Outlook not so good
Well, well, well, where ya been Max and Thomas? It’s been a minute hasn’t it? Both of us have been traveling for a while, in fact we are sitting in different airports writing this post right now. While we may have periods without our weekly update, we want you to know we’re always here for you. If you’ve been with us since the WhatsApp days and live drops, you know we started WTM to help you navigate the market, and invest for your future. Our slack channel is always running, if you have a question either outside of what we cover in the weekly or you don’t see a WTM post in your inbox, shoot us a message on Slack. We have channels set up for different topics, or if you’re nervous to ask a public question - just shoot us a DM. We’re always here to help you make sense of the madness. P.S. we often drop additional research (albeit less polished) on Slack that doesn’t make it into the weekly.
What the Market?
Mr. Market closed the first half of the year with its worst performance since 1970 (or the worst so far…) with the S&P and Nasdaq falling 21% and 30% respectively.“The good news is the first half of the year is over. The bad news is the outlook for second half is not looking good.” Accelerating inflationary pressures and the anticipated rise in interest rates by central banks globally will be sure to generate further volatility (and stress). The swift tightening of monetary policy to drive down inflation risks has increased fears of a recession. How are investors responding? Well…has your butt-hole ever tightened so quickly, it whistles? Because that’s precisely what’s happening with investors as they brace for further volatility across all asset classes (equity, crypto, bonds).
What’s driving the market?
I know that I know nothing - Is a great level of self-awareness for the individual philosopher, but not quite what you want to hear the Chairman of the Fed say. Last week, Powell, startled investors stating “We understand better how little we understand about inflation [...] we are learning to deal with it.” Boy, you can just rock me to sleep tonight; sure am glad to know those in charge know what they’re doing. The Fed continues to walk a tightrope in its attempts to slow down inflation without triggering a recession. The PCE index has been dropping ~10bps every month since peaking in February at 5.3% (currently at 4.8%).
When you promise your date you’ll take them somewhere expensive: Little did they know you were taking them to the gas station. Oil prices continue to rise with WTI crude (1/3 benchmark oil grades) rising to $108/barrel. At the onset of the pandemic, oil producers (OPEC+) took roughly 10M barrels of oil off the market as demand dropped. Oil producers have been gradually returning the reserve barrels into the market with production rising to ~400-432K barrels per day. OPEC+ agreed to raise production to 648K barrels per day in July and August, but OPEC and its allies have been failing to meet their targets… so it may be much ado about nothing. The energy markets have been in consistent turmoil since the world enacted economic sanctions and reduced reliance on Russian petroleum. While nations have reserves (*cough* Saudi Arabia *cough*) they are reluctant to use them all at once.
When the apocalypse is over, I hope you like your job: While we monitor the Fed’s efforts fighting inflation, investors will keep their eyes on the labor market as a signal of economic strength. This Tuesday, the Bureau of Labor Statistics will release its Job openings report and Labor Turnover Survey (JOLTS). Job openings are expected to remain near all-time highs at 11.3M, while the market expects the economy will have added 265,000 jobs last month, decelerating from May’s +390k. The unemployment rate is expected to remain at a very healthy 3.6%.
What’s an investor to do?
Portfolio Management
Keep playing defense and focus on longer term plays. While the risk of recession is rising, the bright side is market may have already started factoring in an economic slowdown.
Investment strategy: Based on your risk appetite, consider one of the two paths or mixture of the two:
Lean into Defensive / Flight to quality: more value stocks, consumer defensive, commodities, corporate bonds with short durations and even inflation-linked bonds which have been outperforming other sectors (see below).
Consider re-entering growth sectors cautiously: Consider re-entering into long-term positions that may be flirting with historical lows due to the macro context. Proceed with caution and trust what you are buying. While history tells us that bear markets often lead into longer and stronger bull markets, historical performance is no indicator of future performance. If you are re-entering, be prepared to sit in the red for some time.
What are we doing?: Currently considering exposure towards income investing opportunities through higher risk corporate bonds from smaller cap companies in strong industries that may generate returns above inflation levels.
Keep an eye on the economy
FOMC Minutes: On Wednesday, we’ll get some insights into the Fed’s thinking on the current economic situation. Listen for a plan and how confident / aligned members seem to be on how to tackle inflationary pressures as well as any hints towards accelerating monetary policy tightening.
More Labor Data: In addition to the job openings, and JOLTS reports, Payroll provider Automatic Data Processing (ADP) will release its June National Employment Report on Thursday, and the Labor department will release June’s non-farm payrolls report on Friday.
See here for the full economic calendar
The Curious Investor
Earnings:
Consumer Cyclical: Levi Strauss
What we’re vibing:
The Four Hour Body by Tim Ferris: We are both huge fans and evangelists of Tim Ferris. His obsessive quest for life hacking is once again beautifully portrayed in this book about the human body. The Four Hour Body is a collection of research from top scientists, nutritionists, and trainers in the world on how to achieve your physical goals. The book aims to maximize results for the smallest changes to your lifestyle. Don’t be discouraged by the name, as it has nothing to do with the content.
Radical Candor by Kim Scott: A must read for both experienced and new managers. Radical Candor is a model for managing people and leading teams. The book outlines and walks through examples of effective and ineffective feedback with a focus on caring personally while challenging directly.
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