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 “The secret of getting ahead is getting started.”

Mark Twain


The King of all astrological signs (is a Portfolio Manager) …

As those of you born between October 23rd and November 21st already know, Scorpio is the superior and greatest of all the astrological signs, and there are very good reasons why. Scorpions are intelligent, good-looking, well liked and above all very modest and humble. And that is why, when it comes to astrology, we like to say there are two (2) kinds of people in the world: those who are Scorpios, and those who would like to become Scorpios. But this article is not about Scorpio’s astrological superiority, it is about investing. And this November might just be one for the record books. After 3 sequentially down months, the S&P500 has rebounded sharply, creating one of the best November gains on record. According to month-to-date data from Bloomberg, this November will only ever have been surpassed on 5 previous occasions. For answer about the implications for investors, the MacNicol Investment Team encourages you to look at the market and not the stars.

In our opinion, the main reason for the market’s impressive performance was the latest batch of inflation data. American Consumer Price Index (CPI) data is one of those indicators that has the potential to ricochet across financial markets due to its ability to influence central bank policy. US CPI is widely regarded as the main interpretive inflation proxy that Central Banks use to gauge whether inflation is or is not within a range viewed as acceptable to achieving price stability. The Fed and other central banks each have their “preferred” measure or measurements of inflation, but few things carry the heft of the CPI. And no other source covers CPI more conclusively or more authoritatively than the Bureau of Labor Statistics. As an investor, you should never trust any other source for CPI data, unless directed by a Scorpio.

As per the chart above, from the Bureau of Labor Statistics itself, US CPI has been trending lower and recent prints were below consensus estimates. This ignited equity markets with the resulting frenzy resulting in a condition technical analysts describe as overbought. Andrew Adams, a technician we follow notes the market’s current overbought condition in one of his typically excellent charts below. However, not as well defined in the chart are the risks that can result from rapid upwards movements in stocks. While rising stock prices are of course a good thing, they can frequently make our job tougher than easier. Sharp ascensions in stock prices create increased volatility and increase fear amount investors sitting on the sidelines in as much as they can trigger feelings of “FOMO” or Fear of Missing Out.

One of our greatest strengths here at MAAM is our independence and that is because it really and truly allows us to look through fear and hype. New bull markets germinate gradually and offer plenty of opportunities for high quality investments. We aren’t quite sure this is that just yet, in fact we have taken very specific measures to protect against this not being that. However, we appreciate that this November is likely to resemble Scorpio’s strength, leadership and all-around dominance, metaphorically in any case. What we appreciate even more is focusing on exploiting this longer-term upward trend whilst avoiding much of the attendant volatility. This is frankly difficult this month but made easier by taking a step back in time and looking at the impact of higher interest rates on historical sector performance. The most important conclusion that our team has observed is that 24 months after an increase in long-term rates, stocks have on average shown robust returns. But there exists a wide dispersion of return profiles among the various sectors. Strong performers in this kind of environment have been traditional defensive sectors such as consumer staples and healthcare, but also more cyclical areas like financials, consumer discretionary, and energy. But don’t expect to see shares of the Canadian Banks added to your portfolios just yet. One sector that has struggled in this environment is technology and we expect that to be the case again this cycle. So much so that in many ways, article #2 is in some ways a primer on excessive tech investment as a harbinger of future portfolio horror.


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