Broker Check
KEY TOPIC: Why Am I So Bearish?

KEY TOPIC: Why Am I So Bearish?

May 18, 2023

Lately, I have been receiving the question, "Why am I so bearish?" quite often. It may surprise those who are familiar with my 25-year career in asset management, as I have typically been more bullish than bearish. As evidence, my Twitter handle is @CommonsenseBull, and I have even written a book with the same title.

However, this environment is different. I haven’t seen a setup like this. I’ve spoken to those who have over 40 years of experience, and they have not seen an environment like this. I’m talking about a rate of change perspective. Rate of change, or ROC, refers to how quickly something changes over time. In this case, whether or not macroeconomic data shows how quickly our economy is accelerating or decelerating.

All of our investing decisions at KEY Advisors are based on stringent data and analysis. Our number one job as fiduciaries is protecting our client’s wealth. Since the end of 2021, the data has consistently been telling us that it is not a risk-on environment. Over the last few weeks, many data points have been published that confirm our bearish position, except for the equities market, but I’ll get to that a little later in this post. Here are some of the datapoints that we’re tracking:

  • Q1 GDP growth missed its target by 90 basis points. The actual reported number was just 1.1%. That is a big miss considering the consensus was 2% after revising down twice before the report.

  • Loan Officer Opinion Survey shows that credit is tightening across commercial, industrial, commercial real estate, and household loans. That’s tighter standards and weaker demand across all categories.

  • The cat and mouse game with the debt ceiling. It will likely come down to the 11th hour or the can will be kicked down the road again. Either way, this resulted in market volatility the last time it happened in 2011

  • Credit Default Swaps (CDS) show high volatility. Learn more about CDS here.

  • Bank failures: three major U.S. banks fail in the first five months of this year. Their total assets exceed $548B, which is more than the banking crisis of 2008, where 165 banks failed between 2008 and 2009 with assets totaling $544B. We don’t believe this cycle is over yet.

  • Interest rates have never been hiked this far, this fast, and we’ve unlikely felt the full effect of these increases until the summer months.

My intention is to be transparent, not to spread fear. Despite being told that my stance is not believed by the markets, there are details that must be considered. When excluding mega-cap tech stocks such as AAPL, META, and GOOG, a few large companies, the market dynamics become more evident. In my view, the Russell 2000 (RUT) provides a more accurate representation of what is happening outside of these companies that are propping up the market.

At the end of the day, I am a bull at heart and in life, but I recognize the importance of careful analysis and planning. As a trusted advisor, my top priority is safeguarding my client’s financial well-being. At present, the wisest decision is to wait and let the data guide us. Rest assured, we are still actively managing investments by trading in long-term treasuries, gold, and silver through ETFs. However, we maintain a significant cash reserve due to favorable interest rates. Patience is a virtue that is paying off for us at the moment.