facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
Mid-Cycle Correction ... ? Thumbnail

Mid-Cycle Correction ... ?


As mentioned in our last blog post, there are numerous inter-market relationships that are pointing to an increased risk of a mid-cycle correction. As a result, we have made some adjustments to our models.   First, we slightly decreased equity exposure and increased the fixed income exposure during our last re-balance. More recently, we sold a few positions that were moving against us. Given our concerns about a mid-cycle correction, most of these second sells were not re-invested. 

If you have worked with us for a while, you have likely heard us state that we do not predict what will happen in the stock market. Instead, we analyze the market and let the data guide us. While there is no single dataset that is definitive, Chart 1 offers one visual to help illustrate our current concern.

Chart 1 – Data Source Optuma & TD Ameritrade

The top portion of Chart 1 is what is referred to as the “Advance Decline Line”. In essence, it shows us the overall trend of the stocks on the New York Stock Exchange. If the line is pointing up, more stocks are advancing than declining. Likewise, if the AD Line is pointing down, more stocks are declining rather than advancing. On this chart, we’ve added a red trendline on the recent peaks of the AD Line. You can see that this trend is pointing down.

The bottom portion of the chart is the S&P 500; the 500 largest stocks in the United States as measured by Standard & Poors. We’ve drawn a red trendline on this line over the same duration as the trendline in the top portion of the chart. This trendline is pointing up, indicating a positive trend.

If these two trendlines were both pointing in the same direction, one would confirm the other. In this case, since the AD Line is pointing down while the S&P 500’s trendline points up, it is referred to as a “negative divergence”.  While negative divergences do not always resolve in a negative manner, we offer this chart as a simple way of highlighting our short-term concerns.

From a longer-term perspective, we remain concerned about inflation. 

One of the drivers of our inflationary concerns is the fact that the Federal Reserve continues to add monetary stimulus into the economy while Congress and the President continue to add fiscal stimulus into the economy. Chart 2 tells us that all this stimulus might not be necessary.

Chart 2 – Data Source: St. Louis Federal Reserve (FRED), Total Non-farm Job Openings

This second chart is sourced directly from the St. Louis Federal Reserve’s FRED (Federal Reserve Economic Data). One downside to this chart is that it only goes back to December 2000. However, in the last 21 years there has never been as many non-farm job openings as there are right now. As a result, in order to attract candidates, employers are raising their starting pay. While this is good news for the new employees, it can easily cascade. Initially, employers will try to absorb the higher cost of these higher employee wages. However, eventually, they will be forced to raise their prices. You have likely already seen this happening. This is one reason why we are concerned that the recent inflationary trend is not “transitory” but could be a bit more stubborn than the Federal Reserve has been suggesting. A healthy economy will have some inflation. But too much inflation is generally not good for either the economy or the stock market.

In our next post, we will discuss the Federal Reserve’s plan to “taper” their asset purchase program as this is another one of our main concerns that could also lead to stock market volatility.


This information is intended to be educational.   Hicks & Associates Wealth Management does not provide tax or legal advice. You should consult with a qualified tax, legal or financial professional before making any decisions.
Investment advisory services are offered through WealthShield Partners, LLC (“WSP”), an investment adviser registered with the Securities and Exchange Commission, doing business as Hicks & Associates Wealth Management. Registration as an investment adviser does not imply a certain level of skill or training. More information about WSP can be found in Form ADV Part 2 which is available upon request.
Past performance is no guarantee of future returns. WealthShield Partners, LLC reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The visuals shown are for illustrative purposes only and do not guarantee success or certain level of performance. This material contains projections, forecasts, estimates, beliefs and similar information (“forward looking information”). Forward looking information is subject to inherent uncertainties and qualifications and is based on numerous assumptions, in each case whether or not identified herein.
This information may be taken, in part, from external sources. We believe these external sources to be reliable, but no warranty is made as to accuracy. This material is not financial advice or an offer to sell any product. There is no guarantee of the future performance of any WealthShield Partners, LLC portfolio. The investment strategies discussed may not be suitable for all investors. Before investing, consider your investment objectives and WealthShield Partner’s charges and expenses. All investment strategies have the potential for profit or loss.