Optimizer Update | May 2022 - The Inside Scoop
Even if you don’t regularly watch a business news channel or read a financial journal every day, you’ve seen the headlines. You’ve also read your statements as they’ve come out since January 1st.
It is easy for the mind to assume the worst because the headlines aren’t giving any data points or frames of reference to help people grasp what is taking place. Plus: negative news and shocking people grabs eyeballs and sells.
Yesterday was one of the worst selloffs we’ve had in a long while. The S&P is down a little over 17% YTD through May 18th. Our Optimizer process is down about half of that of the S&P 500 YTD. The Optimizer B is down a bit more than the Optimizer A. However, both are “long equity” portfolios and have sustained far less of the negative impact compared to the S&P 500.
I’ve said many times that the Optimizer process takes both ITR Economics and Bellwether Wealth to work. The communication between the two firms is constant during times like these. Both firms have people pouring over data, checking, and rechecking information and indicators as they become available. As I said in a video last week, ITR has literally thousands of indicators they watch and use as part of the ITR process.
A senior economist at ITR Economics put this information together last night:
Our preliminary analysis of data through today (May 18th, 2022) – which includes actual data for about two-thirds of the data that goes into the Optimizer and estimates for the remaining one-third that will be released between now and June 1 – is that June will continue to be a Defensive High Inflation month, NOT a Very Defensive (go to cash) signal.
The Optimizer leading indicator itself has formed a tentative low and is rising slightly. The rise is not sharp enough or sustained enough to warrant going to cyclicals, per our algorithm, but it is nonetheless an encouraging green shoot.
We have data going back to 1990 when it relates to the Optimizer process and know median returns 3 months, 6 months and even 12 months after significant drops in the S&P 500 like we are experiencing now. Of the 24 instances this occurred, the returns measured at these various intervals were positive.
I’m asked a lot: “when would we go to cash?” In our trials we have gone to cash when the Optimizer leading indicator was under extreme duress like in 2008. Even though the consumer currently has some headwinds, the average individual has low debt to income levels, there are more job openings than unemployed people, and people have savings and wealth to tap into.
As Eric pointed out in the second bullet above, the Optimizer leading indicator is far from a freefall. Going to cash when the Optimizer shows positive momentum will typically result in worse performance versus staying invested in the market, particularly as we look out a year from now.
If you read ITR’s information or have seen them speak, the Optimizer leading indicator squares with ITR’s long-term macroeconomic outlook that late 2023 into 2024 will be a bounce-back period for the economy. This bodes well for the stock market in advance of that time because the stock market is itself a leading indicator. That means around late 2022 or early 2023 the market should be starting to crawl out of the tough times.
ITR has been reading leading indicators since 1948. They are the oldest privately held, continuously operating economic research and consulting firm in the US with a phenomenal track record.
ITR uses the data from their indicators to tell us what is most probable. Those same leading indicators were what warned us against holding technology stocks when we made our adjustment into a defensive position late last year.
When the data tells us it’s prudent to be aggressive, we will be. Most likely it will be at a time when the headlines are still pointing to the “bad” and the ride in the market is choppy. However, until then, we will be in a conservative equity portfolio, as the current data dictates.
Rest assured we will continue to follow the data. If you’ve seen any of the videos I’ve done, I reference the cycle of market emotions courtesy of Forbes.
It is easy to jump on this cycle and make decisions. However, we will continue to work collectively to follow the data and not use emotions during these volatile times.
If you’d like to visit more about your own situation, please let me know.
Clark S. Bellin CIMA, CPWA