Mr. Market, I fart in your general direction
Mr. Market, I fart in your general direction
What the Market? - May 16 2022
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What the Market?
Mr. Market is looking more and more like your uncle at Thanksgiving who’s on a new drug and hasn’t gotten the dosage on his medications quite right yet. His mood has a broader range than Johnny Depp these days. The S&P 500 has had some volatile upswings, but sadly mostly incessant downswings as the index begins to flirt with bear territory (-20%). While we have seen a wider range in volatility since the beginning of the pandemic in 2020, 2022 is certainly off to a seesaw type of year (see below). Last week marked the sixth consecutive week of an equity selling streak, marked by inflation fears, a potential economic slowdown and renewed supply chain problems worldwide.
What’s driving the market?
All I know, is since yesterday, everything has changed: For starters… we don’t even like Taylor Swift… but some people are just so quotable. April CPI data provided a glimmer of hope that we might’ve reached a peak with headline inflation increasing 8.3% vs. 8.5% in March while core CPI (excluding food and energy) increased 6.2% vs. 6.5% in March. Rents climbed 0.6%, airlines fares 18.6% (there goes your summer bonus), and we won’t mention housing costs so you can enjoy some of your coffee. Willy and the poor boys bout to start playing nickel with $100 coins at this rate. Alas, the Fed spent most of last week trying to re-align its position on how to tame inflation, and markets struggled to digest so much information at once. Various FOMC members indicated that further 0.50% hikes were the baseline for the next monetary policy meeting, with 0.75% being on the table. Markets will be eager to hear what Powell and other central bank officials have to say this week. Goldman Sachs slashed its expectations for economic growth for the year and is estimating the probability of a recession within the next two years at 35%. Not great…noooot great.
What’s in the Earnings?: The S&P 500 just barely avoided bear territory last week. Hopefully, with a continued slowdown amid growth, we can get back to a place where we can focus on opportunities again rather than risks - but time, it shall take. Keep an eye to commentary on opportunities and guidance on industry performance from the next slew of earnings releases. After a 1.5-2 years of unjustified high valuations stocks are shedding excess valuations as they adjust to the tightening cycle and new interest rate period. It will take some time before companies can find stability and resume an upward trajectory.
An eye on retail this week: With inflation being broader and more persistent than expected, producer-price indices at historically high levels, and consumer confidence hitting multi-year lows, investors will be painfully aware of retail companies’ earnings this week. Looking into behemoth retailers like Walmart, Target, Macy’s, Home Depot, will provide helpful information to understand how consumers are coping with higher prices (or rather how well have these companies been able to transfer higher costs to final consumers). The question here is, how much longer can consumers take this continued hit on purchasing power before it impacts demand for these companies?
What’s an investor to do?
Portfolio Management
The message remains the same for now:
Investment mindset: Protect against losses, hedge against inflation, long-term investments with a willingness to stay in the red until the market enters a new cycle of healthy growth.
Investment strategy: Depending on what your stomach can handle, consider a combination of the following approaches:
Avoid / 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). See our learn to invest content guide to learn about valuation methods.
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?: We’re looking into the semiconductor industry to determine if it makes sense to increase our position given many semiconductor companies are trading at historical lows and supply chain issues will likely cause short-term increases in prices across the sector.
Keep an eye on the economy
Retail Sales: The US Census Bureau will release April’s retail sales figures on Tuesday, providing some depth about the state of demand across product categories and providing hints about a potential economic slowdown.
See here for the full economic calendar
The Curious Investor
Upcoming Earnings, In focus: Retail, Tech, Semiconductors
Monday: BuzzFeed, Warby Parker, Wix, Tower Semiconductor, Tencent Music Entertainment, Stratasys
Tuesday: Home Depot, Jumia Tech, Walmart
Wednesday: Lowe’s, Bath & Body Works, Cisco Systems, Target
Thursday: Kohl’s
Friday: Booz Allen Hamilton, Deere & Co, Foot Locker
What we’re vibing:
Put Your Records On Funk Cover by Scary Pockets + Jacob Collier!. We’re big fans of the funk here and Scary Pockets is just out with that new new on one of our favorite songs (okay Max’s…). If you can’t enjoy this, you must ask yourself - where did you lose your soul?
Colombian Salsa Records with Gia Fu: A recent share from a friend, who Gia Fu is, honestly not sure…but she has over 1M views, and her Salsa sets are a jam to dance to, work to, vibe to, whatever you’re feeling - enjoy!
Resources
Learn to invest with our recommended content (books, books, books!)
Disclaimer
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