End of Quarter Rebalancing – Is This the Calm Before the Storm?

The market traded just about spot-on to last week’s Wealth Watch, with the S&P 500 rallying up to the 3,900 area before the sellers came in to drive the index back down. Some of the reason for the rally was re-balancing of portfolios by fund managers, but that should be complete by the end of the week, and we could see the indexes sell off even more. The 3,648 area on the S&P 500 is critical. We could see the market selling off to retest this area of support, and if the market does not hold then the next level of support is around 3,422 on the S&P 500.

I expect that the next couple days might show prices attempting to stabilize, and we could possibly even see a minor bounce. However, trends are bearish, and I do not anticipate that Tuesday’s high of 3,945.86 will be taken out before prices make their way down to challenge and undercut 3,644, even if this might require a couple weeks.

Bitcoin has really sold off from a high of around $67,000 down to $19,190 this morning. If the low of $18,200 is broken, Bitcoin could sell off to the $12,200 level.

Standard & Poor’s 500 Stock Index Declines | 1/03/1928 to 6/29/2022
  Type of Decline
  Dip (5%+)      Moderate Correction (10%+) Severe Correction (15%+) “Bear” Market (20%+)
Number of Occurrences 323 100 45 26
Mean Number of Occurrences Per Year 3.4 1.1 0.5 0.3
Mean Number of Days 35 100 186 289
Mean Decline (%) 10.8 19.5 28.2 35.6
Chances of Decline Moving to Next Stage (%)* 31 45 58 N/A
Last Occurrence 6/2/22 3/29/22 1/3/22 1/3/22
Return to Date (%) From Last Occurrence -8.6 -17.6 -20.4 -20.4
Avg. 6-Month Return After Peak (%) -2.8 -7.2 -12.0 -17.1
Avg. 12-Month Return After Peak (%) 0.4 -3.4 -8.7 -19.4

The S&P Global Flash U.S. Composite PMI fell 2.4 points in June to 51.2, a 5-month low. Services declined 1.8 points to 51.6, below the consensus for unchanged. Manufacturing also swooned more than expected, dropping 4.5 points to 52.4, the lowest reading in nearly two years versus a consensus of 56.1.

The report highlighted the first decline in manufacturing output in two years, with the Output Index decreasing 5.6 points to 49.6. It also noted the first drop in new orders for goods and services since July 2020. Similarly, new export orders fell at the fastest pace since June 2020. Employment slowed and backlogs decreased for the first time in two years. Business confidence slumped to its lowest point since September 2020, as providers were less upbeat about the future.

Inflationary pressures were high with both input costs and output prices rising substantially, but at a slower pace. Wages were adding to operating expenses, but more discounts were being offered, thereby pressuring margins.


Short-Term Rallies Give Hope But Need Caution

The HCM-BuyLine® is clearly negative and we have built up a tremendous amount of cash. I have enclosed our cash holdings as of Monday. The market should rally up to the 3800-3900 range on the S&P 500 before the selling starts again. Some of these rallies are shorts covering their positions. Look for the markets to sell back down to the 3600 range, and if that area of support cannot hold the next logical area of support is a very low 3000-3100. The market can have some very nice rallies in a bear market, so be patient and let the HCM-BuyLine® turn back up so we can get a clear picture the trend has changed.

There are some amazing buys out there right now, and way too many to list, but they are probably going to get more amazing and trade even lower. The cash some of these firms have on their balance sheet is incredible. What to do now?  Be patient, sit on the cash we built up, let the market tell us when it has bottomed, and then we can come back in with both barrels a-blazing’.


Cash and Cash Equivalents as of June 20, 2022
Howard Capital Management, Inc.

HCM Mutual Funds Cash %

Income Plus (HCMEX)*: 74%

Tactical Growth (HCMGX)*: 61%

Dividend Sector (HCMNX)*: 40%

*Click to view top 10 holdings

HCM Mutual Funds Cash %

HCM Defender 100 Index (QQH)*: 100%

HCM Defender 500 Index (LGH)*: 100%

*Click to view top 10 holdings

PWS Models Cash %

Nasdaq 100: 100%

Index Plus: 100% 

Sector Plus: 100% 

Yield Gen: 38% 

Short Term Bond ETF: 50% 

Long Term Bond ETF: 75% 

Muni Bond ETF: 100% 

Low Volatility: 0%

SMA Model Cash %

ALP Aggressive: 70%

ALP Growth: 69% 

ALP Balanced: 67% 

ALP Conservative: 65% 

All-American Aggressive: 62% 

All-American Growth: 62% 

All-American Balanced: 65% 

All-American Conservative: 65% 

Dividend Income Growth: 48% 

Dividend Income Balanced: 56% 

Dividend Income Conservative: 65% 

ILP ETF Growth: 91% 

ILP ETF Balanced: 58% 

ILP ETF Conservative: 38% 

Viper 2 Aggressive: 77% 

Viper 2 Growth: 66% 

Viper 2 Balanced: 54% 

Viper 2 Conservative: 55% 

Ultra Aggressive: 100% 

Horizon Income: 64% 

All Weather: 48% 

MIP Income: 82% 

MIP Conservative: 81% 

MIP Balanced: 81% 

MIP Growth: 81% 

MIP Aggressive: 81%

HCM-061622-61 • 1677-NLD-06172022

Disclosures

Investors should carefully consider the investment objectives, risks, charges, and expenses of Mutual Funds and ETF’s. This and other important information about the Funds are contained in the prospectus, which can be obtained at howardcmfunds.com or by calling 770- 642-4902. The prospectus should be read carefully before investing. HCM Funds are distributed by Northern Lights Distributors, LLC, member FINRA/ SIPC. Northern Lights Distributors, LLC and Howard Capital Management, Inc. are not affiliated. HCM Funds are distributed by Northern Lights Distributors, LLC, member FINRA/ SIPC. Northern Lights Distributors, LLC and Howard Capital Management, Inc. are not affiliated. NLD is distributor for the following: HCMEX, HCGMX, HCMNX, QQH, and LGH.

Important Risk Disclosure Mutual funds involve risk including possible loss of principal. When the Fund is out of the market and in cash or cash equivalents, there is a risk that the market will begin to rise rapidly and may cause the Fund to miss capturing the initial returns of changing market conditions. The mutual funds in which the Fund may invest may use leverage. Using leverage can magnify a mutual fund’s potential for gain or loss and therefore, amplify the effects of market volatility on a mutual fund’s share price. The Fund may be subject to the risk that its assets are invested in a particular sector or group of sectors in the economy and as a result, the value of the Fund may be adversely impacted by events or developments in a sector or group of sectors. The price of small or medium capitalization company stocks may be subject to more abrupt or erratic market movements than larger, more established companies or the market averages in general. A higher portfolio turnover will result in higher transactional and brokerage costs and may result in higher taxes when Fund shares are held in a taxable account. ETFs and mutual funds are subject to investment advisory and other expenses, which will be indirectly paid by the Fund. As a result, the cost of investing in the Fund will be higher than the cost of investing directly in other investment companies and may be higher than other mutual funds that invest directly in securities. The market value of ETF and mutual fund shares may differ from their net asset value. Each investment company and ETF is subject to specific risks, depending on the nature of the fund.

The Morningstar Rating for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history.  Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes.  It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance.  The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star.  The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics.  The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns.  While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.


The Genesis and Failings of Market Predictions

In the year 1982, a leading global publication published a special dossier about what the world would be like in the year 2000. The publication invited a range of professional ‘futurists’ make their predictions. From a robotic revolution to the extinction of inflation to family experimentation practices, these predictions were published for all to read and gauge the future themselves. It’s not surprising that the most of the predictions remain unfulfilled till today. However, these futurists have not been completely discredited, nor have they become extinct. They live among us even today, with different roles and identities.

The practice of making predictions based on factual observations can be traced back to a time when markets didn’t even exist. From an instinctual perspective, making predictions is as much a part of human nature as is any other cognitive practice like rationalizing and reasoning. Over centuries, the art of making a prediction has undergone many-a transformation. This has been facilitated through philosophical, mathematical and even theological sciences. Even then, there still remains a strong element of uncertainty about the validity of making predictions. This is so because making predictions is essentially choosing one of two (or numerous) possible outcomes. There are some who will make the right choices and others who won’t. Those who make the right choice won’t be right all the time, and neither will the ones who made the wrong choice. However, the frequency or consistency in such a game of chance is anybody’s guess a.k.a. prediction.

For anyone who is looking to follow or disregard the plethora of predictions that are made every day, it is advisable to understand what governs such predictions and why they are so popular.

Five Famous Predictions That Never Happened
  1. In the 80s, Nobel Prize-winning economist Paul Krugman predicted that the internet was just another fad and would have no discernible impact on investing.
  2. Nobel Prize-winning economist Paul Samuelson was certain that the Soviet economy would surpass the American Economy by 1990.
  3. Just before the 2008 economic meltdown, AIG had endorsed and promoted the Credit Default Swaps (CDS), which was a prominent cause of the market crash and led to the $85 billion bailout for them.
  4. Economist Irving Fisher predicted the stock market was on the verge of a boom, 9 days before the great market crash of 1929 and lost most of his wealth in the process.
  5. In 2007, former Fed Chair Alan Greenspan claimed that interest rates would be in double digits to control inflation, but a year later Fed fund rates were at historical lows.
Making a Prediction: An erroneous human tendency

The start of this practice is probably anyone’s guess. In recorded history though, the end goal guiding the making of predictions has generally been to attain a strategic advantage over the competition. Whether it is in financial markets, war or sports, predictions are a guesstimate that have a tendency of giving confidence to those who are hopeful of a positive outcome. On the contrary, people also have a general tendency to ignore the possible outcomes that are not so positive, even though it might be most probable.

When Nostradamus, the French polymath, wrote his predictions in the form of prose, he did not write any specific details. Yet, today, people attribute many historical events (including 9/11 attacks, the atomic bomb and the rise of Adolf Hitler) to the predictions made by him. It is also important to note that there are many predictions of his that have not manifested in any way or form. That doesn’t make his supporters and followers discredit his work though. They continue to look for patterns where none might exist. Similarly, there are many who came before and after Nostradamus, making claims about future events and the people involved who are revered in different walks of life, including business, politics and economics.

The truth is human beings are geared to widely accept certain visions of the future that suit their view of things, even if those visions improbable or impossible. It confirms how one analyzes the world one is familiar with and wants to believe that their view is correct. When that hypothesis fails, it is put down to chance or an anomalistic inconsistency in one’s analysis. In light of this, in today’s information age, it is not unusual to find a range of predictions on a daily basis about almost anything and everything happening in the world. Even though these predictions may border on being totally ridiculous, it can find its own stream of subscribers who believe that a particular outcome would suit their worldview.

The questionable foundation of general predictions

“Predictions fail because the world is too complicated to be predicted with accuracy.”

Dan Gardner, Author of Future Babble

Experts have been trying to forecast the price of oil since the inception of the industry in the 19th century and they continue their hot streak of being wrong till today. Modern futurists use retrospective quantitative methods to predict socio-political scenarios decades into the future (known as cliodynamics) yet all they have achieved is the creation of a broad, over-arching theme that captures only part of any future. For decades, there have been innumerable predictions of the Dow Jones Industrial Average index either soaring through the proverbial ceiling or crashing with devastating effects. Just like in the case of cliodynamics, only a miniscule part of the prediction has actually occurred, enough to be branded as an inaccurate prediction.

This further begs the question, how does one qualify to be an expert? What is the criteria that separates the ones who make consistently successful predictions from those who are much less accurate in doing so? As it turns out, there is no such criteria and those who are considered to be ‘investing gurus’ are barely ever absolutely right with their predictions. According to a study by CXO Advisory Group which collecting predictions from 68 different forecasters, after study 6,500 different predictions, it was found that, on average, a forecaster will be correct 46.9% of the time. In other words, if the example of a coin toss were considered where the chances are 50-50, an average person would likely beat the average ‘market guru.’

Dr. Tetlock, The Hedgehog and The Fox

From 1984 till 2003, Dr. Phillip E. Tetlock, a political science writer and revered author, conducted one of the most comprehensive studies of analyzing expert predictions. He assembled a group of 284 experts from a myriad of fields, including government officials, professors, and journalists. They had a diverse range of opinions, from Marxists to free-marketers. In this 20 year period, Dr. Tetlock collected over 28,000 forecasts about the future, including questions about inflation, economic growth, the price of oil, the stock market, elections and the global order of power.

As he validated and analyzed the data sets that he had collected over 2 decades, the final result that he arrived at was that ‘the average expert was as accurate as the famous symbol of random guessing – a dart throwing chimpanzee.’ Of course, some did better than others but they were all far from perfect when it came to making predictions. However, there was a critical pattern he identified while studying these predictions. The way these experts were making predictions had a strong correlation with their individual style of thinking.

In order to simplify this observation, Dr. Tetlock drew inspiration from an essay written by a political theorist and writer, Sir Isaiah Berlin. The essay was titled ‘The Hedgehog and The Fox’ which divided writers and thinkers into hedgehogs (who view the world through the lens of a single defining idea) and foxes (who draw on a wide variety of experiences and for whom the world cannot be boiled down to a single idea).

In Dr. Tetlock’s analysis, the hedgehogs were those who use one big idea (usually an analytical tool) to make forecasts. They preferred simplicity and clarity, so they preferred to keep information pared down to what they thought was the bare essentials. They like using words like ‘certain’ and ‘impossible’ and are usually the ones on television. The foxes, on the other hand, gathered information from many sources, looked at issues with more than one analytical lens, readily admitted mistakes, and were comfortable with complexity and uncertainty. They often said ‘maybe’ and they were humble about their ability to see into the future.

The study also showed an inverse relationship between fame and accuracy. The more famous the person, the less accurate their prediction would be. One would assume that this finding would keep the inaccurate hedgehogs out of the limelight and the focus should remain on the humble foxes. However, hedgehogs are brimming with confidence and make absolute declarations, something that dispels uncertainty. The fox talks about probabilities and possibilities. For the general viewing audience, it’s always more attractive to have their concerns and uncertainties absolutely dispelled, even if it is through a hedgehog analysis which is less accurate than a dart throwing chimpanzee.

The role of bias in analyzing predictions

“Everything makes sense in hindsight. We cannot suppress the powerful intuition that what makes sense in hindsight today was predictable yesterday.”

Daniel Kahneman, Behavioral Scientist, Nobel Prize winner

In the path breaking study called Prospect Theory by Daniel Kahneman and Amos Twersky, the study of human decision making under conditions of risk was thoroughly analyzed. The study’s findings run contrary to the normative implications inherent within classical subjective expected utility theories. This theory gave validation to the idea that risk taking and risk averse behavior occurs not in isolation, but in conjunction with individual behavioral dispositions. These dispositions are driven by the biases individuals may have.

When it comes to making market predictions, such biases play an important role in influencing the final decision of an individual. Some of the prominent cognitive biases that affect predictions are as follows:

  1. Overconfidence bias: Overconfidence is one of the cognitive biases that underlie the illusion of validity. Overconfidence bias can be defined as an unwarranted and often times illogical faith that an investor has in their ability to predict the market. This bias is remarkably prevalent in the investment community. James Montier, former co-head of global strategy at Société Générale, once conducted a study with over 300 professional fund managers to measure the scale of behavioral biases. He asked if they believe themselves to be above average in their ability. 74% of fund managers responded in the affirmative, believing they were above average at investing. And of the remaining 26%, most thought they were average. In short, virtually no one thought they were below average.
  2. Confirmation bias: The illusion of validity persists because people fall prey to the confirmation bias; they focus on information that is consistent with their beliefs while neglecting inconsistent information. As physicist Robert Park once said, “People are awfully good at fooling themselves. They’re so sure they know the answer that they don’t want to confuse people with ugly-looking data.” This bias is more prevalent in market predictors with higher perceived knowledge about the market and higher strength of belief (i.e., sentiment). They will also have a negative interaction effect between the perceived knowledge and the strength of prior belief on confirmation bias.
  3. Representative bias: Representative bias occurs when the similarity of objects or events confuses someone while thinking about the probability of an outcome. According to Kahneman and Tversky, representative bias badly affects people’s decisions during their opinions building and reasoning. This may mislead investors and forecasters to believe they have already processed the information correctly right before they make a decision. While making a judgment, they are likely to ignore other related factors which may affect the value of the investment. Because of the representative bias, forecasters may ignore the law of small numbers where they incorrectly consider a small sample size as being representative of the population. Even though these numbers may reflect the current trend, they cannot possibly describe the properties of a whole population.
  4. Hindsight bias: Hindsight bias leads people to exaggerate the quality of their foresight. It is a behavioral trait where one becomes convinced they accurately predicted an event before it occurred. Based on this, they make predictions about the future. Once an event is part of history, there is a tendency to see the sequence that led to it as inevitable, as if uncertainty and chance were banished. Armed with such a bias, one can become overconfident of one’s foresight and make exaggerated predictions. Those who have hindsight bias, it is common to hear the phrase, “I knew it all along.”
The role of bias in analyzing predictions

It is easy to suffer the pitfalls of following the predictions of the numerous ‘hedgehogs’ that populate mass media nowadays. The markets, just like the future, will forever remain unpredictable. All the predictions that are made, whether scientific or instinctual, are essentially rooted in some form of cognitive bias and are probably driven by the possibility of making some personal gain. To base one’s investment decisions on ‘expert’ predictions is akin to sailing in a storm without a life jacket.

The advisable way to achieve one’s investment return goals is to have a clear objective and an innate ability to shut out the noise made by the so-called market gurus. Instead of listening and acting on the words of the ‘hedgehogs,’ it is more prudent to follow the analysis of the foxes who gear themselves for an uncertain future. These foxes will be advisors and managers who prefer diversification of risk and do not make claims about knowing what comes next. Instead of relying on instincts and emotions, an investor must trust those who take a calculated approach to mitigating possible losses and acting in time as the market moves.

While it might be considered a lot more amenable to do away with market gurus altogether, it is not possible in the current structure of information dissemination and market speculation. In certain markes, like Prediction markets where one trades the outcome of events and market prices indicate what all the investors think the probability of the event is, the role of the guru/expert is almost non-existent. There are many proponents for such markets but they remain a laggard to the popular markets where ‘crystal ball’ predictions still attract a majority of investors. These markets also have the largest market capitalizations and will always remain difficult to transform.

In order to facilitate diversification, there exists a broad range of assets and asset classes in the world now. It would be the rarest of rare occurrence for all of them to boom or go bust at the same time. By planning one’s investments wisely across these classes, based on a sound investment plan, would most likely achieve the long-term gains that any investor dreams of. While ignoring market predictions may not be easy, avoiding making knee-jerk investment decisions based on them can be easily avoided through discipline and consistency.

In Warren Buffet’s now famous article “The Superinvestors of Graham and Doddsville,” he presents indisputable data about how a specific number of asset managers who shared a common teacher have consistently managed to outperform the index over decades. None of them claim to have any supernatural prediction powers and neither do they boast of knowing something that others do not. They have followed their tested methods over a long time frame to achieve a goal they set for themselves. They dedicated their lives to achieving those goals and stayed true to the practices taught to them by Benjamin Graham. In the concluding paragraph of the article, Warren Buffett detailed an undeniable reality of the world which encapsulated the distracting and irrelevant nature of market predictions:

“There seems to be some perverse human characteristic that likes to make easy things difficult… It’s likely to continue that way. Ships will sail around the world but the Flat Earth Society will also continue to flourish.”

HCM-062122-64


Focus on the Data—Not the Drama. How Advisors Can Educate Clients on Today’s Turbulent Market

Stock market volatility has reached a fever pitch in recent months, as has investor anxiety. We don’t expect it to dissipate any time soon. The markets are not trading on fundamentals. Instead, they’re trading on investor sentiment and emotions fueled by outside noise.

How did we get here, and how should advisors work with their clients to focus on the data, not the drama?

Not Your Father’s Stock Market

There are a few things investors need to understand about this stock market that make it considerably different from 15 or 20 years ago. One thing we know is the markets don’t work and function the way they did before. The velocity with which stock markets move is much faster. The upward and downward swings are happening with much greater speed.

A significant part of that transformation over the last decade is the dominance of automated trading. As much as 85% of market trades today are executed by computerized trading or automated machine execution. That’s a far cry from just ten years ago when automated trading accounted for about 20% of trades. Automated trading not only contributes to the higher velocity of trading—but is also a primary contributor to the more significant market selloffs and runups we’ve been experiencing. Couple the increased velocity with the tens of millions of investors accessing hundreds of millions of pieces of data 24/7 at digital speed, and you have a market that can, and will, quickly react to new information or the instant investor sentiment changes.

The media has exacerbated the problem in its seemingly hyperbolic headlines and 24/7 new cycle. The thirst for advertising dollars often makes the media focus on bad news simply because it sells better than good news. Much of the information investors get from the media is centered on driving clicks or viewership, not necessarily on conveying optimal investment advice.

The Challenge for Advisors: Control Client Performance Expectations

Between the stock market volatility and the constant drumming from the media, investors have been pulled in many different directions, often causing them to change their expectations and become emotional about the market.

Emotions often lead to poor investment decisions, which then may lead to underperformance. Current investor losses may have little to do with asset allocation, diversification, or fund choices. Losses may have more to do with suboptimal buy and sell decisions driven by emotions. 

Advisors have historically been challenged to meet client expectations. Past experiences or current circumstantial pressures can be driving forces behind shifting expectations. It’s much more of an issue when clients’ expectations whipsaw along with the market. You’re familiar with the concept: “Keeping up with the Joneses.” Applying this theme in a behavioral finance context, and you have what is referred to as “Anchoring Bias,” where investors errantly anchor portfolio return expectations to recent market highs, instead of taking a holistic view of their progress towards their long-term financial goals.  

How are advisors supposed to manage that? 

The key for advisors is to get control of client expectations through communication and education—and put current market events in perspective. Advisors can work to help their clients avoid common behavioral biases during periods of heightened market volatility by educating them on three critical points:

  • Volatility is not only normal, it also may be good for investment returns
  • Volatility and risk have separate meanings
  • Ignore the noise
Volatility Is Normal

Investors need to understand that market volatility is a normal part of markets. Market pullbacks between 5-10% are a common occurrence, and not unusual to see multiple market pullbacks within the same year. These recalibrations typically occur when the market is overbought or the release of new fundamental news. Investors should in fact consider welcoming market pullbacks because they often help the market reset proper valuation and present investors with a good buying opportunity.

Market Corrections (10-15% declines) are also normal, and while not as prominent as Market Pullbacks, can be viewed in a similar light, but with more caution. When clients are concerned about volatility, it helps to put it in perspective. Remind them that since 2000, the S&P 500 has gained, on average, more than 8% one month following a market correction bottom, going on to then gain more than 24% the following year. So, not only have corrections been short-lived, but they have also been a precursor to significant market gains in their aftermath.

Consider that, in each year since World War II, the market has experienced an average intra-year decline of roughly ~14%, with the market ending the year lower only every third year. As the graphic below shows, the market finished the year in the positive.

Source: Bloomberg

When looking at periods of volatility over a historical timeline of the stock market, it’s clear that stocks can be volatile for periods of time. But over the long-term they historically appear more stable, steadily producing positive returns over time.

The two charts below examine the relative volatility of stock market returns of 5-year rolling returns versus 30-year rolling returns.

A critical takeaway is to educate clients on the importance of following their financial plans and drive awareness of investor behaviors that lead to poor investment decisions during periods of normal market volatility. Reviewing and analyzing a client’s progress towards specific goals should be a primary benchmark for determining changes to an investors financial plan, not TV headlines.

Volatility And Risk Are Not the Same

Investors’ greatest fear is losing money; it’s natural to equate volatility with market risk. However, volatility and risk are not the same, and it’s critical to educate clients on the difference.

Market risk is the chance that by being in the market, you will lose money—though true losses are only realized when a security is sold for a loss. Investors suddenly spooked into bailing out of the market after it has already declined 10 or 15%, could be subjectively “sounding the horn” on a financial plan, still in the 2nd quarter.

Volatility on the other hand, is a range of expected returns or price changes for a particular security, relative to its average – also known as Standard Deviation. Securities with a larger range tend to be larger swings in price and returns, through changing market conditions.

Also, it’s important to remind your clients that volatility is a two-way street. There can be as much volatility to the upside as to the downside. However, investors tend to only focus on the latter, which is why their investment performance can suffer. According to DALBAR’s Investor Behavior Study, twenty years of investor data shows that those who abandoned the market to avoid its worst days almost invariably miss the market’s best days as well. That makes it difficult to overcome the losses incurred and hurts overall investment performance.

Consider this graphic, which shows how your returns would have been impacted on a $10,000 investment if you missed the market’s 5, 10, 30, and 50 best days. What makes it worse for investors is, typically, the market’s best days have occurred near some of its worst days, which is why it’s essential to stay the course during periods of extreme volatility.

Source: FactSet. Returns are based on the S&P 500 Total Return Index. Past performance is not indicative of future returns. An individual cannot invest directly in an index. Data is as of January 31, 2022.

Ignore The Noise

When it comes to investing, the media noise can be deafening. Helping clients understand, while all the significant news events of today may seem consequential, they often have little if any impact on reaching their long-term investment goals. A sudden 1,000-point drop in the market today can certainly be uncomfortable. But through full market cycles, they may barely register as an afterthought on a 5-, 10- or 20-year performance timeline.

It’s critical to have a component to your investment management process that keeps the negative news out of perspective. That will help replace the emotional buy and sell decisions that come with outside market noise, creating more explicit client expectations and potentially more consistent outcomes.

The Bottom Line

We have a phrase at Howard Capital Management, “Focus on the data, not the drama.” We want to make sure we’re making investment decisions on the information we know, not what we think is going to happen.

Right now, there are a lot of unknowns. We are looking for the trends; we concern ourselves with the data, the math, and probabilities.

We trade based on our proprietary HCM-BuyLine®, which is designed to identify clear market trends and seek optimal portfolio allocations through buy and sell decisions based on those trends. Emotions have no place in our process.

The HCM-BuyLine®

The HCM-BuyLine® has been identifying and confirming trends for three decades, enabling Howard Capital Management to sidestep catastrophic market declines in 2000, 2008, and 2020. To learn more about the HCM-BuyLine® and how it is used to tactically manage mutual funds and ETFs, please click here.


About Vance Howard

Vance Howard’s vision for HCM originated after seeing the devastating financial losses investors suffered during the stock market crash of 1987, an event precipitated by computer program trading and investor panic. In an effort to the help investors monitor changing market conditions, he developed the HCM-BuyLine®, a proprietary math-driven indicator, designed with the goal of reducing the impacts of emotional investment decisions.


About Howard Capital Management

Howard Capital Management, Inc. (HCM) is a SEC-Registered Investment Advisory Firm founded by Vance Howard, which offers professional money management services to private clients, financial advisors, and registered investment advisors through a suite of separately managed accounts, retirement tools, self-directed brokerage accounts, proprietary mutual funds, and ETFs. As of December 31, 2021, Howard had assets under management of $5 billion.

For more information, financial advisors should contact their wholesaler by contacting Howard Capital Management at howardcm.com or 770-642-4902.


HCM-061622-63


Rates on the Rise and the HCM Cash Buildup Continues

The Federal Reserve did raise interest rates by .75 percent this afternoon, and this is a welcome event. This is the first time there has been any real meaningful move to slow the rise in inflation. This market is looking for leadership from the White House, the Fed and the Treasury department and this is the only real meaningful event we have received from any office in the federal government.

The markets have sold off fast and deep after Friday’s inflation number jumped even higher. Optimism was starting to tick up as the market closed one day above the HCM-BuyLine® indicator on June 6th, indicating the potential start of a new trend. Remember, the market must close above the HCM-BuyLine® for 5 days for a confirmed signal to re-enter the market, which it did not do. The markets immediately sold off a sharp 9%+ in 4 trading days after the inflation number was released. One thing you most likely can expect is extreme volatility over the next few weeks, if not a few months.

I’m sure many of you have seen and read about Ray Dalio, who manages one of the world’s largest hedge funds. He is a big practitioner of transcendental meditation (TM). Transcendental meditation is usually practiced twice a day for 20 minutes where you sit in a quite space, close your eyes and try to empty your mind of stress and negative thoughts. Ray Dalio is a very big believer in TM and speaks about its benefits on a regular basis. So why do you think Ray is such a big advocate of TM? Answer: because of markets like this! Everyone, and I mean everyone, is getting thrown around the room in markets like this. Even Ray Dalio.

Stay optimistic. I have never met a rich pessimist!


Stocks Getting Rocked After Poor Inflation Numbers

The markets and the news have gotten so bad that it might actually be good. Confidence has dropped to about as bad as I have seen it in over 35 years. I was taken aback by Treasury Secretary Janet Yellen’s admission “Well, look, I think I was wrong then about the path that inflation would take,” Yellen answered. “As I mentioned, there have been unanticipated and large shocks to the economy that have boosted energy and food prices, and supply bottlenecks that have affected our economy badly, that I at the time didn’t fully understand. But we recognize that now.” I appreciate her candor but anyone reading the Wall Street Journal or Investor Business Daily could see there was a real problem with inflation starting as far back as last year. Her latest hypothesis that we will not fall into a recession is not very inspiring.

The Reuters/University of Michigan Consumer Sentiment Index plunged 8.2 points in the preliminary June survey to 50.2, a record low, and far below the consensus of 59.0. It was the fifth decline in the past six months, as the sticker shock of higher gasoline and food prices continued to depress consumers. The assessment of current conditions dropped to its lowest level since May 1975, while consumer expectations were the worst since May 1980.

Friday’s report that the May Consumer Price Index gained 8.6% from the previous year was the highest inflation rate in more than forty years and pushed stock prices sharply lower for the day and week. Going into the report, expectations were for a slight dip in year-over-year inflation. As a result, Friday’s report apparently took stock and bond markets by surprise. The end result was sharply lower stock prices and a big jump in interest rates. As far as stocks are concerned, the recent rebound appears to have ended with a test of last month’s low now likely.

Core CPI, which excludes food and energy, rose a smaller 0.6%, but also exceeded the consensus of 0.5%. It was the biggest gain in nearly a year. Almost all core CPI components increased from the month before, as price pressures remained broad-based. Notably, shelter soared 0.6%, the most since January 1991. Airline fares jumped 12.6%, its third consecutive month of double-digit gains, as demand for travel increased, as did fuel and other costs. Used car and truck prices rose 1.8%, up for the first time in four months, while new vehicle prices rose 1.0% and have increased by at least that amount in nine of the past 13 months. The persistence of vehicle price growth reflects continued shortages and bottlenecks in this sector that emerged during the pandemic and have showed little improvement, as vehicle inventories continue to hover near historic lows relative to demand.


7-Week Losing Streak Finally Broken. Is Optimism Coming Back?

The S&P Index jumped 6.7% last week, the best since the week ending November 6, 2020. What’s more, the rally ended the losing streak at seven, avoiding a tie for the most consecutive weekly declines in the history of the benchmark. Breadth indicators like “Percentage of SPX issues above their 20-day moving average” jumped to their highest levels of the year.  This is encouraging given that trends remain negative.

One other development worth highlighting is the degree to which stocks hitting new 52-week lows plummeted to the lowest levels since early April.  Both of these readings suggest that the bounce late last week accomplished some technical progress and could be worth following.

The Conference Board’s Consumer Confidence Index fell 2.2 points in May to 106.4, a three-month low, but above the consensus of 103.9. The index is down 13.6 points from a year ago and has failed to recapture its pre-recession level so far in this expansion. In our analysis, the decline in confidence had generated a slowdown signal for the economy earlier this year. Nevertheless, the index remains well above its pandemic lows and far from recession territory.

Consumers felt more wary about both the present situation and the future outlook. On net, the assessment of current business conditions improved, while views on job availability weakened somewhat, but were still higher than pre-recession. The latter suggests a near-term uptick in the unemployment rate, but still tight labor market conditions. Consumer expectations backtracked 1.5 points to 77.5, its second lowest level since February 2014. Notably, expected business conditions hit their lowest level since October 2011, which historically has correlated with slower real GDP growth over the next two quarters. Job and income expectations were more favorable, but well below higher levels earlier in the expansion.


Vance Howard on CNBC: Investors should be patient, and not buying right now

Vance Howard of Howard Capital Management says he’s writing out his shopping list and looking for areas of opportunity when the market turns positive again. Click the image to watch the whole interview. 
Vance Howard on CNBC

Caution Advised! Trader’s Rally Might be Temporary

The markets are deeply oversold and due for a nice trader’s rally. I would suspect a solid 10% move up, possibly up to around 4500 on the S&P 500 over the near-term. Be very careful because this could just be a TRADER’S RALLY. Stay nimble and set very tight stops.

We are not calling a bottom, but this selloff has created some amazing buys, and we think they could get even better. The HCM-BuyLine® is negative and until it changes, we will sit on the cash we have built up and let the HCM-BuyLine® tell us when to re-enter the market.

Some stocks we are looking at when the trend changes back to an uptrend are companies like Salesforce (CRM), Nvidia (NVDA), Advanced Microdevices (AMD), and the list goes on and on.

The S&P 500 roared into the close Friday, closing positive on the day at 3,901.36. The VIX closed at $29.43. The S&P 500 has still fallen seven weeks in a row, its longest losing streak since 2001. It recovered from its plunge into bear territory, but it’s still down 18% this year. 2022 is a midterm year, which typically experience a 17.1% average drawdown from peak to trough. When considering market cycles, this midterm year isn’t much of an anomaly.


Scroll to top arrow