When the boss starts talking crazy
When the boss starts talking crazy
What the Market? - August 01, 2022
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What the Market?
Mr. Market is taking a moment to step back and ask, is it really all that bad? Everyone from the Fed, to the government, and analysts is talking a bit of crazy and life’s rough so why not enjoy a little reprieve? Unfortunately, it may just be that; economic data has not been encouraging and forecasts have been brought down across multiple sectors. Mr. Market is going through some heavy right now, and the road back will continue to be filled with inconsistent market reactions and volatility as he works to find his groove again amidst a slew of relevant economic data.
What’s driving the market?
Another day, another rate hike, am I right? As expected, the Fed rose interest rates by an additional 75bps (the largest hike since ‘94) bringing the fed funds rate to 2.5%. Powell stated that the Fed is planning to raise rates to 3-3.5% by the end of the year, meaning we’re likely to see an additional 50-100bps increase in the second half of the year. The scary part of Powell’s speech was when he stated that the Fed’s decisions would now be dependent on data (excuse me… what were you doing before?). We’re not sure what was more frightening, Powell, or when McDonalds campaigned that their chicken McNuggets were “NOW made with REAL white meat?” (wtf were they made with before?). Anyway, the Fed said they will be monitoring core-inflation metrics, the labor market, supply chain inflation and the evolution of commodity prices (currently decreasing). As for financial markets, perhaps they can rejoice in having a bit more certainty of the Fed’s actions and more steady and gentle rate hikes. TLDR, the Fed is taking its Flintstone gummy chill pills.
Recession, you must be joking? No, I’m not, and don’t call me recession: The economy contracted for the 2nd consecutive quarter (-.9% vs. +.8% expectation) which means we’re technically in a recession. Technically, I’m six feet tall in my Nike’s (and according to my dating profile) so who’s to say it’s true or not? Well, the National Bureau of Economic Research (NBER) does. As the official record-keeper of recessions in the U.S., the NBER’ must see “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” Fed Chairman, Jerome Powell, was also hesitant to call it a recession given the strength of the labor market despite slowing consumer spend and residential investment. The call will come if the data suggests it and it is important to keep in mind that Q2 data may not fully reflect the impact of the Fed’s recent rate hikes or the global macroeconomic backdrop. Q3 data will likely be more telling, pay attention to the most interest rate sensitive sectors (e.g., housing).
What’s an investor to do?
Portfolio Management
The market is rallying and investors are perking up. Is it safe to come out yet? Do you swim when there is no lifeguard on duty? Do you like to live your life dangerously? Do you like high chances that you might lose? What about hot pockets? Did that last question feel like a curveball? Get used to it, because that’s what the market is going to be like; but it won’t taste as good as those delicious 2AM microwavable pockets of warm intoxicated satisfaction.
It appears that a slowing economy and sluggish growth may have been priced in to valuations already. The macro landscape has not settled yet, data is still coming in, and we don’t know the full picture. There will likely be more volatility and economic curveballs, don’t expect a steady rally until inflation is tamed. That being said, the strategy is still to remain defensive but watch inflation closely.
Investment strategy: Based on your risk appetite, consider a smoothie of the following ideas:
Lean into Defensive / Flight to quality: more value stocks, consumer defensive, commodities, corporate bonds with short durations and even inflation-linked bonds.
Consider re-entering the market cautiously: Consider re-entering into long-term positions that may be flirting with historical lows due to the macro context. Proceed with caution and know what you are buying.
Research: This is the time to start looking beyond the slowdown and formulating your strategy of what sectors and companies are going to thrive once we’re on the other side. What companies are way too undervalued and weathering the storm?
What are we up to?:
Overall we’re evaluating positions to rebalance our portfolio towards long-term growth oriented sectors.
Confirmed Trades: Increased our existing positions in MSFT and SOFI ahead of earnings with a minimum 2 year horizon in mind.
Determining Size of Investment: in 3M’s potential spinoff of its healthcare business into a standalone company for a quick swing trade. The move here is to buy 3M ahead of the spinoff to receive shares of the new company. We LOVE spinoffs, it’s a financial engineering move designed to help investors. Ask us about it on Slack.
Ever wish you could trade like an insider and get away with it? Maybe get a job as the Speaker of the House. Regardless of our thoughts on the CHIPS+ bill (not big fans… more on this on our Slack channel), we have been long on the semiconductor industry for years. We are considering increasing our exposure given low valuations of fundamentally strong companies (e.g., Micron, Texas Instruments, and ETFs) that will benefit from the bill. It’s odd how confident we feel about the move or maybe that’s because Nancy Pelosi sold Nvidia stock (American company that manufactures outside the US and therefore likely won’t qualify for CHIPS+ funding) but is holding some serious call options on American manufacturer, Micron (which already has long standing gov’t contracts). Just saying… this bill has sat in Congress for years but all of a sudden, Pelosi decided to open up 9-month call options on the company best positioned to receive funding… Someone should have told Martha Stewart she picked the wrong job…
Keep an eye on the economy
US Employment report
See here for the full economic calendar
The Curious Investor
Upcoming Earnings:
There are a TON of companies reporting this week, this list is only a clip. For a full list see here.
Defensive: Aflac, Caterpillar, DuPont, CVS
Consumer Discretionary: Activision Blizzard, Starbucks, Yum! Brands
Travel / Hospitality: Avis, Airbnb, JetBlue, Marriott, Uber
Financial Services: PayPal, Robinhood, Block
Tech: Alibaba, Advanced Micro Devices
Join our Slack Channel for free access to additional earnings coverage:
What we’re vibing:
The New World Order - Ray Dalio: Dalio may be one of the best economic teachers in recent times. His ability to simplify highly complex economical mechanisms and cycles is outstanding. In his latest video, Dalio breaks down the process in which global reserve currencies change, a process we may well be in the middle of.
Street Food: USA on Netflix - Coming in hot premiering this week is another chapter in the street food docuseries after Latin America and Asia, this time directed by Daniel Gelb (creator of Chef’s Table and Jiro Dreams of Sushi). A very humane introspection into the foods that define America, highlighting its diversity and cultural heritage.
Resources
Learn to invest with our recommended content (books, books, books!)
Disclaimer
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