You break it, you own it
In a universe of high-yielding fixed
income and rising interest rates the risks have seemingly grown for
stocks. As many have observed, the end
of the third quarter was not very kind to portfolio valuations. However, we do know this: corrections and
panics are a part of investing and usually present incredible opportunity to
step in and capitalize when markets trough.
Though the selling might continue into the next few weeks markets always
present a “quantitative bottom” from which the next up-leg derives.
Managing the downside of cyclical
events is crucial in moving portfolios forward, from point A to point B. Letting winners run until attaining stochastic
exhaustion while trying to hold losses to a minimum is the essence of good
stewardship.
We can’t yet know the tally of costs
associated with war between Israel and its neighbors. The conflict in the
Middle East is likely to affect global markets negatively, especially oil
stocks. There is only so much product to
extract and, unfortunately, a large percentage of global reserves are located
in that territory. When regional
conflict erupts it opens the floodgates for worry and concern about supply and
distribution elsewhere. But this “supply
and demand” conundrum is not unique to oil.
Covid showed us that medical equipment and pharmaceuticals, water and
food, housing and security can also be quickly held hostage by territorial
disputes, government inaction, and climate change. Rather than demonizing these sectors and our
circumstance, savvy investors can find potential capital gains opportunity from
longer-term issues that persist beyond current events and provincial conflict.
It is difficult as a growth investor
to espouse that “bottom-fishing” is an effective tool. But widening our aperture shows us that
parabolic trendlines always have peaks and valleys; that there will be
recoveries that follow capitulations. It
is during those recoveries that price momentum can be quantified as to probable
duration and magnitude before the next apex.
When markets fall below their “moving
average” there is an opportunity to recalibrate sector weightings as well as
specific equity selections. Our current
fourth quarter list of recommended candidates seems to favor defensive
categories and overwhelmingly negative/neutral confidence. Our weightings going forward should favor
Basic Materials and Utilities while underweighting Consumer Cyclicals and
Industrials.
Manage the risk
There is no question that the events
in the Middle East will weigh heavily over the global body politic for the
foreseeable future. We also note that global
central bank’s monetary policies have been a boon to investors seeking an
alternative, safe-haven from the volatility in the equity markets. We expect to capitalize upon these
inefficiencies by continuing our pattern of adding short-term time deposits
(CD’s, Treasuries, commercial paper) as a substitute for ambitious gambling in
the stock market.
Our perception of risks has expanded
since last Saturday’s attacks. We cannot
change vectors overnight but, clearly, there will be an economic (if not
political or military) reckoning to be had.
Therefore, it makes sense to look at pivot points in the economy that
are consistent with our quantitative discipline, beginning with macro,
earnings, and price momentum.
