We saw the U.S. equity markets retreat from their all-time highs (except the Nasdaq Composite which still has yet to break it’s 2000 all-time high!). The retreats were modest except in the growth-oriented Russell 2000 which declined 4.04%…in a single week. Volatility was up 12% from many see as complacency lows. The intermediate term trending indicators I use are still showing green arrows for the US and Canadian stock markets but internally the components of those indicators are starting to turn negative. None of my trading strategies have moved to cash yet although some individual stocks have been sold because they breached their stops.
Banco Espirito Santo SA: The Canary In The Coal Mine?
My wife’s grandfather actually worked in a coal mine that used canaries—they were the first warning sign that there was a problem with the oxygen and signaled that action should be taken and people should exit the mine. Last week, Portuguese bank Banco Espirito Santo announced that it had missed a short-term interest payment. Doing so is a clear signal of financial hardship. This roiled the markets which have since stabilized. Is Banco Espirito Santo a canary in the coal mine? Is it possible that there are other companies that have the appearance that all is OK when it’s not?
I remember back in 2007 when the S&P 500 hit its all-time high in October. We didn’t really see everything unravel until August of the following year. There were several canaries prior to that collapse that were simply explained away by the media and the Wall Street System’s preachers. Retail investors were told that everything was OK and many of them ended up losing significant portions of their wealth as a result.
The chorus of those warning of a ‘crash’ is growing but no one seems to know exactly when it will occur. That’s why it is so important to work with a money manager that relies on well-defined processes and systems that are designed to protect wealth as much as grow it. Retail investors are told that the mutual fund managers they use will take action—but few did in 2000, fewer still in 2008. What should cause retail investors to believe that this time is different?
Interestingly, while the stock markets continue to be a question mark, there are places to invest that seem to be doing well. My favorite bond fund continues to power ahead and is now ahead of the S&P 500, the NASDAQ Composite, Dow Jones Industrial Average, and the Russell 2000. And while the US Dollar continues to decline (-3.1% YTD), the British Pound is up 12.7% against the US Dollar YTD. The Canadian TSX is still up over 11% YTD. REITS went up 1% last week and are up 16.3% YTD. So the key to doing well in this environment is understanding the Macro environment where the USD continues to go down, inflation continues, yields are declining and US growth is slowing. Perhaps, the Banco Espirito Santo news doesn’t mean to abandon the markets, just to invest accordingly.
Data Bank:
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
