Dandelion Seeds
This is a pretty tough spot to be in if your job is to make directional calls on equities.
Plainly, macro risks are skewed to the downside. And even if they weren't, developed market central banks, blindsided as they were by the hottest inflation in 40 years, are bent on orchestrating a growth slowdown, in part because they're compelled to answer for something (supply factor-driven inflation) that's beyond their capacity to control. The only option they have is to force the demand side to pull
Gee, who woulda thought that Brexit would be be the first domino in a series of events ending with the UK looking like an emerging market country?
I wonder if we are (or I am) overthinking this.
Job market still hot, and jobs is really the #1 thing people (and economists) care about most (inflation is a scary thing, but -5% real wage growth is better than -100%, especially if you think high inflation won’t last (like breakevens and consumers alike seem to think).
Consumer spending still pretty good (shifting mix from stuff to gas, food, services, and some of that can shift back as commodities ease; sure Americans seem to be saving less and credit-carding more, but since when have equity investors cared where the money comes from?)
Housing market is sinking, but not yet to an extent that hurts anyone but homebuilders, investors, and real estate brokers (and mortgage rates are dropping, homebuilder stocks rising, inventory rising but from absurdly low levels – “normalization” maybe?)
Fed saying have gotten to “neutral” and future hikes will data-depend on inflation (granted they are hastily saying other things now, but it’s hard to fully unsay what gets said at the presser)
Expectation is that “peak inflation” was last month (maybe not peak “core” inflation but Fed has been upping the reaction-function importance of “headline”) and if headline inflation converges to core at say 5% YOY by year-end, with a string of flattish headline MOMs, maybe don’t justify a pivot but could it support a pause after duly delivering the well-expected 50-75 bp in Sep?
Valuation isn’t overtly cheap, but on some measures (PE NTM, and DCF assuming rF goes no higher) it isn’t offensively expensive IF you think this is merely a “mid-cycle slowdown”, “technical recession”, or other term signifying something rather benign.
Consensus estimates still assume record margins and sturdy EPS growth in 2023, but 2Q action suggests that investors don’t believe that anyway (and if rF = 2.6%, the DCF valuation can absorb some margin compression and a year of little growth i.e. a mid-cycle slowdown).
That isn’t a sophisticated, deep, or clever analysis. It’s hardly an analysis at all. But being sophisticated, deep, and clever isn’t the goal. The goal is to outperform. Nor is it an excuse for failing to outperform.
I’ve been bearish enough to hold portfolio exposure very low, still net long but much less than “normal”. That was smart enough from Jan to Jun, then very dumb from Jul to now (can you say “underperformance”?).
At the same time I’ve been stockpiling cash for THE buying opportunity, and because everything seems to be happening much faster this time, have had Sep ‘22 penciled on the calendar as the I-don’t-know-but-if-forced-to-guess-that’s-my-guess timing for when I’ll start spending that cash.
As H says, it is really hard to figure out what to do right now. The macro (market) is confusing, and it’s dominating the micro (picking).
I decided just to hold (my portfolio is largely anchored on SPY/SPYD plus profitable tech). Who knows which approach will prove to be more profitable- I certainly do not feel completely confident that my approach will turn out to be the best approach- but I am not overly concerned that I will be worse off, either.
If all of these macro issues ever settle down, I will dust off my fundamental analysis skills.
Best of luck to all.
These past two summers I watched as leveraged bets on growth/tech stocks, supported by artificially low interest rates, defied gravity like Wile E. Coyote. “FAANG,” FOMO,” and “buy the dip,” was just about all I heard right up until November when inflation finally started to bite. As a retiree who had enjoyed the security of bonds and dividends I was not amused. Quite honestly, near 0% interest rates felt like a tax on savers and more cautious investors (that at least in part, was being used to subsidize the frenzy in growth stocks, meme stocks and Bitcoin), but I digress. “Indeterminate” may be unsettling to some, but I honestly prefer a market where there is more than one play to be had, and not everyone considers themselves a stock-picking genius. Now it’s time to do your research, diversify, pick your horses carefully, and put your money down. If we do wind up in a long recession, then I guess we all lose, but at least now there is some semblance of more traditional risks vs rewards to be had.