Another bad signal, Cucchiaro contended, is the approximately $200 trillion in financial products and $350 trillion in debt instruments tied to the three-month Libor index. What if rates, which most experts agree will continue to rise several times this year, suddenly spiked as they did in the stagflation crisis of the late 1970s and early 1980s?
“This would be a big deal if Libor starts accelerating; it would have a negative impact on corporations that have debt tied to Libor,” Cucchiaro said.
This, he said, argues for going softly with stocks.
“And when you consider all the economic and fundamental factors, you would give [equities] a neutral rating,” he said.
Cucchiaro said 3Edge has not moved totally out of stocks, but it has greatly reduced them in its typical portfolio over the last year.
His conservative portfolio, for example, was at 30 percent equities last year, but is now at 6 percent. In the moderate portfolio, the percentage of equities has dropped from 60 percent to 20 percent. In the firm’s aggressive portfolio—in which investors are assumed to have longer time horizons and can absorb short-term losses—stocks have gone from 80 percent to 35 percent, Cucchiaro said.
In fleeing from dangerous stocks, what should investors do?
The 3Edge team contended that, in taking a defensive investing position, advisors should use gold and cash. While stocks historically outperform gold, Cucchiaro said, there are 10- to 15-year periods in which gold wins because stocks are overvalued. The latter happened in 1929, 1969 and at the turn of the century, just before the tech stock blowup.
He didn’t predict another crash. But he said “this is not the time to be bold in equity markets.”