I've seen a vast spectrum of different market conditions over my three-odd decades investing, but this - right now - is one of the weirder markets and more bizarre economies I can recall ever experiencing.
Value, they tell me, is dead. I dispute that; I think uninformed, static stock-picking by large institutions is really what's "dead."
That said, it's undeniable that most value managers are sucking eggs right now.
As we've seen, normally, value and momentum trade off lead position in the "here's what's working" stakes; if one is working, the other usually isn't doing so hot, but will come into ascendance eventually.
But weirdly enough, there is no real reason to cheer in the momentum camp just now, either; most momentum managers are struggling.
I'm struggling, too. Specifically, I'm "struggling" to understand how momentum lags in a rising market, but it's there in black and white: Momentum is indeed lagging and has been all year.
But that's not even the weirdest thing...
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We're Rolling Through Truly Strange Terrain Here
The stock market is up more than 16% so far this year, even though earnings are forecast to decline for at least the next two quarters. Whenever a grim forecast is released, it's totally out of mind - forgotten - among investors after 48 hours or so: "Hey, whatever, it's only an alarming reduction in U.S. corporate earnings. Who's getting eliminated from 'Organic Idols Dancing with Kitchen Star Models' tonight?"
The quants, with their countless calculations and formulas, are getting their heads bashed in on a daily basis.
It's time to shake things up a bit - the most interesting man in finance has an important message...
The talking heads tell me the economy is wonderful, but if the Fed even hints at rising rates, everything grinds to a halt. My mom paid close to 15% for her mortgage when I was a wee lad, but anything over 4% today, and the builders pack up and go home.
The Chicago Board Options Exchange Volatility Index (VIX) is trading at levels suggesting everlasting peace and prosperity... even as we engage in a trade war with China and inch closer to an actual war with Iran.
Speaking of Iran, how is it that West Texas Intermediate crude is below $60 a barrel when it looks like we could - at any minute - see major disruption in the global supply chain?
Tweets can add or subtract hundreds of billions of dollars on the market in the blink of an eye.
Much of Europe has negative interest rates, and they still can't get the economy to grow.
Most tech stocks trade at nosebleed valuation, but semiconductors - which are used in all aspects of tech - are trading at single-digit earnings multiples.
Funds and ETFs are clamoring for high-yield bonds at 6% or less, and people desperate for yield are standing in line to buy them even as credit criteria weaken dramatically.
The Vanguard Group thinks forward returns for stocks and bonds will be well below the historical averages... but it also thinks you should buy some of its fine, nice index funds anyway. (Don't do that.)
Markets aren't behaving in any kind of reasonable fashion.
Look, the universe is under no obligation to make sense to us, but nevertheless, those of us with some gray in our hair see a lot of conflicting and confusing information when we look at financial markets today.
Now I know some young guns, too, who think they have all this figured out. They reckon all they have to do is "buy the tip" and schmooze their brokers into giving them shares of veggie-burger makers and ride-sharing companies, and the money will flow forever.
I have to tell them (and you, if you're one of the young guns): I have seen that movie, and it doesn't end well.
You don't have to take the dirt nap with them, though.
Here's the Smart Way to Play It
Am I suggesting that the markets are going to crash? While I certainly hope they do - fortunes are born in bad markets - my crystal ball is in the shop.
What I am saying is it's tough to make money right now. Much like driving in the pouring rain, a little caution can go a long way when you're deciding how to put your money to work every day.
See Now: These 100 stocks have a 94% win rate based on our testing. Full story here...
The trick is to use the edge that you have as an individual investor.
Buy small stocks that the algorithms and ETFs can't or won't push around. Avoid like the plague investments that are flat-out unsmart, like tech stocks at 50 times sales, for instance, and real estate investment trusts (REITs) that own a lot of property in overheated markets like New York, San Francisco, and Seattle.
Instead, buy the small, dividend-paying banks that service the high-tech industries for single-digit earnings multiples and REITs that own property in the Sunbelt and smaller cities. Fatigued property and tax refugees who're abandoning those big, overheated markets will be moving there.
Hold back some cash if you can't find bargains. When markets fall, cash becomes the most valuable tool in the box.
I don't know what the stock market will do over the next days, weeks, or months. No one does, in my opinion.
I do know that pockets of the economy and stock market are priced like we live in a perfect world, and the front page of all the newspapers I read every day are telling me that this just is not the case. Political risk is high; the noise level is near deafening.
I'm very fond of my money - I worked hard for it - and I don't like losing it. So when things don't make sense, when it just doesn't add up I like playing a little defense.
Maybe I'm wrong and everything really is perfect. We'll all sing "Kumbaya" and go party on the big rock candy mountain.
If that's the case... stocks will take off and move higher. So will the little banks and smart, well-positioned REITs we own. I won't miss a thing. My stocks will go ballistic right along with everything else.
If, however, confusion turns to terror at some point and stocks collapse, then my stocks will not be getting dumped by ETFs and margin-call dodging hedge funds. My position should hold up much better than most. I'll also have the cash to buy up great companies at the kind of bargain prices that pretty much guarantee I don't have to worry about getting a real job for at least another decade or two.
In the stock and bond markets, confusion usually means danger. It might be different this time, but from a historical perspective, that's surely not the way to bet it.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.