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The Goldilocks Warning 12-05-15

Written by admin | Dec 6, 2015

I Need You Help

After nearly 15 years of writing the X-Factor report, it is time for a change.

In fact, over the next few weeks you are going to see a lot of changes starting with this week’s newsletter.

  1. You will immediately notice that the “disclaimer” at the top of the newsletter is now gone. This is because I have left the firm that I started at the turn of the century to join a new firm as Chief Portfolio Strategist / Economist. This is a great opportunity for me to do many of the things that I have wanted to do for the last several years.
  2. Next month, I will launch a series of portfolios directly driven by my team and me. For the first time in more than three years, I will once again be working directly with individual clients. I am really excited to get back to my core values and the roots of my passion – you and your money. The new portfolios, and the underlying strategies, will be discussed and reviewed each week in this missive. My goal is to keep you informed not only about what I am thinking, but what I am doing within the portfolios I manage.
  3. Also, next week, STREETTALKLIVE will no longer exist.  In its place you will find my new blog site REAL INVESTMENT ADVICE. I am really excited about the new site. You find my daily work as always, but I will also be featuring work from new content partners including 720 Global Research, Zacks Investment Research, Alhambra Partners, Advisor Perspectives, and others that I will be announcing over the next couple of months. The topics will cover everything from portfolio management, to economics to financial and retirement planning.

So, what do I need your help with?

I am designing REAL INVESTMENT ADVICE to be a valuable resource to YOU.  However, in order to do that I need your suggestions about:

  • What type of information would make REAL INVESTMENT ADVICE a daily visit for you?
  • What resources would you like to see?
  • What you would like to have in the weekly newsletter? (portfolio strategies, economic data, etc.)
  • What do you want to HEAR more of on the “Lance Roberts Show.”
  • What are some of your favorite “go to” websites currently?

Click Here To Send Your Suggestions

My goal is to build a suite of products to serve you, and my clients, more effectively. However, if order to that, I need to know what is most important to you. Let me thank you in advance for your loyal readership over the years. I look forward to serving you for many years into the future.

Lance Roberts


As we enter the final month of the year, stocks (as measured by the S&P 500) have made no progress for the year.


Unfortunately, many hedge and mutual funds are lagging even further behind on a year-to-date basis. As I stated recently:

“Historical tendencies suggest a bias to the upside. This is particularly the case given the weakness this past summer which has left many mutual and hedge funds trailing their benchmarks. The need to play ‘catch-up’ will likely create a push into larger capitalization stocks as portfolios are ‘window dressed’ for year-end reporting.”

Importantly, as shown in the next chart below, the recent turmoil in the market over the past week was expected. In early November, I laid out the expectation of a market decline back to support which would facilitate the year-end advance. Here is the updated version of that chart.


So far, the expectation the strong October advance would experience a pull-back to support setting up the year-end push towards overhead resistance continues to play out. More importantly, the market has been unable to push above the downtrend resistance from the June highs.

It is quite likely that over the next week the recent volatility will continue as mutual fund distributions of short and long-term capital gains, dividends, and interest continues. Following those distributions, the last half of the year should be more positively biased as manager’s position for the end of the year reporting.


This is the time of year that I receive many panicked emails about sharp drops in mutual fund prices in accounts. There is nothing to worry about.  This is the effect of the annual distributions from funds to you. This is how it works:

  • You own 1 share of fund ABCDX at 10.00
  • The fund distributes 1.00 in capital gains to you.
  • The fund declines in price by 1.00 to 9.00.  (You panic because your fund just lost 10%)
  • In about a week, you will either receive 1.00 in cash or 1.00 in shares, if you reinvest, of the fund.
  • Assuming no price change, your net value will be restored.

The forecast for the end of the year, however, does not carry over into 2016. With declining profitability, a weak economic outlook, surging inventories, a stronger dollar and a potential for higher rates there are many headwinds that currently exist.

However, my biggest worry comes from the rising utterances of “it’s a Goldilocks economy.”


Just this year there has been a rising number of articles suggesting that we have once again entered into a “Goldilocks Economy.”

There are plenty more, but you get the idea. The problem is that in the rush to come up with a “bullish thesis” as to why stocks should continue to elevate in the future, they have forgotten the last time the U.S. entered into such a state of “economic bliss.”  You might remember this:

“The Fed’s official forecast, an average of forecasts by Fed governors and the Fed’s district banks, essentially portrays a ‘Goldilocks’ economy that is neither too hot, with inflation, nor too cold, with rising unemployment.” – WSJ Feb 15, 2007

Of course, it was just 10-months later that the U.S. entered into a recession followed by the worst financial crisis since the “Great Depression.”

The problem with this “oft-repeated monument to trite” is that it’s absolute nonsense. As John Tamny penned for Forbes:

“A ‘Goldilocks Economy,’ one that is ‘not too hot and not too cold,’ is very much the fashionable explanation at the moment for all that’s allegedly good.

‘Goldilocks’ presumes economic uniformity where there is none, as though there’s no difference between Sausalito and Stockton, New York City and Newark. But there is, and that’s what’s so silly about commentary that lionizes the Fed for allegedly engineering ‘Goldilocks,’ ‘soft landings,’ and other laughable concepts that could only be dreamt up by the economics profession and the witless pundits who promote the profession’s mysticism.

What this tells us is that the Fed can’t engineer the falsehood that is Goldilocks, rather the Fed’s meddling is what some call Goldilocks, and sometimes worse. Not too hot and not too cold isn’t something sane minds aspire to, rather it’s the mediocrity we can expect so long as we presume that central bankers allocating the credit of others is the source of our prosperity.”

John is correct. An economy that is growing at 2%, inflation near zero, and Central banks global dumping trillions of dollars into the financial system to keep it afloat is not an economy that we should be aspiring to. Unfortunately, today’s “Goldilocks” economy is more akin to what we saw in 2007 than most would like to admit.

Wages growth remains nascent while employment growth remains weak. Annual rates of growth in retail sales, core durable goods orders, imports, and exports are all suggesting the economy is far weaker than headlines suggest. Commodities too are suggesting that something is amiss with the economic landscape but are being dismissed as a side effect of plunging oil prices.

However, it isn’t just the economy that is reminiscent of the 2007 landscape.  The markets also reflect the same. Here are a couple of charts worth reminding you of.


Currently, relative strength as measured by RSI on a weekly basis has continued to deteriorate. Not only was such deterioration a hallmark of the market topping process in 2007, but also in 2000.

The same is true when you look at the NYSE advance-decline line.


Another hallmark of the 2007 peak, and 2000 was the deviation in the markets from the longer-term bullish trend. Accelerations is price are typically late stage events as market exuberance exceeds underlying reality….hence the need for coming up with terms like “Goldilocks economy” to justify bullish outlooks.


Looking back in history, declines in price momentum have signaled both short-term corrections and major market peaks. Like 2007, the markets are currently suggesting that investor risk is extremely elevated.


Even on a MONTHLY basis, both short and long-term signals are suggesting that the current technical backdrop is more akin to 2007.


The problem of suggesting that we have once again evolved into a “Goldilocks economy” is that such an environment of slower growth is not conducive to supporting corporate profit growth at a level to justify high valuations.

Such a backdrop becomes particularly problematic when the Federal Reserve begins to raise interest rates which removes one of the fundamental underpinnings of an overvalued market which was low interest rates. Ultimately, higher interest rates, particulalry in an economy with a deteriorating economic backdrop, becomes the pin that “pops the bubble.”

As Michael Kahn concludes in his article yesterday:

“Half of all S&P 500 stocks are trading below their major averages while the “market” is near its highs. It quantifies that the market is indeed narrow, and as history is a guide, in a very dangerous place.

Of course, such conditions can last for weeks and months so we cannot say that things will head south tomorrow or even in a few weeks. But when the generals charge into battle and the troops do not follow it is probably not a good thing.

With December nearly upon us, conventional wisdom says that the stock market is fully engrossed in the strongest half of the year. According to the ‘sell in May’ seasonal strategy, investors should have jumped back into the market in October.

But this is the first time the Fed may actually start to raise rates in many years. Whether or not that is already baked into the market remains to be seen but the technical environment suggests big problems are already in place.”

It is true that the bears didn’t eat Goldilocks at the end of the story…but then again, there never was a sequel either.


With the year-end approaching, this is an opportune time to take advantage of “tax loss” harvesting and portfolio rebalancing and clean-up for the New Year. Here are some guidelines to follow:

  1. Trim positions that are big winners in your portfolio back to their original portfolio weightings. (ie. Take profits)
  2. Sell losing positions for the “tax loss.” Tax the loss in positions that are not performing as expected and offset those losses against your harvested gains for this year.
  3. Positions that performed with the market should also be reduced back to original portfolio weights.
  4. Move trailing stop losses up to new levels.
  5. Review your portfolio allocation relative to your risk tolerance. If you are aggressively weighted in equities at this point of the market cycle, you may want to try and recall how you felt during 2008. Raise cash levels and increase fixed income accordingly to reduce relative market exposure.

How you personally manage your investments is up to you. I am only suggesting a few guidelines to rebalance portfolio risk accordingly. Therefore, use this information at your own discretion.

Sector Analysis and 401K Plan Manager

Both of these sections are under development and will return next week.

Have a great weekend.


Lance Roberts

Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report”. Follow Lance on Facebook, Twitter and Linked-In

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