Over the last few months, as the outlook for the economy turned more sour, I’ve used these weekly commentaries to warn you not to get too negative. Long-term investors need to have a strategy they can stick with no matter what happens, a strategy that keeps them on an even keel. If you were so nervous that you sold out near the recent bottom, you need to reassess your risk tolerance; you were obviously carrying more risk than you were comfortable with – or you wouldn’t have sold. Strategy has nothing to do with trying to time tops and bottoms. That is the province of traders and despite years of evidence that it can’t be done consistently, there are those who keep trying. We aren’t one of them. And you shouldn’t be either.

The S&P 500 is 17.7% off the mid-June low and if you sold anytime between the low and mid-July, you are probably feeling a little sick to your stomach right now. You’re probably saying, well, this won’t last, I’ll just wait for it to come back down and then I’ll do some buying (which you won’t because it will be some bad news that brings it back down). Or, the economy is still headed for recession so it’s only a matter of time before stocks really do go down 50% like they did in the last two real recessions (the COVID recession was a special situation). Or any number of other things designed to make yourself feel better about your poor decision.

That’s the wrong way to think about it. It wasn’t a poor decision because the market went up after you sold. It was a poor decision because you made it under duress. You had a strategy (well, certainly Alhambra clients did and do) and you couldn’t stick with it when things got tough. Your poor decision was the one you made when you decided how much risk you could take. But having made that mistake you shouldn’t compound it by making another poor decision when the loss hurts more than you thought it would. Once made, you need to ride out the tough times and make an adjustment when things are better. Then you’ll avoid turning a temporary loss into a permanent one.

Investing is hard and determining your risk tolerance is far from an exact science. I have said for years that I never really know what a client’s risk tolerance is until they suffer some losses. And if you are really a long-term investor you will suffer some losses with the emphasis on suffer. I hate being down over any time frame and it is always painful when it happens. But I also know that our strategy has proven its worth through all kinds of markets and economic environments. That doesn’t mean it doesn’t suffer losses occasionally and it doesn’t mean that you (I) won’t question whether it will work this time when it does. The only investment strategy that won’t ever make you uncomfortable is one that is risk-free (or nearly so). In fact, I’d go so far as to say that if you aren’t uncomfortable with your strategy sometimes, you aren’t taking enough risk.

So, now that risk markets have come back, I’m going to spend a little time warning you not to get too positive, too enthusiastic about the recent rally. Emotional control is a two-way street and getting too bullish is just as dangerous as getting too bearish. At the lows, our moderate-risk clients were down about 10%* and after the recovery of the last month, they are down low to mid-single digits. That is in comparison to the standard 60/40 stock/bond portfolio that is still down nearly 10%. It is interesting – at least to me – that a 5% loss on the way up feels so much better than a 5% loss on the way down.

How things have gone recently doesn’t tell us anything about how things will go from here though. I am somewhat optimistic because many of the conditions that prevailed at the lows still do. This is a rally that no one loves; there are still a lot of skeptics – this is just a bear market rally! – but not as many as there were a few weeks ago. Put/call ratios have fallen to levels that I associate with corrections. I prefer to look at what people do rather than what they say and they are buying quite a lot of calls, betting on a higher stock market. Other measures of sentiment have moderated as well, the ranks of the bears thinning a tad.

One of the main underpinnings of this recovery in risk assets is the recent fall in interest rates and while that can continue for a while, I think there is a limit to how low rates can go and keep stocks on the upswing. The 10-year rate peaked on June 14th at 3.48% and closed Friday at 2.85%. (BTW, stocks bottomed on June 16th and no that isn’t coincidence.) Rates fell because expectations for Fed policy moderated and because the economic data softened some. But if the economy gets worse from here, there will come a point when falling rates are bad for stocks because it means recession is imminent. It could also be that the moderation of inflation seen in a slew of reports last week (CPI, PPI, and import and export prices) is temporary and investors start to push rates higher again. The only scenario where stocks keep going up is if economic growth prospects improve while inflation expectations continue to fall – the goldilocks scenario. That isn’t as unlikely as it seems but betting big on it would fall into that too enthusiastic category.

There are still plenty of things for an investor to worry about but markets have recently pushed off the onset of any recession to at least Q2 2023 when short-term rates are expected to peak. That is a moving target though and it was only a couple of weeks ago when that date was as close as the end of this year. And it was only a few months ago when it was reckoned to be as late as Q4 2023. The market-based view – the wisdom of the crowd – is that the US economy’s prospects have improved and risk assets are responding to that.

Last week I pointed out some extremes in futures market positioning for rates, the dollar, and stocks. Large speculators were very short bonds, very short stocks, and very long the dollar. Last week’s trading only changed that by a little so I’d say the likelihood the recent trends continue are pretty high. If you sold at the lows, waiting for a pullback may end up a lot like the wait for Godot. If you sold because of recession fears or whatever, you need to correct your mistake. I can’t tell you how to do that because everyone’s situation is different but trying to time the correction of your mistake is just another mistake.

*Alhambra client returns cited here are just estimates after looking at a range of accounts. We don’t keep composites because our client portfolios are not uniform. We had clients who were down more at the lows because they have large unrealized capital gains and we are managing to after-tax returns. We also have clients who are doing better than cited above because of timing issues (new clients, etc.). I’m just trying to give you an idea how we’ve done in a very difficult year.


The rising rate, rising dollar environment persists. The 10-year yield was up on the week – as were most Treasury yields – while the dollar was down. TIPS yields were mostly unchanged for the week so inflation expectations actually rose ever so slightly, a result one might not have expected in a week where the most important economic data of the week were the various inflation readings that proved softer than expected.

The main impact of the softer inflation readings – and we’re still talking about some pretty hot readings – was that growth expectations improved. We can see that in things like credit spreads which have tightened considerably over the last month. High yield spreads peaked at 5.99% on July 5th –  along with recession fears – and closed Friday just slightly below 4.2%. While that is still above the best levels close to 3% it is nowhere near what we would expect if the economy were on the verge of recession.

The dollar was down nearly 1% last week and is now down 3.3% from the intraday high of 109.14 on July 14th. However, the trend is still up and while I can make a technical case for further weakness, a fundamental case is much more difficult to see. I have seen some encouraging data on Europe’s natural gas inventories so maybe that situation is improving but making a case for a big recovery in European growth is difficult at best. It is even harder to make one for China right now and that likely impacts most of Asia. So, while we may see some dollar weakness, I wouldn’t expect it to amount to much right now.

Rising rates and a rising dollar based on improving growth prospects is an environment favorable for US stocks and that has certainly proven true over the last month. For it to continue though, we’re going to have to see continued positive economic data. Short-term rates markets have pushed expectations for peak rates out to the second quarter of 2023 and to a higher terminal rate. SOFR futures show rates peaking at 3.645% in the March 2023 contract. A few weeks ago expectations were that rates would peak at the end of 2022 or early in 2023 at just over 3%.



All the major asset classes we track were higher last week with small cap stocks and real estate rising the most. Value stocks resumed their leadership last week after several weeks of growth stock recovery. That was driven by a large rise in financial, materials, and energy stocks.

Crude oil was higher on the week, recovering some of the recent correction. That isn’t surprising after a big sell-off and we did hit my initial downside target. I would not get in a big hurry to buy energy stocks though; I don’t think we’ve seen the lows in crude yet and the eagerness of others to buy these stocks on every downtick keeps me wary. It would be really easy psychologically to buy energy stocks right now because everyone else sure seems to be but remember what I said last week about the easy trades.

The future course of commodities and gold will depend to a large degree on those growth expectations discussed above. If growth expectations continue to recover and real rates rise further, commodities are going to be a difficult asset to hold. We would expect general commodities to outperform gold in that situation though and we saw gains in commodities across the board last week. Gold was higher too with the weaker dollar but it was up a lot less than the general commodity indexes. Our portfolios always have an allocation to commodities but it has been tactically reduced to half the strategic position for now.

One trend we’re watching closely is the recent outperformance of small-cap stocks versus large. Small and mid-cap stocks are much cheaper than large cap and have a higher expected and historical growth rate to boot. When it comes time to raise our allocation to equities – and we’re not quite there yet – small caps may be the best option.


It was the week to own economically sensitive sectors and some other beat-up sectors. Energy did lead the pack but as I said above, I’m still skeptical of that rally. More interesting to me are the financials and real estate. It isn’t getting much attention but bank lending is rising at a rapid rate. Commercial & Industrial loans rose 1.6% from June to July and 10.5% year-over-year. And while all the macro bears are fretting about real estate, real estate loans rose 0.9% from June to July and 8.3% year-over-year. If we have a big recession next year those loans may not look that smart but for now, they are positive for bank earnings. BTW, this is exactly what we should expect from QT. QE raised profits at banks (through trading, etc.) and its withdrawal means they need to find other ways to make money. And the natural source is the thing most banks were founded to do – lend.

Market Indicators

Keeping an even keel means staying informed of the facts and not reacting emotionally to the news whether good or bad. Be aware of what the big picture trends are and where we are now. The S&P 500 – “the stock market” – is in a short-term uptrend, an intermediate-term downtrend, and a long-term uptrend. This isn’t some exact technical analysis; it’s just common sense:

As you can see too, that intermediate-term downtrend is on the verge of changing to an uptrend. If it does, I’m not sure what people will call this market but the obvious choice is “bull”.

That isn’t getting too exuberant, it is just acknowledging reality. There are a lot of people these days who seem to want the market to go down, who want to see the US economy as performing poorly and getting worse. I can’t say for sure why they see things this way – although I have some thoughts on the matter – but it is obvious that they do. They do investors no favors by creating fear and uncertainty. Whether they are right or wrong should not change your strategy. It could change your tactics but your strategy shouldn’t change unless your goals or situation change. Don’t let the marketing strategy of some internet guru knock you off course.

Joe Calhoun

If you are unsure what I mean by strategy and tactics, if you aren’t clear on the difference, give us a call and we’d be happy to explain it.