“The more things change the more they look the same.” I can’t help but think that this old adage is an appropriate one for the current state of affairs. Specifically, how we look across the general environment and the kinds of things that tend to move markets. Let’s take a look at some examples:

Russia / Ukraine: Will they, or won’t they? Monday said yes but then Wednesday said no. Major indexes reacted predictably on both days. Come Friday we see reports of heavy shelling in Eastern Ukraine’s Denetsk and Luhansk regions. Kyiv has urged restraint from their field commanders. The main reason being that Ukraine (and Washington) believe that the Russian strategy is to goad Ukraine into activity that the Russians will be able to claim is an attack on them and therefore provide a moral justification to ‘remove the threat’ in order ‘to restore peace’. That strategy worked well in 2008 when Russia invaded Georgia. The publicly stated argument to ‘remove threats and restore peace’ could then be extended to include Russia’s demands vis-à-vis NATO. Meanwhile, there is escalation. From today’s New York Times:

KYIV, Ukraine — Tensions between Russia and the West ratcheted up on Friday as Moscow announced plans to test nuclear-capable missiles and held war games on NATO’s doorstep in Belarus, while the United States said more Russian forces continued to take positions menacing Ukraine in a crisis that risks erupting into the biggest conflict in Europe in decades.

As President Biden prepared to speak with NATO allies on Friday, U.S. officials said that as many as 190,000 Russian troops were arrayed in and near Ukraine, a number that includes Russia-backed separatists in eastern Ukraine.

I seriously doubt many policy experts believe that this will end up a major calamity. However, when the top brass starts playing high-stakes poker things can get out of hand in a hurry. So, let’s call this Uncertainty # 1.

Federal Reserve: The Fed has made it clear that a) higher interest rates are on their way and b) the Fed’s ‘Balance Sheet’ will be trimmed. What remains unclear is ‘How much and how soon?’ Let’s call this Uncertainty # 2.

Housing: Whether or not you believe that housing is in a bubble, you have to admit that there is exceptional activity in the sector. Zillow released figures yesterday that included a 22% price spike yet to come in 2022. That sort of thinking encourages those thinking of buying to get in before homes are just unaffordable. (Sounds like 2005, no?)
That’s our Uncertainty # 3.

Supply Chain Issues Remain: Although most retailers report that supply lines are stabilizing, there are a few pockets of disruption. The video streaming company Roku reported good earnings this week but then admitted that the hardware side of its business is troubled with a lack of smart TV chips. As I write this ROKU shares are off 26%.

Uncertainty # 4

Innovation: Stocks related to advances in technology are suffering. This may well be just a symptom of a short-term fear of Large Cap Growth but it’s still pretty ugly at the moment. Cathy Wood is considered one of the major gurus in this sector and she manages a number of funds  each related to the symbol AARK. Some of her key holdings are down over 60% from their 12-month highs.
Uncertainty # 5

Covid-19: Who would have thought that Covid would be a bright spot? Thankfully, it is. Deaths and hospitalizations continue to fall. Covid related stories have essentially vanished in the news.
However, we’re still going to call it Uncertainty # 6

Build Back Better: Biden’s BBB is pretty much dead in the water. All in all, we regard this is a net positive, especially now that inflation is on the front burner. However, it’s not so good that the 20% or so share of the BBB expenditures that actually would have gone to infrastructure investment will not get spent. That part may yet return.
Uncertainty # 7

There you have it. Seven reasons why forecasting is sometimes a fool’s errand. Not wishing to be such a fool, we’re just playing it cool…for now.

Ron’s Market Minute and a half – What are Investors doing Now?

Hello again.  I know I said I’d talk about the bond market this week, (spoiler- the aggregate bond index is down- so far this year more than its worst year – out of the past 20) but perhaps next week.  It’s been a really crazy week with some pretty large swings in the investment world.  Thought I’d take this space to comment: NOT on theory, but on what price swings show us about what the investment world is actually doing with its investment dollars. 

First the S&P Index* because it’s such a good indicator of the general market. We track SPY which is an ETF that very closely replicates the index. After a couple of days of positive action, the SPY has hit overhead resistance and bounced back down. Not a good sign for the bulls.  For now, it remains in neutral configuration, which means it is bouncing around without a clear indication whether the next main moves will be up or down. It appears that there are currently more sellers than buyers. If it can’t break through the overhead resistance the next leg may be down. 

Sectors — the parts that make up the index. The defensive sectors continue to be the target of investor dollars, so investors are adding to their holdings of utilities, consumer staples (toothpaste, tp etc.), and financials. We (and the bulls) would be happier to see some buying in technology and consumer discretionary (bigger appliances, new cars) holdings.  We do not like to see investors being so defensive, it shows their concern for the future of markets.

The strongest area this year (so far) has been energy (old world energy and oil).  The charts show the arena as being overbought (too much buying in a short time) so it would be reasonable to expect it to hesitate for a while, but the overall trend short, intermediate, and long, is up. Disclaimer- our clients are overweight energy holdings.

We’re finally seeing some investors buying gold. We say finally because it is a typical holding in inflationary times. Gold has gone nowhere for the past year and a half, but it’s starting to show some buyers. We’re watching and may be adding some gold or gold miners to our portfolios.

Of interest: Some of the ‘Covid awakening’ stocks are beginning to show some life this week- these include cruise lines, entertainment, and airlines. We’re watching. 

And last, because someone always asks, Bitcoin (we do not currently own Bitcoin) appears to have hit resistance after a few days of life and is currently tracking back down. 

You can deduce that we are VERY conservatively positioned at this time. Not pretty, but that’s how it looks at the moment.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

LFS-4342258-021822

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