My old man grew up in a share cropping family in East Tennessee, and only finished the eighth grade before setting out on his lifelong entrepreneurial path. Despite less than modest beginnings, he had a vocabulary that would make the SAT designers blush, and he loved the phrase “cause célèbre.”
Last week, investors experienced a cause célèbre when reports came out of Washington accusing Trump of both asking former FBI director James Comey to squadoosh the investigation into Michael Flynn and sharing closely-held intelligence with Russia. In typical fashion, investors got distracted, lost focus on the forces that really impact asset prices, and did exactly the wrong thing at exactly the wrong time.
What’s Up, Big Perma?
Let me start by saying that the moment you become “perma” anything, you’ve lost the investing game. If you are perma-bullish or perma-bearish on a market, you tend to ignore economic and financial market data that's counter to your perspective. This anchoring causes you to acknowledge only the supportive evidence, which leads to you missing critical information that could have provided insight into opportunities and helped you sidestep potential danger.
Being “perma” is made even worse if you politicize investment decisions by being perma-Republican, perma-Democrat, or even perma-anti-Washington.
The only “perma” you should strive to be is perma-data dependent, perma-process driven and perma-risk conscious.
Just the Data, Ma’am
While everyone else was focused on the scuttlebutt in Washington, googling the word “impeachment” and getting images of Monica Lewinsky’s dress, I focused on the latest round of economic and financial market data.
U.S. industrial production in April accelerated to a 2.2% annual growth rate, up from 1.5% in March. This is the fourth consecutive monthly acceleration, and the fastest growth rate for IP in over two years.
This is just the latest in a long string of U.S. data points since the beginning of the year indicating that U.S. growth continues to improve.
If you’re an investor who doesn’t get into economic data and instead prefers charts and markets, the story’s the same: they are confirming accelerating U.S. growth in real time. I track two proprietary indices, one composed of assets that outperform when U.S. growth is accelerating and the other composed of assets that outperform when U.S. economic growth is slowing.
So far this year, my U.S. High Growth Index has gained 6.2%, versus a 5.6% gain for my U.S. Slow Growth Index. The former has experienced a maximum, peak-to-trough, drawdown of 3.6%, while the latter has experienced a drawdown of 4.1%.
That’s 60 basis points of outperformance by high growth assets (and it’s been as high as 400 basis points) with less downside risk.
Those financial market stats have nothing to do with Trump, Comey, Russia or any other cause célèbre trotted out by the media to capture your attention. The economic data and financial markets are telling you clear as day that U.S. growth is accelerating. This should be the primary force dictating how you position your portfolio.
Unfortunately, investors took their eye off the “accelerating U.S. growth” ball last Wednesday, overreacted to the Trump news and gave the rest of us a huge opportunity.
In reaction to the Trump news, investors held a fire sale in U.S. tech stocks and used the proceeds to run headlong into U.S. Treasuries and gold. The Nasdaq 100 lost over 2.5%; Treasuries, as tracked by the iShares Barclays 20+ Year Treasury Bond ETF (TLT), gained 1.5%; and gold, tracked by the SPDR Gold Trust ETF (GLD), gained 1.8%.
When U.S. growth is accelerating and the Fed is normalizing interest rates, the playbook is simple. You buy go-go growth sectors like technology and you avoid gold and long-dated bonds. If you go both ways, then you look for opportunities to initiate short trades in these last two markets.
U.S. growth has been accelerating for eleven months and counting. Over that time, the Nasdaq 100 has gained 29% and experienced a maximum, peak-to-trough, drawdown of just 4.9%.
Over those same eleven months, long-dated Treasuries (TLT) have declined 9% while experiencing a drawdown of 18%. In a similar fashion, gold (GLD) has declined 6%, also experiencing a drawdown of 18%. Essentially, at some point in the last year these two markets have experienced a crash, which is a peak-to-trough decline of 20% or more.
Which would you prefer: a 30% gain with minimal volatility, or an outright decline of 6% while having to stomach a market crash in your account? The rewards and risks of these markets over the last year have nothing to do with Trump and everything to do with the Fundamental Gravity for these markets.
When investors rush into markets with trades that go against that market’s Fundamental Gravity because of news that has no impact beyond a few days, that’s the time to step in and position yourself appropriately.
Trump-related news may impact markets for a couple of hours or a couple of days, but the real catalysts for markets haven’t changed. Those catalysts have always been and will always be the three most critical forces, or gravities, that impact asset prices: fundamental, quantitative and behavioral.
Last Wednesday was a prime opportunity to stay focused on the U.S. Fundamental Gravity and use investors’ overreaction to buy tech stocks while shorting gold and U.S. Treasuries.
If Trump’s first 100 days are any indication, then the next 1,361 days will be a rewarding opportunity for those of us able to stay data dependent, process driven and risk conscious.