the last four, pre-recession cycles in 2018 then inverting in mid-2019…

• Defensive sectors, like utilities, outperforming offensive, early-cycle sectors, like financials, as early as the first quarter of 2018…

• Safe-haven investments, like gold and mining shares, outperforming the averages later that year…

• And our proprietary Weiss Ratings “Buy”/“Sell” Ratio, which gauges the breadth and underlying health of the market, topping out in early 2018.

Put together, these pieces show us the real big picture: Markets were headed for a correction without a global health crisis. The outbreak was merely an accelerant.

So, Pollyanna policymakers and perma-bulls on Wall Street can say whatever they want. I recommend you ignore them. Investing as if they’re right is a big gamble right now…

Especially when you take into account that advice has been dead wrong for a few YEARS now!

Source: Weiss Ratings, April 14, 2020

Just look at the data in my updated “Boring ETF screener.” Across this chart, you see more defensive exchange-traded funds (ETFs) outperforming flashy, junk-filled ETFs long before the coronavirus outbreak threw a wrench into the economy.

If you had just bought plain-vanilla U.S. Treasuries, as tracked by the iShares 20+ Year Treasury Bond ETF (TLT, Rated “B”), you would’ve crushed the SPDR S&P 500 ETF Trust (SPY, Rated “C”) 43% to 26% in the last THREE years.

If you had just bought the SPDR Gold Shares (GLD, Rated “B”), you would have generated TRIPLE the return of the SPY over the last two years.

If you had bought the Utilities Select Sector SPDR Fund (XLU, Rated “B-”), you would have made about 5% in the last year, even after the recent selloff. That compares to a 15% LOSS for a lousy sector ETF like the Financial Select Sector SPDR Fund (XLF, Rated “C”).

Wall Street missed performance gaps this large before the virus, and they’re missing the same signs now.

Meanwhile, efforts by the Fed, Congress and the Treasury Department are designed to only combat the shorter-term economic effects of the virus to get us past them.

But they’ll only serve to temporarily prop up asset prices and fuel a short-term relief rally. But they’ll ultimately fail to “fix” the markets or the economy for the longer term.

So, what’s the best course of action as an investor? Same as it has been for some time now…

Stay safe. Stay defensive. Own more gold, cash and Treasuries than you used to. Sell junk bonds and bond funds. Don’t chase rallies for more than a short-term trade. They’re likely to be followed by larger plunges in a bear market like this one.

And, finally, stay extremely selective and patient until bubble-era excesses have been more fully wrung out.

Until next time,

Mike Larson