Addressing the "Bear" in the Room

Happy New Year and Happy New Decade to each of you! This time of year allows for reflection on the past and renewed vigor for what lies ahead. We are excited for the year ahead as we continue building for a strong future for both our burgeoning company but most importantly our clients. We will be publishing our Quarterly Reflection/Year-End Review next week which will highlight our strategic initiatives taking place in 2020 as well as feature the growth we experienced throughout 2019. We look forward to sharing it with you all!

As some of you know, as mentioned above, I do a considerable amount of reflection at year-end, not from a goal perspective but a review of the path I traveled and the experiences I encountered in my professional and personal life. During our coffee today, I would like to share my reflection and thoughts about something I encountered professionally over the last few months; being labeled as a “bear”. There are two popular investor classifications in the financial world; you’re either a “bull” or a “bear”. Bullish sentiment is defined as an investor who buys financial securities in hopes of appreciation whereas a bear is defined as an investor who sells securities because they anticipated losses. So, grab your cup of coffee as we address the “bear” in the room!

For the high-speed espresso drinkers, here is a quick bullet point synopsis:

  • The dichotomy between financial participants is that you’re either a “Bull” or a “Bear”
  • Our investment strategy does not identify as a “Bull” or a “Bear”
  • Business cycle investment strategy means full-cycle investing

At some point in history, it became widely accepted to classify investors as either a “bull” or a “bear” with the aim of labeling one’s attitude on the financial markets. For years, we’ve watched financial practitioners classify investor sentiment as one or the other akin to the dichotomy of one’s political belief; republican or democrat. We aim to not identify as either given the way we view financial markets and design our investment strategy. We often describe our investment attitude like the analogy of a glass of water; either half full or half empty dependent upon one’s sentimental view. Where we differ is that we simply measure the level of water in the glass and make our decision on how to protect the water left and/or how to prudently get more in the glass as we’re always thirsty.

Our investment strategy is purposely designed to help eliminate as many investment biases as possible by having a data-dependent view. We believe that financial markets are acutely sensitive to the growth rates (how fast or slow the economy grows) in economic conditions. With the assessment of various stages in the business cycle, we can begin to articulate the growth rate of the economy. By having a pulse on these macroeconomic conditions, we can understand the impact on various financial assets which allow us to construct portfolios with securities that ebb and flow with the business cycle. This translation of business cycle awareness paves the way for full-cycle investing.

One of our favorite data points and charts we use to contextualize the business cycle is the Institute for Supply Management Purchasers Manufacturing Index, also known as the ISM PMI. This index measures the short-term business cycle by assessing the sentiment and financial plans of businesses throughout the United States. What you will see in the chart below is that the ISM PMI index closely tracks the level of interest rates and the return profile for stocks. Therefore, by having an in-depth analysis of the direction of the business cycle, we can have an indication of how financial assets will perform.

We believe that one of the largest misconceptions about the investment landscape stems from the belief that one must be either “bullish” or “bearish” and how that translates to being invested or uninvested. As most of our followers know, we’ve been highly vocal on the decelerating growth rates of economic conditions over the last 22 months which has led some to believe we must be inherently “bearish”. This is far from true. In fact, based on the definitions we discussed earlier over coffee, we were quite “bullish” on specific asset classes, sectors, industries, and factors during this deceleration. Below is a sample of our framework and analysis of what instruments fare well during different phases of economic growth.

Over the years it has always been a livelier party, or at least a more accepting group, to have “bullish” rather than “bearish” rhetoric. I encourage investors, and fellow practitioners, to remove this noise and identify securities/investments that provide superior risk-adjusted returns at various phases of the business cycle.

I look forward to sharing our 2019 review of financial markets on what went right and went wrong, as well as our expectations for 2020!

Please feel free to reach out with any questions, topic suggestions, or if you want to chat!


Chief Investment Strategist