Listen To The Music (aka The Fed)

In their final meeting of 2021 last week, Fed Chairman Jerome Powell announced that the asset purchases the Fed has been making for about 18 months now at the clip of $140 billion per month, would not only be “tapered” further, but will now end in March of 2022.

At that point, the Fed will be removing on an annualized basis nearly $1.7 trillion of support to financial markets. We can’t know for certain what impact this will have, but I’m definitely in the camp of “this can’t be a positive.”

In recent years, Fed policy and interventions has become more important than ever before, so when the Fed sends a message that they will be tightening financial conditions, I’d suggest we take a lesson from The Doobie Brothers (1972), and Listen To The Music.

This will definitely be this year’s shortest monthly update, as we’ve just had a lot going on. Read on.

In This Case, The Music Is The Fed

As I write this just before Christmas Eve, the S&P 500 has closed at an all-time high.  What’s not to like?  It has been a solid year for most stock indexes, no doubt, but cracks are beginning to show up within the internal health of the market (participation, new highs diverging), and virtually no other index confirmed this recent high.  It is hard to make a bearish case, as I think the index has tested its 50-day moving average 10 times this year, and every time, stocks mount a rally, often making new highs.  Just 22 days ago, the S&P 500 closed at 4513, and looked to be teetering.  Since then, it has rallied 4.7% in about 3 weeks.

One could argue that the Fed really isn’t going to be tightening credit conditions until they actually start raising rates.  They’re just removing support.  However, $1.7 trillion is a lot of money, and the question becomes, who (or what) replaces that?  The Fed is not likely going to raise interest rates until sometime in the spring at a minimum, and current forecasts suggest only 3 increases next year in the Fed Funds rate to a level of 0.75%.  For all we know, stocks may keep climbing next year, but to me, this is like removing the stilts from a building.  How long will it hold up, especially with inflation figures continuing to roll in at rates of 6% and higher.

Next year has another headwind as well.  Within the Presidential Cycle, it will be a Mid-Term Election Year.  As the table below from Ned Davis Research shows, this portion of the cycle shows the lowest gain historically of any of the four years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This data goes back to 1872, and you can see that the median gain per year in mid-term years is only 2.7%, by far the worst of the four years.  Coupled with a Fed who is messaging that things will not be as supportive as the past 18 months, I think investors should indeed heed the Doobie Brothers hit song, and Listen To The Music.  At best, we’re Living On The Fault Line (1977), and we could be in for Nothin’ But A Heartache.  Yes, those are also songs from the Doobie Brothers, who also have a new album out, Liberte’.  And, no, we’re not on their publicity team!

Current Portfolio Allocations

From a technical standpoint, I can say that stocks look weaker from a breadth perspective more so than at any time in the past 18 months.  But, our models are still 3 of 5 positive for stocks, and likely to switch back to 4 of 5 this weekend, which will have us increase our tactical equity portion from 60% to 80% invested.  Candidly, every “sell” from one of our models this year has been met with higher prices.  This is the price of risk management.  The deterioration that took place in November has once again been met by a decent rally, but as noted above, nothing is confirming the S&P’s new high.  At some point, this will matter.  But, not now, and not likely the last week of the calendar year, which usually has a strong upward bias.  In bonds, our high yield bond risk model generated a SELL on November 29, the first such change in 13 months.  We’re now using two variations of our model, so this shift caused us to move 50% of our high yield bond positions into short term bond funds.  Like stocks, our SELL has been met by rising prices, but not yet enough for our model to reverse.  This portion of our fixed income exposure is now 50% in high yield, and 50% in short duration bond funds.

Bottom line, I can give you all the conjecture you want about headwinds, Fed tightening, cycles and so on, but please remember this is not a forecast that next year will be down, or terrible.  It very well may be.  So far, though, our models are not necessarily that negative.

Welcome, Tracy Curtis

Today marks the ninth day for Tracy at TABR, who is in the midst of assuming the role of Mary Hernandez as our Office Manager and Senior Client Services Specialist.  Mary will be officially retiring in mid-January, and is sharing as much wisdom as possible in the next month with Tracy of her 18 years at TABR.

Tracy comes to us after a recent stint at DST Wealth Management in Indian Wells, where she handled a variety of roles.  She has just finished her B.S. in Management at Pepperdine University, and moved to Orange County from La Quinta, CA with her beloved Chihauhau, Wilson.  All of us at TABR are excited to have Tracy join our team, much as we are saddened to see Mary leave.  More on Mary next month.  Make sure to introduce yourself to Tracy the next time you call, and many of you will also get to meet her during your next office visit.

Family Time With The Medlands

Some of you have been with me for over 35 years.  And a large number certainly over 20.  As a result, from afar and sometimes within conversations, you’ve watched our kids grow up (Bob’s and Steve’s).  In that vein, below are recent photos of Steve’s no longer little ones, Audrey (14) and Conrad (12).

Audrey, above, loves the snow when it is available (!), is a freshman at Dana Hills High School, and also loves the beach and spending time with her friends.

Conrad, below, is halfway through middle school.  He ran cross country this year, and plans to return to that next school year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Team LaRoi

A year ago, our son, Adam (below), was unemployed for the better part of 9 months.  Covid pretty much shut down the entire live music industry, and his focus has been fashion and music in his role as a freelance photographer after graduating from NYU with a major in photo.

 

 

 

 

 

 

 

 

 

 

 

 

 

Earlier this year, though, he was recommended for a job shooting photo, video and a documentary for the Kid LaRoi, a young pop/rap singer from Australia (see LaRoi below).  

 

 

 

 

 

 

 

 

 

 

 

 

 

Adam has been with LaRoi and his team since May, and they are preparing for a world tour which begins in Los Angeles in early February.  In July, LaRoi cut a single with Justin Bieber called Stay, which had been the Number One pop song in America for nearly 7 months until Adele had the audacity to release her new album.  Another hugely popular song of his is Without You, with Miley Cyrus.  LaRoi and his team work extremely hard, and Adam is enjoying his time with them, doing what he loves.

Material Of A Less Serious Nature

Fifty-one years ago, Herman James, a North Carolina mountain man, was drafted by the Army.  On his first day in basic training, the Army issued him a comb.  That afternoon, the Army barber shaved off all his hair.  On his second day, the Army issued him a toothbrush.  That afternoon the Army dentist yanked seven of his teeth.  On the third day, the Army issued him a jockstrap.  The Army has been looking for Herman for 51 years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No doubt, that is the best sentiment we can share with you.  Thanks for the trust and confidence you place in all of us at TABR.  May you celebrate a Happy Hanukkah, Merry Christmas, and a Happy New Year with friends, family and all of your loved ones.

Sincerely,

Bob Kargenian, CMT

President

TABR Capital Management

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