Playing the Contrarian

Some people are contrarians by nature. If you tell them it will be a wonderful day, they will point out all the potential pitfalls. If you want to go right, they’ll go left. If you suggest steak, they’ll want a burrito. I am not this way. In fact, I’d prefer to run with the herd and enjoy the camaraderie of others. If you want to take the hill for a worthy cause, I’ll be right there beside you. Sometimes, however, I find myself playing the contrarian for no other reason than my work suggests one thing, while the majority desire another. Unlike someone who is simply rooted in this behavior, when I find myself in the minority it is usually due to my own homework, research and well thought out ideas.

Take for instance an article I wrote in September of 2021, "Raising the Caution Flag," a few months before the ugly bear market of 2022.?While it was anecdotal, my belief surrounding the euphoria and excitement in markets led us to taking a more cautious position, which for many was not popular. The general mood on Wall Street was positive as noted by new market highs and technology excitement, however we began to feel a change of character was upon us. Within just a few months the signs of change were clear as we penned another article titled “Buckle Up” discussing what was sure to be a volatile year.

Fast forward a few months to November of 2022 when selling intensified and in our opinion it was clear that investors were fed up with the idea of owning stocks and stepping aside. We published “Buying High, Selling Low” taking a look at the wrong ways to be a long-term investor. For the first time in a long time, our work suggested that value presented itself within the stock market and rather than selling, it was our opinion that folks should be looking for opportunities.

Of course, I would be remiss not to mention the times ‘bucking the general trend’ does not work out. In fact over the years, there have been numerous occasions where our work suggests an opportunity or risk that simply doesn’t come to fruition. Take for instance in July of 2020 when I was asked to join CNBC and comment on John Deere (DE). The company had recently received an upgrade, however I was overly concerned about the debt and advised folks to stay away. The stock was trading in the 170s and has since more than doubled. That was a terrible call by yours truly.

For the last few years, you can find a common theme in my writing. I have remained firmly in the bullish camp with one of the primary drivers being investor sentiment. In fact, you’ve more than likely seen me write or say that in my opinion this has been one of the most hated Bull markets I can ever recall. This anecdotal evidence along with a general fundamental thesis has kept us long of stocks and participating in the run.

Now however, we’re starting to see a shift. From our vantage point, investors have moved from denial to acceptance, which in my opinion is the second to last psychological step of a bull market run. In case you’re wondering, acceptance usually moves to euphoria whereby all rationale investment strategies are thrown out with speculation taking center stage. Despite a few outstanding individual stock moves, in our opinion, we are far from witnessing a speculative bubble, just yet.

That being said, with markets reaching new all-time highs, valuations now being stretched considerably across a variety of sectors and companies, I find my work beginning to put me into the uncomfortable position of market contrarian once again.

A few weeks ago, we voiced our first level of concern writing "One Step Towards Cautionville’'.?Our rationale for caution in this piece centered around stretched valuations specifically within technology and even more specifically within Semiconductors and the darling, NVIDIA. It’s worthy to note that while the S&P and Dow have made new highs, the tech-heavy NASDAQ has not and remains below the July 10th high.

Once again, we’re voicing the subtle voice of concern as we feel investors are starting to step away from their cautious positioning and adding risk at levels that are not nearly as attractive to us as they were just a year or two ago.

It is for this reason that we once again underwent a small portfolio adjustment in a majority of our client accounts, reducing our equity exposure and parking those funds, for the time being, into an intermediate term treasury fund. This step brings us around halfway towards our goal of reducing risk into the later parts of 2025, ahead of what we feel may be a difficult 2026 and beyond. While we may be early in this move, I have no problem laying my head on the pillow each evening with the peace of mind that I am acting as a fiduciary, putting the interest of my clients well ahead of any personal motive at all.

My read on the markets right now is really quite simple. When you combine extreme valuation with broad optimism, we have the recipe of a pullback. This does NOT mean we feel the market has peaked and in fact, if we move into the euphoria stage, we may still have a long way to go. As we enter the election season after an already strong 2024, we feel it important to choose prudence and patience. Should we continue higher with speculation driving stocks, I would have no issue taking even more risk off the table. We’ll continue to monitor this daily.

Until next time

~ Quint

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