Asset management, money management, investment management, risk management, Stamford, CT
InVEST Risk Model ®
InVEST is an acronym for the 5 key indicators that really matter and signal the true direction and health of the market.
Interest Rates
Interest Rates (monetary policy) – The major direction of the stock market is dominated by monetary conditions. Monetary policy is controlled by the Federal Reserve by adjusting the money supply and short-term interest rates. More money in the system is generally good for the markets. More restrictive monetary conditions are not.
The yield curve inverted (short-term interest rates above long-term rates – a sign of “tight” monetary policy) BEFORE each of the last seven recessions including:
- December 2007
- March 2001
- July 1990
- July 1981
- January 1980
- November 1973
- December 1969
Monetary policy and interest rates are important factors. Consider that:
- The Federal Reserve raised interest rates from 3.5% in 1928 to 6% in 1929 PRIOR to the 1929 stock market crash.
- The Federal Reserve started to raise interest rates in November 1999 PRIOR to the 2000-2002 bear market
- The Federal Reserve raised interest rates in 1987 PRIOR to the October 1987 stock market crash
- The Federal Reserve raised interest rates from 3.5% in 1928 to 6% in 1929 PRIOR to the 1929 stock market crash.
Valuation
Valuation – refers to the price of the market relative to the underlying earnings
Every major decline – including stocks, bonds, real estate, and commodities had their origins in rich valuations. In 2000, for example, the NASDAQ 100 Index had a price/Earnings ratio of roughly 300 prior to the 82% drop by October 2002.
Source: Bloomberg
The greatest setbacks have been when markets are overvalued and when capital concentrates in one market or sector:
- Gold 2011 ($1921/oz)
- Mortgage-backed securities (“AAA-rated” subprime MBS) 2007-2008
- Real estate 2006-2007
- Technology 2000
- Japan 1990
- “Nifty-fifty” (1973-1974)
- “Go-Go” years (late 1960s)
- 1929 Stock Market Crash
Economic Cycle
Economic Cycle – refers to whether the economy is in an expanding or contracting phase, which is important because 7 of the last 8 bear markets began with the onset of an economic recession.
The yield curve inverted (short-term interest rates above long-term rates) BEFORE each of the last seven recessions
There has NEVER been a 0.6% increase in the unemployment rate that did not translate into a recession:
- Dates/Unemployment rates → Date/Peak Unemployment rate
- May 2007/ 4.4% – December 2007/ 5.0% → October 2009/ 10%
- December 2000/ 3.9% – June 2001/ 4.5% → June 2003/ 6.3%
- June 1990/ 5.2% – September 1990/ 5.9% → June 1992/ 7.8%
No recession in more than 50 years has begun without the Leading Economic Index peaking and turning down
Sentiment
Sentiment – is a measure of fear & greed. Sentiment – or investor psychology – has been similar at nearly every major market peak and bottom. We look for extremes in sentiment which is often a very good contrary indicator.
At the March 2003 low – (extreme) bearishness hit 47% following the 2000-2003 decline (S&P 500 advanced 68% over next twelve months)
At the October 2007 high, the difference between the number of “Bulls” and “Bears” according to Investors Intelligence was 42.2, the highest differential to that point in history
Technical Factors
Technical factors – refer to the examination of price movements of various markets to determine their overall health. One example is the Dow Theory, which gave a “sell” signal prior to the 2000-2002 and 2008-2009 declines.
On the other hand, in 2012, the S&P 500 index never traded below the December 31, 2011 closing level – not even for a single day. Said another way, in 2012 the S&P 500 was never down “year-to-date” for the entire calendar year.
The same thing happened in 2013. That is, in calendar year 2013, the S&P 500 index never traded below the December 31, 2012 closing level, not even for 1 day despite impending “fiscal cliff,” “sequestration,” and government shutdown! That was a very positive indication of technical strength.
Between December 31, 2011 and December 31, 2013 the S&P 500 index gained 46.9 percent
TJT Capital Group’s InVEST Risk Model ®
Investing is trickier than most people realize. Even so‐called experts get it very, very wrong from time to time. If you need evidence, here are some examples that prove just how far off investors can be:
- Did you know that the best consecutive four‐year performance in the history of the U.S. stock market occurred during the Great Depression? It’s true: the worst economic crisis in American history actually produced the best four-year return on record.
- By the same token, what many investors believed was the best time to invest – judging by the record amount of money that went into the U.S stock market (mostly the NASDAQ) in the first quarter of 2000 – resulted in a roughly 78 percent decline over the next two years.
- The rout caused by the so‐called “Great Recession,” from its peak in October 2007 through to March 2009, resulted in a devastating 56.7 percent loss in the S&P 500 index. What many bankers, regulators, academics and investors got so profoundly wrong was deeming so‐called “AAA‐Rated” pools of sub‐prime mortgage bonds to be as safe and liquid as U.S. Treasury securities. As a result, those bonds required no reserves against them, based on accepted accounting rules. When the bonds began to default, there was no financial cushion – and the global markets and economy seized up as a result.
- More recently, between 2012 and 2014, despite a litany of potentially negative issues – including a government shutdown, elections, Federal Reserve concerns, and the elimination of tax cuts, among others – the cumulative return for the S&P 500 index was more than 74 percent.
The point here is that investing is not easy. Bull markets and bear markets are part of investing reality. Add to that the fact that investors are often influenced by the crowd (aka, market predictions, biases, opinions, narratives and consensus), and you begin to understand why so many struggle.
TJT Capital Group’s proprietary InVEST Risk Model ® is a unique and trusted tool that guides us to help clients meet their financial goals by simplifying the complex, filtering the noise, and increasing the probability of success. Specifically, we have researched and documented five indicators that really matter when it comes to determining the health of the markets, and we use these as the basis for managing all portfolios.
Put our InVEST Risk Model ® to work for you.
TJT Capital Group helps you participate in markets when conditions are right and looks to protect your money when those conditions change. With experience in building a billion dollar business for a large institution, we bring expertise to managing portfolios to help our clients meet their goals.
InVEST Risk Model ® - The TJT Difference
Investing is not easy. Too often people invest looking through the rear-view mirror, or based upon current headlines, preconceived notions or predictions.
Successful investing involves knowing what moves markets.
You need to have an edge and separate the signals from the noise. TJT’s management team has a combined 90+ years of investment and client service experience. Let us put our expertise to work for you.
- A study of a 25-year period found that Fortune Magazine’s least admired companies outperformed the most admired companies. Higher admiration was followed by lower returns.
- The best consecutive 4-year stock market return was during the Great Depression.
- Over the past 60 years, stocks have had better returns when the unemployment rate is above 8% than when unemployment is 4%.