Sentiment Leads The Market; The Fed Follows

Listen here or on the go with Apple Podcasts and Spotify

The Market Pinball Wizard Avi Gilburt shares why the market forces the Fed’s hands (0:05). FX prediction: sizable decline coming in 2nd half of 2024 in DXY, then a multi-year rally. Will emerging markets outperform S&P? (1:40) Investing in an election year (5:15). Why it’s time to get out of dividend plays (7:15). This is an abridged conversation from a recent Investing Experts podcast.

Transcript

Avi Gilburt: Historically, well, first of all, people believe that the Fed sets rates. The Fed sets only very, very, very short-term rates. The Fed sets its discount rates.

When it comes to market rates, the market is really what directs that. And oddly enough, even the Fed’s moving on interest rates follows the market. So it’s not that the Fed leads the market, the Fed actually follows the market.

So if you want to know what the Fed’s going to do, you look at the – what the market’s doing. There have been many, many turns we’ve called in the markets just using, believe it or not, (TLT). And when we’ve seen turns about to happen in TLT and we go long, within a few months, as the rally is taking shape, the Fed starts jabbering about changing rates. So, when you look at the charts, the charts will tell you what the Fed will do. The market forces the Fed’s hand.

Rena Sherbill: So what are your thoughts if they do cut rates in September?

Avi Gilburt: It doesn’t make a difference to me because the chart has already been pointing up for some time.

So whether the Fed does it, or whether the Fed doesn’t do it, and it’s up to them. I’m looking at what the market’s telling me that rates are going to do. And the market’s telling me rates are going to come down at least until we get to the 105 to 110 region on TLT. And then we’re going to take it one step at a time.

Rena Sherbill: So what other things are you paying attention to it in the market or how would you encourage investors to be thinking about things? What else would you point to?

Avi Gilburt: Well, for those that are in the FX world, we’re looking for a sizable decline starting in the second half of 2024 in the (DXY) of all things, we’re looking for a sizable decline in the dollar. I’m actually looking for the DXY to get back down into the low- to mid-90s before that decline completes.

That’s a sizable move because right now, we’re hovering around 104. But once that decline completes, I think, I’m looking for a multi-year rally and it could even be a decade long rally in the DXY after the next decline completes.

So for those that trade FX or those that need to understand what the pairs are doing, I’ll tell you right now, the DXY is about to see a sizable decline starting in the second half of this year, but only to be followed by an even much larger rally as we look out over the next decade potentially.

Another place I’m looking at is the emerging markets. A funny thing is, even though I see the S&P go into what could be a very, very long-term bear market, I see the potential for emerging markets to be outperforming the S&P 500.

For example, when the S&P 500 is only going to get a corrective rally not to new highs, emerging markets are setting up for during those periods that they can easily well exceed the S&P 500 and go to new highs in the emerging markets. And what I’m specifically talking about is the ETF, (EEM) is what I’m looking at.

So I’m looking for more of a pullback in the EEM. But if I get the type of pullback that I want to see, then I’m probably going to be taking some of the cash that I have free and putting it into the EEM for a rally.

Rena Sherbill: And when you’re talking about the currency and EEM, is this strictly chart-based? Are there any fundamental factors here or is this strictly chart?

Avi Gilburt: Strictly chart-based. When I deal with larger broad markets, I usually will not pay much mind to the fundamentals. And that’s because the fundamentals usually coincide with the movements in the markets only after the markets make their move.

And I think when I did my presentation, I presented one of our larger hedge fund managers that commented that it’s amazing how we come up with a contrarian play and then maybe three, four months later, he’ll start seeing it in the fundamentals.

So oftentimes, sentiment will lead the fundamentals by quite some time. For example, when the market is crashing in 2020, and I said to all my clients, guys, 2,200, I’m a big buyer there because I’m looking to go over 4,000 from there.

Now, if you look at the fundamentals of the market at the time, well, you had record unemployment, you had economic shutdowns all over the country and all over the world, who the hell could have foreseen the potential that the market is going to go screaming higher like that?

Well, that’s where sentiment leads the market. Sentiment will lead the fundamentals on the larger degree scale. But as I say, when you’re looking at small individual stocks, you’re not going to have mass sentiment within those stock purchases and sales. You really have to understand the fundamentals of those individual companies more so than any large caps.

Rena Sherbill: We see so much analysis in an election year, especially this election, which is driving a lot of opinions. And it seems that there’s a lot of guesses or wannabe prophets and not necessarily staying true to the facts. How do you encourage investors to be agnostic through an election year, through all these things?

Avi Gilburt: It’s so funny. I remember back in 2016, when everybody thought that if Hillary won, market’s going to rally like crazy. If Trump won, the market’s going to crash. Well, we kept pounding the table from early 2016, even before we went into the elections, from early 2016, we were calling for a bottom in the market around 1,800 and we were looking for the market to rally to minimum 2,600 that year. And we said, we didn’t care who was elected.

And at the end of the day, like I say, people believe what they want to believe, but oftentimes, it really doesn’t make any difference to the market. I’ll give you a funny quote from Alan Greenspan. And this is something Alan Greenspan actually said, “it hardly makes any difference who will be the next President. The world is governed by market forces.” He nailed it. He nailed it. That’s exactly the truth.

People think this is so important to the market. That is so important to the market. And you know what? Once you get past that event, they don’t care anymore. It really wasn’t that important at the end of the day.

Or sometimes it could be exactly the opposite of what they expected at the end of the day, like with October 2022. So, as they say, opinions are like armpits and I’m trying to clean it up a little bit. Opinions are like armpits. Everybody has one and they all smell.

RS: Appreciate it. That’s a nice twist on that one.

Avi, what else would you share with investors right now? What else do you think would help them understand things?

AG: Well, like I said, I think it’s a time where people should start considering, especially those that are very close to retirement, considering raising cash. And I know everybody on Seeking Alpha loves those dividend plays, but I’m waiting for the market to give me that first big decline to signal we have begun the bear market.

And then I’m going to be instructing all my clients on the next corrective rally thereafter, it’s time to even get out of the dividend plays because that next rally thereafter is going to set up a major market crash.

Before that happens, I’m going to suggest to people to get out of dividend plays. Why? Because I know people love those dividend plays and say, well, you know what, the market always comes back and they say dividend plays did well and through The Great Depression and The Great Recession. But we’re dealing with a different environment that we’re heading into.

My expectation is we’re probably going to be looking at a very prolonged bear market, could be 10, could be 20 years long. During such a malaise of economic activity, dividends will be cut. In my opinion, I have no question in my mind, dividends will be cut during those periods. Some of those companies may be even going out of business.

So, for the dividend players out there, not only are you going to have to stomach a major capital depreciation in your asset value, you’re also going to have to stomach cuts in dividends. So from the way I’m looking at it and the way I’m telling my clients, once we get that first signal that the market is heading into that long-term bear market, the next major rally, corrective rally thereafter, I’m going to say, it’s time to get out of dividend plays.

We can get back into dividend plays once the next crash completes. And we’re going to have multiple crashes during that long-term bear market. It won’t be just one. There’ll be multiple crashes.

So it’s not going to be one simple one and done like we had in The Great Depression, which is why The Great Depression, the stock market crash from ‘29 to ‘32, lasted three years, took 80% off the market. That’s not a long time in the larger span of the lifetime of the market.

But if you’re looking at a 20- or 30-year period of time, because what Elliot taught us is the theory of alternation. If a Wave 2, which was the ‘29 crash, takes a very, very short amount of time, the Wave 4, which is the next bear market that I’m expecting, which is of the same degree as that ‘29 crash, will take much, much longer. It’ll be completely different in nature.

So that’s why I’m expecting a very prolonged market, a bear market. And I think dividend players may wind up being very hurt by that type of timeframe.

I remember I wrote a number of years ago, I mean three years ago, I wrote an article saying, I feel bad for people who are approaching retirement, especially if they’re not realizing what’s coming because those people probably be the ones that are most hurt.

Rena Sherbill: I know you’re not a prophet, but would you say that the dividend cuts are going to be one of the first prongs of the crash?

Avi Gilburt: No, no, no, no. The dividend cuts will probably come. Remember, you’re first going to have something, in my opinion, you’re first going to have something that’s going to feel like a mini crash.

I think we’ll go from whatever high we strike in the S&P 500 approaching 6,000, I think, we’ll probably go from there down to about 3500 to 3800 in a rather rapid fashion. Is it going to be an outright crash like it was in 2020? I don’t think so, but again, I can’t tell you for sure, but it will be a probably a very strong decline, I believe, that we’ll see back down to those regions.

And will dividends be affected there? I don’t think so. I think what will happen is you’ll then get a corrective rally back up and then you’ll have a crash. Probably during that next crash, you’ll probably start seeing some real big issues in companies across the world.

And I think that’s when you’re going to start seeing the dividend issues, but it’s going to be over time. The dividend issue is going to take place over time.