This article is part of my mid-month ‘Market Minutes’ series and is a supplement to my first-of-the-month Big Portfolio Refresh.
In this issue:
FOREWORD
SIGNIFICANT OBSERVATIONS
MARKET OUTLOOK
Overview
The Charts
MY PORTFOLIO
Portfolio Objective
Asset Allocation
Current Holdings
Performance
Recent Trades and Positioning
ETF-only Portfolio Alternative
FOREWORD
The ‘pain trade’ continues to be to the upside as the rally in US stock indexes that began last October continues, but now with 13 of the last 14 trading days seeing incredibly light volume.
A pain trade occurs when a popular asset class or widely followed investing strategy takes an unexpected turn that catches most investors flat-footed. Pain trades sorely test the resolve of even the best traders and investors since they must face the dilemma of whether to hold on to the hope that the trade will eventually work out, or take their losses before the situation worsens.
In this case it’s the mega-cap stocks that continue to significantly outperform, and with such a heavy weighting in the indexes the performance of the S&P 500 and the NASDAQ Comp are making it painful for traders to stay out of that trade.
SP500 HEAT MAP. In this heat map of S&P 500 components, we see that while there has been relative balance in the performance of small- and mid-cap stocks, the mega-cap names have significantly outperformed, allowing the index to greatly outperform most individual names over the past few months.
For the past year or so, bad economic news has been seen as ‘good news’ that may allow the FOMC to loosen monetary policy. But at some point, bad news is just bad news, and we may soon see a return to that paradigm. Recent economic reports continue to show a slowing economy and higher probabilities of recession later this year, and with a Fed that’s in no position to bring interest rates down, stock indexes are likely to pull back strongly at some point.
Until then, we shall endure the pain together :-)
Meanwhile, I continue to look for opportunities to increase my portfolio weighting in the assets I believe will outperform once the cycle of big tech outperformance ends. Specifically I continue to look for the best opportunities in dividend-paying stocks, emerging market equities, ex-US developed market stocks, and companies that produce real assets such as industrial metals, crude oil and agricultural products. These are the areas I believe will shine for the remainder of this decade as it becomes apparent that inflation is far stickier than most had assumed.
Later in this post I will address the specifics around my portfolio holdings, recent trades, and my revised market outlook. I will also share the performance of my portfolio in some detail to put the effects of my risk management overlay into context.
Let’s dig in…
SIGNIFICANT OBSERVATIONS
1. Money Market Funds: The risk-free return of money market funds continues to be quite attractive with an average of 4.57% APY as of March 20, 2023. A money market mutual fund continues to make sense for a portion of one’s assets.
2. Unemployment Rate: The unemployment rate continues to be at historical lows at 3.5%, though I expect an uptick in this number as 2023 progresses. Remember that economic activity generally peaks during times of low unemployment as this is a lagging or coincident indicator, rather than a leading indicator of economic activity.
3. Credit Crunch: We saw a relatively big drop in bank credit beginning on March 15 as the regional bank debacle began. We wait to see whether the banking system begins to stabilize from here, and whether continued pressure on the consumer further tightens credit markets regardless.
4. CPI: The Consumer Price Index rose only 0.1% in March with inflation running at 5% YOY. Excluding food and energy, the core CPI accelerated 0.4% in March, and 5.6% YOY, both as expected. While prices remain elevated, we may have some indication here that the Fed’s rate hikes over the past year are in the early stages of slowing the economy.
5. PPI: Producer Price Index tumbled in March to Lowest since January 2021. The PPI is generally a leading indicator of CPI, so this may suggest that future CPI numbers may show a slowing inflation.
6. Retail Sales: Retail sales slide more than expected in the report published on April 14. In the chart below we see the continued slump in this area of consumer spending.
7. Market Reactions to Data: On 4/12 we saw four big intra-day swings in the S&P 500 following the CPI report. Then on 4/13 the entire move was wiped out as the index rallied throughout the day on the PPI report.
OPEC production cut: On April 2, Saudi Arabia and other OPEC+ oil producers announced further oil output cuts of around 1.16 million barrels per day, in a surprise move that analysts said would cause an immediate rise in prices and the United States called inadvisable. With the US dollar already under pressure of late, the developing oil relationship among Saudi Arabia, China, Russia, Iran and others creates additional headwinds for the US ‘petro-dollar’.
MARKET OUTLOOK & MY PORTFOLIO
If something cannot go on forever, it will eventually stop. — Herbert Stein
The rally in stocks that began in October of last year has taken the S&P for a +20% ride higher while the NASDAQ Comp rose 26% to its April 4 top. While it’s unwise to rule out the possibility of higher highs, I still expect the pain trade to the upside to eventually become a very painful move down for those still buying mega-cap stocks at these levels.
Of course, it’s best to be positioned for any and all outcomes. I continue to modify my portfolio as needed keeping a high level of risk management which modifying long and short positions along the way based on the highest probability of moves suggested by the charts.
Let’s review my latest market outlook and portfolio holdings to get some idea as to how I am prepared for whatever may come.
Twice-a-month I revise and publish my comprehensive market outlook along with the details of my portfolio (see table of contents above).
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