When I first began developing these pieces, the purpose behind developing a vision for them was to deliver a concise, no-nonsense article for clients and followers to receive my perspective without the typical fluff that we see time and again in other publications. I named this concept Keeping it “Reel” as I liked the fishing pun, but also the meaning behind it. Today I intend to communicate where my thoughts are at with the environment that we have found ourselves in.

After the economy was shut down due to Covid-19, the government released an atomic bomb of stimulus, massively inflating the money supply. Businesses received PPP (many of which didn’t exactly need it), citizens received stimulus checks, and the economy slowly opened back up with many bumps in the road. The Fed and many economists contended that inflation would be ‘transitory’ – which is layman for “We don’t really know the duration, but we don’t expect it to be very long term”. Fast forward to today, and we are living in times with 7% inflation, a sad situation in Ukraine that has seemingly spiraled out of control, and gas prices at a historic all time high further catalyzed by the situation in Europe.

In 2021, certain parts of the markets were bid up to stratospheric levels (SPACs, crypto, high growth/valuation tech), further catalyzed by inexperienced retail ‘investors’ with an endless amount of FOMO (Fear of Missing Out). This was classic late cycle investor euphoria. Behavior like this almost always ends up blowing up and blow up is what they did. Many of those names that you couldn’t go wrong throwing money at ended up down more than 70% off their highs. Around November, the equity markets overall began to show signs of weakness (specifically tech) as the market began to price in higher rates. Higher rates on their own are not always a bad thing, as it typically signals a healthy and growing economy. However, soaring inflation and a Fed that is way behind is another story.

With housing prices and rents sustained at historic rates, prices at the pump at all time highs, groceries, and other consumer goods and services seemingly through the roof, consumers continue to spend money like this year may in fact be their last. All of this is textbook late cycle behavior. I’ve been saying for months how we need a slowdown in the worst of ways to put a cap on this behavior, because I feel that the longer this continues the worse the eventual and unavoidable fallout will be. Inflation and asset price growth rates like this are just not sustainable, and I think the stock market has (as it almost always does) gotten ahead of this. Both the equity and bond markets are historically some of the best leading indicators when it comes to predicting economic conditions. It’s not unusual that markets are rallying during the depths of a recession as we come out of it.

With the yield curve continuing to flatten, specific bubbles popping in equities, consumer crippling fuel prices, unsustainable housing price increases, among several other factors including a Federal Reserve that is way behind on normalizing monetary policy, it really kicks up the probability that the Fed will hike us into an economic slowdown or a recession as they are so famous for doing in the past. As I look at how the market is behaving and what it is telling me, it would not surprise me whatsoever for us to see this slowdown within the next year.

With that said, I am encouraging clients to look at their own financial picture as it relates to their spending habits, savings, and borrowing. If I owned a cyclically affected business, I would be taking a very hard look at how aggressive I am being given all I’ve outlined above. Everyone has benefited for the most part by a seemingly unstoppable economy, and we should not forget about what happened to those who overextended in 2008.

As it goes for portfolios, I have been a net seller of client assets all year, and the mathematics that our quant strategies employ suggests that having some cash may not be a bad idea in this current market. In fact, one of our quants has been in all cash and short-term Treasuries since November. Bravo to them on getting that one right. Regardless of what the indexes say statistically, we are in a bear market as far as I’m concerned. When I was at a big wire house firm before I went on my own, I always remembered their motto that “cash was crap” – especially in inflationary times. Personally, I’d rather avoid the risk of losing another 10-20+% in exchange for the loss of 7% of buying power as it relates to inflation when it comes to a piece of a portfolio.

I will continue to follow the fundamentals for more economic clarity going forward and will continue to rely on our quant strategies to help us make appropriate decisions based on the math and market trends. When the market trend changes back to a risk-on (or buy) signal, we will be deploying the cash we’ve had on the sidelines for clients. However, I do think we should be prepared for a bit of a ride for at least this year.

For clients utilizing the quant-powered 401(k) Optimizer, please be sure you are keeping up with your emails and making appropriate changes to your accounts per the instructions you receive. Now is the time to really pay attention to updates.

Thank you for taking the time to read and I hope this commentary has been helpful. It is not intended to scare anyone, but simply to help set appropriate expectations based on what I am seeing.

Mike Lambrechts