My wife and I have three amazing boys – Jonah, Dov and Leo. However, I sometimes daydream that if we had twin girls, it would have been fun to name them Cassandra and Pollyanna. Imagine the teenage years!

Of course, Pollyanna is a 1960 Walt Disney movie about a girl with boundless optimism. Cassandra was a priestess in Greek mythology, who foresaw impending doom. Her curse was that no one believed her.

Today, most economists have a very rosy outlook so maybe we just accept that things are pretty good. Or perhaps the fact that very few people are nervous is a sign in and of itself that risks are being ignored. Are we to heed Pollyanna or Cassandra?

True to our passive investing roots, we believe the biggest risk is trying to time the market. Yet as value investors, we try to avoid market frothiness and today’s market does display some hallmarks of excess. In this quarter’s newsletter, we will offer our view of current market conditions and discuss the ways Longwave is attempting to stay invested while subtly reducing risk in this very complicated investment environment.

The Case for Pollyanna

You might remember that the stock market for most of 2022 was pretty lackluster. The culprit for this malaise was the US Federal Reserve. Although the economy was in good shape, all that pandemic stimulus sparked some serious inflation. To cool down prices, spending and wage growth, the Fed stepped hard on the brakes. They raised interest rates by 5 percent and removed cash from the economy (see chart). Accordingly, businesses pulled back spending, hiring and borrowing. As a result, the past two years were characterized by a constant fear that recession was imminent.

But the recession never landed. Inflation came down and around October of last year, something very important changed. The Fed began to signal that they were done raising interest rates and in fact were likely to start lowering them sometime in 2024. According to our Director of Investment Research, Brandon Wester, the chart above also illustrates that around April 2023 (coinciding with the collapse of Silicon Valley Bank) the Fed also began freeing up cash for the economy. On top of all that, the US Government is maintaining $1 Trillion in deficit spending every 3 months, mostly through money printing. Given that most US debt is held by US nationals and businesses, that money is ending up in our economy.

As a result, since November, the market has been on a tear, driven anew by lose money, relatively low inflation, low unemployment, and tech optimism. Investors are starting to think a recession is not in the cards, at least for now.

Minding Cassandra

The market has now gone up for 5 straight months; but more than that, animal spirits are back. The IPO market is in full swing. Crypto currency, THE speculative asset class, is back to all-time highs. Meme investing has returned (DJT the former president’s social media investment vehicle launched and skyrocketed to over $8 Billion before falling by almost half in just a few days). By some measures, tech stocks are more expensive today than they were before the dot-com crash. Even residential real estate, which was supposed to take a tumble due to higher mortgage rates, continues to do well across the country.

To some, the recent melt-up feels like it’s déjà vu all over again. We don’t have to go too far back to recall what can go wrong. After a pandemic-era spending party in 2021, the economy experienced a big hangover the following year, dropping by 20%. Bonds, real estate and most other asset classes were also down big. With government cash spiking the punch bowl once again, a sudden and unexpected reversal could cause a repeat of 2022’s rush for the exits.

Will the Election Upset the Applecart?

This leads us to address the question we have heard most over the past few months: how will this election cycle effect the economy and the markets? First, it should come as no surprise that the US Government appears to be juicing the economy during an election year. However, once the election season is over, we might see a less accommodating Fed. It might actually be healthy for things to calm down a bit – asset bubbles and speculation don’t usually end well.

But in terms of which party gets elected, we are more ambivalent (speaking as investors only). Historical research shows that there is little to no correlation between election years and standout market performance, either good or bad. We certainly wouldn’t rearrange your portfolio based on who you think might win in October.

If the market is being artificially propped up with trillions of dollars, how do we lessen the blow if this stimulus reverses next year? We are already on it.

Looking Ahead

As archetypes, Cassandra and Pollyanna represent theatrical extremes of personality. However, making extreme investment moves rarely bring consistent results - being too optimistic prevents us from seeing risk and being too pessimistic prevents us from taking advantage of opportunities. Longwave aims to balance risk and opportunity to create a smoother experience for our clients, to stay invested regardless of froth or fear, interest rates, jobless rates or whoever happens to be in the White House. In this spring of uncertainty, we are grateful and honored by your trust.

Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.

All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.

My Two Daughters