Bad News Bears
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What the Market?
Remember when Steve Jobs would leave a big reveal at the end of a presentation with “One More Thing” and everyone would get crazy excited at the big news? Well, this market update is like that, except no one is excited about the news. Mr. Market logged another week of losses, with the 8th consecutive week of decline for the Dow Jones, and 7th for the S&P & Nasdaq. This marks the longest streak since 2001, and only the second time since 1980. Markets briefly entered bear territory (-20%) before closing at -18%. Last week’s drop was driven by disappointing earnings from big box retailers (e.g., Walmart, Target). As it turns out, consumers are not happy about retailers passing on the costs of inflation onto them to protect their margins (#Make99CentPizza99CentsAgain).
Today, Mr. Market has to navigate an environment of inflationary pressures, rising interest rates, a war in Ukraine, and a continued lockdown in China (causing supply chain havoc). Oh, and, one more thing…compressed corporate margins. Yippee!
What’s driving the market?
Persistent inflation and recession fears: Increasing inflationary pressures, supply chain issues and a Fed that looks set on raising rates until it all shakes out are driving fears of a recession. Investors have never been so bearish on the tech stocks that have been lining their pockets for years. Investors are so worried that they are beginning to hope for a “Fed Put.” While not an official term, it is the expectation that the Fed will take action if stocks fall too much (though it is not in their mandate to maintain asset prices). The Fed could either begin buying assets or find a way to persuade banks into lending, or ease its policy tightening. While there is some precedent for this, today’s Fed seems hell bent and ready to risk a recession to get inflation under wraps. At the end of the day, it’s going to be really hard for stocks to stage a comeback until these major macroeconomic issues are resolved. China needs to re-open and ease supply chains, Russia needs to withdraw from Ukraine and energy/oil prices stabilize, the Fed needs to crush inflation. For now, monitor the economic data - there will be a plethora of releases this week (see below).
Davos: After a two year hiatus due to the pandemic, the World Economic Forum is set to resume. CEOs, politicians and other big names will come together to discuss relevant topics such as the war in Ukraine, the pandemic , generalized economic woes from inflationary pressures and continued mismatches in supply chains. Granted not much is expected to come from such meetings, it’s always interesting to keep an eye out for the overarching topics being discussed and any bilateral or multilateral deal announcements that may occur.
What’s an investor to do?
Portfolio Management
100 Awesome points to anyone who bought some bonds last week! If you didn’t… you must really like pain, have you considered joining Fight Club? The message remains the same:
Investment mindset: Protect against losses, hedge against inflation, long-term investments in segments you feel comfortable with.
Investment strategy: We’re in a market with incredibly negative sentiment - this is the time to balance out your portfolio! Depending on what your stomach can handle, consider a combination of the following:
Rotate out of speculative positions: (lofty valuations, high P.E ratios, relying on raised capital or financing to drive growth often found in tech companies)
Lean into Defensive / Flight to quality: more value stocks, consumer defensive, commodities, corporate bonds with short durations.
Consider re-entering the market cautiously: Consider doubling down onto your most confident long-term positions that may be flirting with historical lows due to the environment. Proceed with caution & expect to sit in the red for a while instead of trying to time the market.
What are we doing?: Currently considering entering or doubling down on certain tech companies that have been (in our view) been hit a bit too hard these last few weeks.
Keep an eye on the economy
Personal Consumption Expenditures Index: The Fed’s preferred measure of inflation will be released on Friday. Analysts expect a drop to 6.4% (from 6.6% in March).
A second look at Q1 GDP: On Thursday, we’ll take another look at GDP data which is expected to be revised from a 1.4% contraction to a 1.3% contraction.
FOMC Minutes: On Wednesday, we’ll get some insight into how the last Fed meeting went and analysts can get a better sense of how central bankers see interest rates moving this year.
Purchasing Managers Index (PMI): The PMI index has been trending increasingly pessimistic in recent months. The report will provide valuable insight into how inflation is affecting both supply and demand sides of economic activity. Brace yourselves…can’t imagine this being all pippy and yippy.
Home Sales: In addition to the plethora of economic data, on Tuesday, data regarding new home sales will be released (anticipating continued decline since December). Although not as relevant as the other macro data, it will provide a broader backdrop of the state of affairs in terms of demand and consumer sentiment. As interest rates keep rising, it is only normal to see the housing market slow down.
See here for the full economic calendar
The Curious Investor
Upcoming Earnings
Monday: Advance Auto Parts, Zoom
Tuesday: Best Buy, Nordstrom, Ralph Lauren, Urban Outfitters
Thursday: Dollar General, Alibaba, Autodesk, Macy’s, VMware, Workday
Friday: Canopy growth
What we’re vibing:
Siddhartha - Ser Parte. Brought to our attention by a fellow WTM reader, singer and song writer Siddhartha has quickly become a house favorite. His albums 00:00 and live show Al Aire are pretty great. Absolutely worth listening to for those into latin music or looking to switch it up a bit.
The Thrill is Gone Live with Gary Moore and BB King - Need we say much more than that? There are some that say that it was during this meeting of two legends that call & response performances were born. Enjoy!
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