After another wild week, which featured another hot inflation read and more instability in the bond market, it is helpful to reset where we are in the markets and where we might go from here. To do that, we brought Gary Stringer, the Chief Investment Officer at Stringer Asset Management, into the ETF Think Tank to offer up his thoughts on the state of the financial markets.
The discussion starts with Thursday’s market action, which saw a sharp decline in stocks followed up by an even sharper rebound. What exactly happened? Stringer says his firm tends not to pay a lot of attention to short-term moves because they are mostly noise. In this case, he feels like maybe the market was due for a bit of a rebound with sentiment looking quite bearish at the moment. Perhaps there was a feeling of “it can’t get much worse”, but it is difficult to ascribe one specific reason.
Stringer wasn’t entirely surprised by the September inflation reading, but he does see it continuing and those views remain intact. He does note, however, that several inflationary factors, such as money growth and commodities prices, are already starting to roll over. The core inflation rate is a bit of a laggard, but he expects the headline rate to start declining soon, maybe even quickly.
One thing in which Stringer’s view has changed a bit is that he views a recession next year as a probability, not just a possibility. We’re in a technical GDP recession right now, but he is waiting for earnings to be the next big shoe to drop. His company is looking for the point where job creation begins declining, the unemployment rate begins ticking up, consumption decreasing, and retail sales falling. Stringer believes these things will begin appearing next year, which will drag down earnings expectations. A lot of this, he believes, is already priced in, but we could remain in a trading range until some of this is resolved.
One of the big advantages this time around, compared to the financial crisis, is that the big banks are in much better shape. Jerome Powell and the Fed have clearly telegraphed their intentions and that’s given the financial institutions plenty of time to prepare. Unfortunately, the Fed was so far behind in responding to changes in conditions that the stock prices of these companies are likely to struggle. Overall, the banks are in good shape to be able to ride out this storm.
When it comes to the bond market, Stringer is cautious, yet opportunistic. Earlier in the year, he was heavier in floating rate notes and focused on low-rate sensitivity fixed income. Now, he’s eliminated corporate bonds, but has been adding intermediate-term Treasuries and munis. He feels like he is buying high quality fixed income and getting paid for it for the first time in years. His research has noted that when the yield curve inverts, the 10-year Treasury yield traditionally keeps moving lower, so he feels there is some opportunity there. Stringer thinks that 10-year yields are too high right now and Treasuries could be interesting for a while.
Other key takeaways:
- Stringer liked TIPS last year, but feels the upside is now gone and there is a lot more risk involved.
- He’s also avoiding bank loans at the moment. His company had them early on when it was more constructive on the economic environment, but there’s a fair amount of credit and liquidity risk there. If everybody decides to head for the exits, it really adds to risk.
- Fat tail events are always a risk, but with balance sheet health the way it is, it’s probably not as likely today. Stringer uses ETFs with a built-in options hedge as part of his defensive strategy.
- Stringer overlays everything the company does with his “cash indicator”, which is designed to alert him to when things are turning very adverse. It helps delineate between “normal, but scary” and “things are really falling apart”.
- Stringer thinks that the dollar will remain strong for some period of time citing the BoE’s actions with regard to pension plans and the BoJ’s on yield curve control. That means the Fed likely won’t have to do as much easing comparatively speaking.
- Multiple contraction has been severe, but that’s part of the reason he’s still holding onto big tech. If rates come back down, that could unlock a lot of value.
You can watch a replay of this virtual happy hour on our YouTube channel here. While there, subscribe to our channel to stay up to date on our latest content.
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