April 12, 2022
Markets, Economy, and Portfolio Management Spring 2022
In the first quarter, the S&P 500 Index corrected intraday 14.9% from its high, and on a closing basis 13% implying that the U.S. economy is in a growth scare rather than an impending recession. By quarter end, a broad rally in stocks recovered more than half this correction losses. This was the worst correction since the start of the Covid pandemic two years ago. A faster tightening cycle by the Federal Reserve, runaway inflation and Russia’s invasion of Ukraine all contributed to the stock market’s correction.
The S&P 500 could retest current correction low if inflation does not peak in Q2. Parts of the Treasury yield curve inverted, typically a harbinger of a recession ahead. The yield curve subsequently quickly un-inverted to a positive sloping curve making an argument for growth ahead not a recession. The 3 months-to-10-years Treasury Yield Curve, a more reliable indicator, remains steep signaling no recession ahead. Which way the market goes depends on the path of inflation. If the Fed through its front-loaded hikes cannot curb inflation soon then expect a recession and down market in stocks over next twelve months. Furthermore, weighing on stocks is the upcoming Mid-term election. Historically stocks correct sometime from May through October period before Mid-term election.
The bottom line, this will be a transition year for the U.S. economy but worth the pain. Does anyone really expect that transitioning from abnormal monetary policy (zero Fed Funds rate in an economy that grew at 5.7%) to more normal monetary policy will happen smoothly? In the end the U.S. economy will be better off with normal yields and rates and so will income investors.
There may be room for investors to gain from stocks later this year. The S&P 500 typically peaks 18 months after an inversion and a recession typically starts shortly after that – late 2023. It takes around a year for stocks to peak after a point of the Yield Curve inverts, and the S&P 500 usually trades higher by 15% during that period, according to JPMorgan. Following the Midterm election, this November through April 2023, S&P 500 enters its historically best return period of the Presidential cycle, with past returns strongly positive one hundred percent of the time according to the Stock Trader’s Almanac. Given inflation recedes and U.S economy avoids a recession, stocks would rally. For the time being, I am only buying stocks at lower entry levels than today’s market level. I expect to be overweight stocks again before Midterm election day.
April 12, 2022
Portfolio Management Actions Spring 2022
Portfolio strategies are closer to their neutral weighting in equities because it pays not to fight the Federal Reserve (Fed). The Fed is removing liquidity from the economy by hiking its key interest rate and reducing its Balance sheet (not buying Treasuries). The S&P 500 index has an inverse relationship to the Federal Balance sheet. When the Federal Balance sheet expands the S&P 500 Index moves higher and when it shrinks so do stock multiples. This year poses numerous headwinds for stocks and bonds.
The U.S. economy is in early Late cycle experiencing stagflation. Certain areas of the equity market have more upside than other areas. Those areas are Energy, Commodities, Materials, Technology, and Consumer Staple sectors. In addition, defensive type sectors such as Healthcare. Portfolios will remain underweight in bonds and near neutral in cash-equivalents and ultra-short bonds until the second-rate hike. Historically, by the Fed’s second-rate hike bonds become a buy.
I am rebalancing portfolios from neutral to overweight equities at the beginning of the fourth quarter before mid-term election day. The headwinds troubling stocks now should abate by then producing a strong year-end rally. Until then hold onto stocks which are the best long-term inflation hedge. Many companies have been able to pass on rising costs, and I see low real rates favoring equities.
Markets, Economy, Portfolio Management Update Winter 2022
Despite recent slowdown in economic growth related to Omicron effects, the U.S. economy remains in expansion mode. The CNBC Survey of Economist is projecting a median 4.3% real economic growth in 2022. A peak in Omicron cases and effective viral vaccines could bring about yet another Spring re-opening phase. Supply bottlenecks and shortages are a work in process that eventually fixes itself resulting in a moderation of inflationary pressure. Inflation pressures are peaking but will linger. Investors should consider high quality companies with pricing power offering dividend growth. Prepare for higher market volatility stemming from Fed tightening, geopolitical risks (Russia), slowing China economy, and the midterm elections. The period before midterm election is known for corrections due to uncertainty of outcomes. I would be a buyer in any midterm election correction.
Portfolio Management Actions Winter 2022
I’m gradually reducing overweight in equities towards neutral by quarter end. Large-cap Growth stocks are not likely to repeat last year’s performance. It is time to balance between Large-cap Growth and Value stocks. Market and macro-economic conditions suggest that Value outperforms. This year is a return to normalcy for earnings, economic growth, yields, and inflation compared to history. Normalcy supports equity markets. The US economy is moving away from Mid-cycle fundamentals towards early Late cycle. Portfolios will remain underweight in bonds until the Ten-Years Treasury yield peaks this cycle.
Portfolio Management Fall 2021
Portfolios are overweight equities going into year-end. I see positive earnings outlook until1Q220. Intermediate economic growth will remain above long-term average rate and interest rates historically low (supportive of earnings growth). Mid-cycle fundamentals suggest favoring cyclical value stocks and quality dividend appreciation stocks. Portfolios staying with underweight in long term bonds for now and increasing fixed income investments credit quality.
Q3 Portfolio Management
Portfolios are overweight equities relative to bonds and cash. The current economic environment favor stocks over bonds. Mid-cycle economic conditions are positive for economically sensitive stocks. Furthermore, the present interest rate environment still favors stocks over bonds and cash.
Q2 Portfolio Management
Portfolios are overweight equities, underweight bonds, and underweight cash-equivalents because the U.S. economy is in a robust expansion. Historically, stocks outperform bonds and cash-equivalents in an economic expansion experiencing rising yields. Economic conditions suggest diversifying into cyclical Value stocks.
Q1 2021 Portfolio Management
Global stocks are entering 2021 in a broad uptrend, anticipating that re-openings and continued central bank accommodation will support a robust global economic recovery this year.
July 17, 2020
Q2 2020 Portfolio Management Summary
While the upcoming election will add to the uncertainty and volatility of a market already beleaguered by Covid, opportunities for capital redeployment may arise.
April 1, 2020
Q1 2020 Portfolio Management Summary
How will Aspetuck position portfolios in the next quarter amid extreme market swings and what will most likely be several weeks of more dark news surrounding Covid-19 in the U.S.?