- Michael Gayed takes a bearish view of the stock market and says he’s ready for a correction.
- It uses intermarket indicators to determine which direction the stock market might be heading.
- He suggested investors diversify by adding treasury bills, gold and even cash to cushion a correction.
The stock market experienced its longest bull run in history before the Covid-19 crisis. In the last 12 months of recovery, the S&P 500 has jumped 32% and frequently hits new highs.
But Michael A. Gayed, an award-winning investment manager at Toroso Asset Management, says it’s not the right kind of growth.
Gayed is the editor of The Lead-Lag Report, a premium research service focused on the idea that if you want to kill it on the stock market, you need to proactively avoid getting killed. It works through the prism of cross-market analysis, that is, the idea that the relative movements of different parts of the market tell you about the changes that may occur. He applies these concepts through three mutual funds that he manages.
The three main indicators for which it is best known are the predictive powers of the utility sector, treasury bills and the demand for lumber relative to gold. He recently told Insider what they were showing him about stocks, especially the last two.
He considers the utilities sector to be one of the most unique in the stock market, as it is the most sensitive to interest rates and its earnings depend on the variability of interest rates. This usually means that when rates fall along with demand for money, utilities benefit because their businesses are heavily indebted and can borrow cheaply.
In the co-authored article that won him the 2014 Charles H Dow Award, he further explained that utilities tend to beat the market in low rate environments as investors are drawn to their cost of capital. cheaper in a weaker economy. Currently, the utilities sector has been trailing the S&P 500 year-to-date by around seven percentage points.
“If utilities outperform the stock market, that would suggest that demand for currency is likely down,” Gayed told Insider.
The same idea applies to Treasuries, he adds. As for the demand for timber relative to gold, the correlation has predictive power because timber is linked to the housing market, which is an indicator of growth, inflation and credit creation. . Meanwhile, gold is a safe haven, meaning that during high risk times in the stock market, it tends to do quite well, he said.
Therefore, most major crashes, corrections and bear markets are historically preceded by the strength of long-term utilities and Treasuries, and the weakness of lumber versus gold.
Currently, the clearest indicators are the behavior of long-term treasury yields, which have been declining since March, and lumber, which has turned absolutely smoky coming out of the early May high, Gayed notes.
He adds that if they continued to drop at their current rate, there would be two explanations, and both relate to predictable and potentially damaging events – the so-called Gray Swans. The first is the Delta variant which does the trick, and the second is the expiration of the debt ceiling and the risk of credit downgrade.
Another risk on its radar is that inflation is in fact transient even after the amount of stimulus that has been poured into the economy to revive it.
“If inflation is transient, the stimulus story that has driven headline averages up is wrong,” Gayed told Insider.
Stepping away from macroeconomic indicators and just looking at stocks, Gayed adds that the big names in large-cap tech are what pushes the market over small caps and emerging markets.
He also notes that areas oriented towards the internal market are expected to be in the lead, but have been lagging behind since February. Small-cap incomes are more sensitive nationally as they are more exposed to consumer discretion, and their lag is likely due to feelings that the pandemic may not be over.
For these reasons, he recommends that investors build up their hedges against a decline in the stock markets.
“Historically, the real diversifiers have been the ones people hate the most: Treasuries, gold, and the dollar itself. No one ever wants to allocate to these because they don’t do much until you have those stressful and high risk times, ”Gayed said.
He continues, “If I’m right and the conditions favor a crash, I use this analogy that I think it’s the eye of the storm. If so, then investors should probably think about just lowering their overall beta risk. exposure and diversification in these areas. “