Second Quarter 2022 – Nostradamus and Rose Filled Nose ConesSubmitted by Alsworth Capital Management, LLC on July 12th, 2022
You have no doubt heard of the sixteenth century prognosticator known as Nostradamus. His long record of exceptionally vague predictions has taken on a life of its own and he has been credited with predicting centuries worth of historical events. Often, his words can be twisted into a pretzel to make some conspiracy theory seem credible. A modern follower of Nostradamus, John Hogue, famously connected the dots to reveal that he predicted the events of 9/11, some 440 years in advance! According to Hogue, Nostradamus forecast a “great King of Terror” when “1999 is seven months over.” This seems to miss the mark, unless you transpose the “9’s” and “1’s” in 1999 to read 9111, then make them an abbreviated date of 9/11/1. Then, if you take Nostradamus’ use of “sept” (which is “seven” in his native French) and instead convert it to the English abbreviation of “September.” Whallah!
Who was this famous clairvoyant, Nostradamus? Born in France in 1503, his original claim to fame was peddling a cure for the Black Plague made of cypress, iris root, cloves, sweet calamus, aloe and fresh roses picked at dewfall. As a plague doctor, he donned the iconic long black beak shaped mask full of this concoction, to cleanse the sick air before it was breathed in. Unfortunately, this potion didn’t help his family, as his wife and two children all died of the plague. After the virus ran its evolutionary course, the “cure” was deemed to have obviously worked for the survivors and Nostradamus was declared a brilliant apothecary, though he had a product that nobody needed anymore. So, he moved on to predicting major weather patterns, a profitable venture in agrarian society, with prosaic announcements such as “disturbed air and rough winds” are expected and “fire from the sky” is coming. Despite having no training in the field, he then moved on to using astrology to source predictions such as “Throughout Gaul there shall be certain uprisings, which shall be appeased by stern counsel.” As his notoriety grew, he was summoned by the Queen of France, who had a long history of being swindled by magicians and soothsayers. After a few passages in his scores of ominous predictions were selectively recharacterized to explain (after the fact) a few horrible events in the Queen’s life, he was vaulted to the role of trusted advisor. This position gave him standing and his fame has extended for centuries beyond his death.
With the advent of historical context, it is easy to dismiss a quack from 400 years ago as a gifted con artist with no authority. However, human nature is slow to evolve and we still long for the same knowledge of the future that Nostradamus promised. During times of distress, oracles come out of the woodwork to hawk simple answers to complex problems. Today we are inundated with forecasts about what the future holds by experts on social media, our favored news channel, and at backyard barbecues. It is tempting to believe that these guesses are facts. The reality is that nobody knows with certainty if the stock market will continue to decline or when the market will recover. During difficult market environments, it is a natural instinct for investors to want to pull out their money and put it in cash. Then all you need to do is wait for the market to bottom and put the money back to work when price movements are more comfortable to watch. These instincts are affirmed by confident sounding claims made by modern day fortune tellers that the market is definitely heading lower. This forecast would have been more useful before the 20% dip! These prognostications never seem to tell us the date we should tag in our calendars for when the market will recover. They never tell us what trigger event will cause the stars to align in a way to predict the end of the decline. Rather than believe in fortune tellers, we should accept that nobody can predict the future and that any proclamations about the future are just guesses. We believe that we should probability weight those guesses based on a credibility scale, then take a heaping helping of humility and spread out our bets to reduce our exposure when our best guess turns out to be wrong.
The first half of this year has been difficult for virtually all investment asset classes. Stocks are down in valuation by about 20% and bonds are down about 10% year to date. Gold has been basically flat with a 1.3% decline year to date. This is by far the worst first-half performance for a traditional “60/40” portfolio (60% S&P500 / 40% Aggregate Bond) in history, with a decline of about 16%. It is a rare event to have both stocks and bonds down double digits.
Investment Outlook and Portfolio Positioning
We spend a great deal of time modeling possible scenarios in an unknowable future. We also spend a lot of resources on consultants that don’t claim to know the future, but that use lots of data to make probability weighted best guesses. We develop portfolios that we believe can meet client objectives during all kinds of economic scenarios, regardless of what we expect, then we tilt them to reflect our best guess at what stage in the cycle we are in, at any given moment. Our tilts are limited by our level of confidence in knowing the most probable outcome. At present, we believe we are most likely in the early stages of elevated inflation and slowing growth. This economic scenario is one of the least common and most difficult to manage (stagflation). As a result, we have been holding about 10% less than our strategic model weight in stocks, due to continued concerns about valuations. We have tilted our stock holdings toward high quality companies and away from leveraged growth companies. We have no dedicated US Large Cap Growth allocation at present, and we came into the year with only a few percent allocated. We have skewed our portfolio toward cheaper international companies. We have shifted our bonds toward non-traditional holdings like floating rate bonds and we have entrusted highly active professional managers for almost all of our bond holdings. We are holding Gold as an asset class that has historically held up during stagflation periods, and we hold it as a hedge against the potential of a declining US dollar in the future. We recently added a position with a firm that actively manages exposure to asset classes such as currencies, commodities and inflation protected bonds, in addition to traditional stock and bond investments. Our best guess is that we are likely to see a slowdown in growth through this year and next, which behaves more like typical recessions (vs. Great Recession or Dot.com Bubble Bust). Valuations in the US stock market have improved with the big sell off year to date, but they don’t look cheap by historical standards yet. If stocks sell off more, we will view that as an opportunity to start adding to the position. Unlike the pandemic two-month dip and recovery, we are expecting that this one will take longer to run the full cycle. Historically, these cycles average about two years. As always, we continue to maintain a broadly diversified portfolio built to withstand multiple economic scenarios. Our best guess at the future results in modest tilts away from our strategic allocation and never all or nothing allocations like 100% cash or 100% stocks. We aim to be good stewards and continue to invest for productive use of capital, as opposed to hiding it under a rock with no interest earned. We have Gold and short-term bonds that we can sell to meet most distribution needs, without having to sell off assets that are down considerably from recent highs. We are confident that better investing opportunities will present themselves in the future and that today’s pain will set us up for better long-term returns. We don’t need to predict the future or time the markets perfectly to participate in long-term economic growth. Ignore the forecasts of impending doom and stay optimistic that creative people will continue to invent great products that will improve productivity and enhance lives.
As always, please call or write with any questions that you have.
Shane M. Alsworth, MBA, CFP®, CLU®, CIMA®
The views and opinions presented in this article are those of Shane Alsworth only
Sources: Morningstar/Ibbotson data, Ned Davis Research, BCA Research, Litman Gregory Research, Lapham’s Quarterly “Quack Prophet” by Colin Dickey
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