This week along with some sharp turns in the market came some interesting comments on Federal Reserve policy and markets came from Ray Dalio, the investment guru and world’s largest hedge fund manager. Dalio, the founder of Bridgewater Associates feels that the Federal Reserve, while they may raise interest rates soon, will be forced to enact another round of Quantitative Easing (QE). QE is the purchase of assets by the Federal Reserve to stimulate the economy. It increases the size of the Fed’s balance sheet and provides support to equity prices. Much like in 1936 the Fed finds themselves painted into a corner and addicted to quantitative easing. In 1936 the Fed raised rates for the first time since the 1929 stock market crash and that tighter monetary policy caused a recession which sent equity prices tumbling. Will the Fed do that again? They are certainly trying to avoid that but must get interest rates above zero. Dalio expects a major easing from the Fed. Could we see rising interest rates courtesy of the Federal Reserve AND QE? We are contingency planners and must provide for all outcomes.
On Monday of last week the S&P 500 was over 4 standard deviations away from its 50 Day Moving Average (DMA). That is level that would denote an extreme move in a short amount of time. The last time that this occurred was in August of 2011 when the United States sovereign debt was downgraded. The following week the S&P 500 rallied over 7%. We felt that Monday was an appropriate time to put cash to work for our more aggressive clients. By the end of the week we had seen a 6.3% rally in the S&P 500 from its lows and we felt that taking some profits in a tax efficient manner was appropriate. History has shown that sharp selloffs like this tend to have reflex rallies that are prone to failure. Having seen sharp declines investors are likely to scale back risk exposure and that produces overhead resistance to stock prices. We would not be shocked and are quite prepared for the downside in prices to resume next week. Now is a very good time to reassess one’s appetite for risk and whether that is commiserate with one’s risk exposure. If you didn’t sleep well last week you need to have less risk in your portfolio. If the market selloff didn’t interfere with your zzzz’s or you felt like buying on the dip then your risk is either okay or could be increased. Take some time and think about how you reacted last week.
It is going to be another fun filled week. These are the times that we thrive on and live for. Dislocations in markets provide opportunity. You can see things as problems or opportunities. If you are prepared then it is an opportunity. We are prepared with an underweight in equities and quite happy with market moves lower and dislocations. We are shopping for groceries and want to see lower prices. As Warren Buffett has often said, “Why would anyone want higher stock prices”? Know that we have room in our basket and are looking for groceries in the discount aisle.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.