It’s the Upside Down market: Strange things are the norm

After more than 30 years in the markets, I know one thing: The current market is not what one would call “normal” by any stretch. We have a lot to worry about it, but investors always have worries. No, instead, this market is upside down. Investors are worried about bad things, sure, but they also are ignoring good signs.

On the one hand investors are being defensive, but on the other they are being aggressive. They panic sell one day and then panic buy the next. Yep, there are some weird things going on this year.

Let’s take a look at five reasons we’re calling this The Upside Down market, an alternate investing dimension like something out of Netflix’s Stranger Things.

INVESTORS ARE WORRIED ABOUT RECESSION AND INFLATION

One day, investors sell stocks because they are worried about inflation. The next day, they sell stocks because they are worried about recession. Pick a worry, people. While it has happened in the past (once, maybe twice), it is rare for an economy to experience simultaneous recession and inflation. A recession sops demand and, lower demand puts less pressure on prices. Corporate earnings have been rising nonetheless. Employment is high. We are not in recession yet, but investors are anticipating one. So, investors worry about a recession and inflation, but we do not think both are going to happen. We’d be more worried about a recession today, but our worry would be tempered by the fact that it is probably already priced in.

THE RICHEST PEOPLE IN THE WORLD ARE BUYING

It is hard to find a confident bull in this market. Everyone is bearish, or, “cautiously optimistic.” Few investors want to do anything. If they are not selling, they are sitting on their hands and hoping this bear market passes quickly. Yet, with this doom-and-gloom backdrop, some of the richest people in the world are going on spending sprees. We all know about Elon Musk’s US$44-billion bid for Twitter, and Warren Buffett recently disclosed that his company spent US$51 billion recently on equities, after complaining for years that he could find nothing to buy. Did I mention that these are among the world’s richest people (Elon is No. 1 on that list). If the richest people in the world are buying right now, maybe it might be time to reconsider your bearish outlook?

VOLATILITY HAS EXPLODED

Now, most investors understand that stock investing comes with risks, and accept some level of volatility. But the level of moves this year has been crazy. Investors complain that they buy a stock, and then are down 12 per cent in three days. Many stocks have fallen 60 per cent, 70 per cent, or 80 per cent, this year. Buyers in any sector other than energy have been crushed. Already this year, the Nasdaq market has had more than 60 trading days of moves greater than +/- one per cent. And that one per cent reflects closing prices. Intra-day swings in the market have been simply ridiculous. The VIX volatility index, while elevated, has still not spiked above 50 though, as it has during other market bottoms. We may not be at the bottom yet, but we do think we are probably getting close.

BONDS HAVE BEEN HORRIBLE, ALONG WITH EQUITIES

Usually, when money flees stocks, it goes into bonds. In The Upside Down market, money is fleeing everything: If you are a stock investor, and last year decided it was time to take some profits and shift to bonds, you have lost a ton of money. Even inflation-linked bond funds, such as iShares Real Return Bond Index ETF (XRB on TSX), have been hit badly this year (it is down 16 per cent). So, you can’t hide out in stocks, and you can’t win in bonds. Real estate looks iffy, cryptocurrencies look worse. Energy and commodities had a good run, but even they are fading now. It makes us wonder: Where exactly is all the money going? Generally, something always works in the market. Even in 2008, gold and the U.S. dollar rose. The year is not yet over, but investors are already hardpressed picking a sector or asset class that they think is going to be higher at year end.

MASSIVE FEAR AND MASSIVE GREED ARE CO-EXISTING

Investors are fearful of everything these days, as we have discussed above. One would think that fear would restrict investors’ propensity to speculate. It usually does. But not in The Upside Down. This is exemplified best with last week’s Bored Apes metaverse land auction, where $320 million of completely virtual land was sold. Think about that: No one wants stocks, or bonds, or cryptocurrencies, but “investors” are willing to shell out more than US$300 million for digital land. Digital land. You can’t move there. You can’t see it without a computer. You can’t even bury a box of gold on your digital land and wait for the financial apocalypse. US$300 million actually changed hands for this stuff. And people think the Vancouver real estate market is insane.

Financial Post

Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/ Short Fund may own non-Canadian stocks mentioned.)