Authored by Michael Lebowtiz via RealInvestmentAdvice.com,
The bull market surge in 2020 and 2021, followed by the bear market swoon, are great reminders that liquidity and valuations are critical to managing wealth effectively. Unfortunately, most investors pay too much attention to one or the other, but not both.
Those assessing liquidity conditions and tracking valuations were prepared for the bullish stampede of 2021 and understood the risks that ensued when easy monetary and fiscal policy tides ebbed. Most others were left in the bull’s dust or are being ravaged by the bear.
We share our views on portfolio management to better appreciate the value of both liquidity and valuations. Further, we highlight our recent portfolio management activity to show how we navigated through the changing liquidity situation this year.
Our Perspectives on Valuations and Liquidity
Valuations help investors gauge the potential downside risk and upside potential in a stock or market. At the same time, assessing liquidity conditions, including technical analysis, and defining short-term trends help with investment timing and asset selection.
Today’s Environment – Liquidity
Current liquidity conditions dictate conservatism. The Fed is aggressively raising interest rates and reducing its balance sheet. Further, fiscal spending is falling well short of that in the prior two years. As a result, liquidity is exiting the financial markets, which augurs a bearish trend. As we wrote in the Don’t Fight The Fed:
“For example, nine months ago, the upward trend started to flatten. At the time, inflation was rising rapidly, and the Fed began talking about interest rate hikes. Since the initial expectations were for small rate hikes and no QT, the trend flattening and ultimate shift toward a downward direction...