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
Moody’s Downgrades Banking System
Labor Market Surprise
Fed Reamins Hawkish
Sector Scorecard
MARKET OUTLOOK
Overview
The Charts
MY PORTFOLIO
Portfolio Objective
Asset Allocation
Current Holdings
Performance
Recent Trades and Positioning
ETF-only Portfolio Alternative
FOREWORD, on managing risk
“If you can keep your head when all about you are loosing theirs…” — Rudyard Kipling
There comes a time in every market cycle where something nasty emerges, causing me to fully pause and reassess everything, even if only for some peace of mind. For me, that pause occurred last week on Thursday.
Risk management has always been a core component of my portfolio strategy, and the events of the past week have served as a reminder of its importance. When people panic, all logic is often thrown out the window — a portfolio manager must always be prepared in advance for a black swan event such as we saw last week.
Over the past few days, my portfolio greatly benefited from my holdings in the following:
Large cash position
Short-equities
Long-dated US treasuries
Gold
Due to the ‘crisis in confidence’ that arose, there was a lot of technical damage and many significant changes to the charts across all asset classes. As such, I have carefully reviewed each of my holdings taking gains where appropriate, paring back some higher-beta names, and in general reducing my overall allocation to risk assets.
I have also slightly revised my market outlook as the timeline for my previously-forecasted market moves may be pulled forward.
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 in order to put the effects of my risk management overlay into some context.
Let’s dig in…
SIGNIFICANT OBSERVATIONS
MOODY’S DOWNGRADES BANKS, CRISIS OF CONFIDENCE SPARKED
In yet another blow to the banking system, yesterday Moody’s cut its outlook on the U.S. banking system to negative citing ‘rapidly deteriorating operating environment’. And today we see European banks struggling as well with Credit Suisse shares sliding 24% before trading was halted.
There has already been myriad articles written about the bank failures of the past week, so rather than adding any commentary I want to address the market reaction directly.
In the wake of the banking tumult, we saw significant moves in the stocks of regional banks and most financial services companies across the board. Below is an illustration of the meltdown in the regional bank ETF, KRE. In this chart, each candle represents a single trading day.
The move down was swift and severe, and those who were either over-leveraged at the top, or panicked at the bottom, likely lost a lot of money.
Two of my portfolio holdings (SCHW and EWBC) got caught up in the mess, but fortunately I was able to swing-trade the quick dip in order to protect my holdings in those companies. I continue to hold SCHW at equal-weight but sold my positions in EWBC after taking a nice gain yesterday.
LABOR MARKET SURPRISE
If the already jittery market needed another reason to be very confused, it got another jolt on Friday, March 10 when the BLS reported February jobs data. The data came in hotter than expected at the headline level with some 311K jobs reportedly created in February, well above the 225K consensus and was also above the whisper number of 250K.
But while the headline payroll number was big — driven mostly by retail workers and waiters — the unemployment rate unexpectedly jumped from 3.4% to 3.6%, and above the 3.4% consensus estimate. The number of unemployed workers increased from 5.7 million to 5.9 million while the labor force increased by 1.7 million workers in the past 3 months. So the rise in unemployment appears to be of result of increase in the labor participation rate, rather than job losses.
With the favorable balance in the numbers above, this jobs report was probably just what the Fed wanted, so despite the big beat in the headline payroll number the market may have actually rallied nicely on Friday if not for the regional baking news.
FED REMAINS HAWKISH
On March 7, Jerome Powell spoke in front of Congress saying the Federal Reserve will likely need to raise interest rates more than expected in response to recent strong data and is prepared to move in larger steps if the "totality" of incoming information suggests tougher measures are needed to control inflation".
Of course, the above took place just prior to the banking disasters that began to unfold, and we’ve not yet heard from the Chairman as to whether his hawkish position has changed.
The FOMC meets again next week, and right now it’s difficult to predict what the Fed will do, both with their interest rate targets and their narrative. As it stands right now, clearly the banking blow-ups have added a very complicated factor to the Fed’s equation.
As we saw in the CPI numbers that came out yesterday, inflation continues — suggesting a need for rate hikes to continue. In the face of the underlying market conditions, I believe this puts the Fed and investors alike in a very tough spot.
The FOMC meeting concludes March 22. Stay tuned.
SECTOR SCORECARD
Below is the 1-month performance of various market sectors. I’ve included the short-equity indexes here as well to illustrate the need for the right risk management tools.
MARKET OUTLOOK & MY PORTFOLIO
“Talk about how SVB is a one-off reminds me of all those shoulders that shrugged in ‘07 when New Century Financial shuttered. 2 months later Bernanke said it would be “contained”. 4 months after that, it was Countrywide. It’s as if the word contagion doesn’t exist for some people".” — David Rosenberg
Earlier this month I discussed the banking crisis of 2008 and how, for most people, it seemed to come out of nowhere though all the signs had been there for many months. Unbelievable timing with that article, though it was simply a coincidence. Note that I am not predicting another “2008” here — that article was written to explain, in general, why I do what I do.
Twice-a-month I revise and publish my comprehensive market outlook along with details of my portfolio (see table of contents above).
If you are not yet a paid subscriber you are welcome to view a recent free post to get an idea of the sort of detail I provide for my paid audience. For subscription tiers please click the button below or visit my About page.
Keep reading with a 7-day free trial
Subscribe to FiNiche Investments to keep reading this post and get 7 days of free access to the full post archives.