WTF Mr. Market?
“Never let a good crisis go to waste.”
- Sir Winston Churchill
The Portfolio Performance
The portfolio is up 0.28% YTD
Our benchmark, the S&P 500 is up +9.0% YTD
The stock market is continuing to work its way through several issues, each of which is complex, and each issue comes with many contradictory analyses. COVID-19 risks, Covid variant risks, social unrest, inflation risks, tax policy risks, government over-spending risks, global conflict risks, cyber security risks, employment risks, and don't forget Elon Musk Tweets. Any one of these risks would be enough to put the market in turmoil and cause portfolios to decline. While I'm disappointed in the Stay Invested portfolio's performance year-to-date, I'm still optimistic for the rest of the year and for 2022. To be truly concerned I would need to see the credit markets reacting and having a tantrum over the broader economy; it's not. I'm not taking any actions right now, but I expect to be buying and rebalancing the portfolio very soon.
This is the perfect time to remind everyone -
The stock market doesn't go to zero, portfolio's do.
What I mean by this quote is that typical investor behavior is to buy stocks at the highs when everything seems to be going up and then sell at the lows out of the fear of losing everything. That selling at lows is what locks in those losses and causes portfolios to decline. Just because the stock market isn't rewarding you on your timeline is no reason to sell and decry that the whole market is a scam. I hear that often. Investors who buy at lows, maintain their holdings in a conservative allocation over long periods of time see the largest gains. There is nothing easy about what I just said. To buy stocks when they are down is completely contrary to human behavior, but this is an absolute requirement to achieve gains in the stock market. If Ferrari's unexpectedly started selling for 10% of their previous prices, you'd go purchase one, or two. When the price moved back up to the regular price, you'd probably sell it for a big profit, locking in your gains. The stock market works the same way, though arguably with many more factors to analyze.
Was This Decline a Surprise?
No. For investors who follow technical indicators as well as the market and company fundamental, this decline was flashing the "Check Engine" light on our stock market dashboard. In addition to the broad market indexes like the S&P 500, the DOW and the NASDAQ there exists an index that measures investor fear. The CBOE Volatility Index measures the short-term volatility of the S&P 500 indexes. In other words, the VIX is a measure of the volatility of the S&P 500 index and alludes to how quickly market sentiment changes. In general, we refer to the VIX as the Fear Index. Typically, the VIX and the S&P 500 move in opposite directions. When stocks are headed up, fear is low so the VIX declines. When the market is down, the VIX goes up as fear rises. That's the simplistic stuff, but there exists another condition that every investor should be watchful over known as Volatility Swell.
A Volatility Swell is when the market is flat, but the VIX rises or spikes higher, as shown in the chart below for April to date. Notice that the yellow trend lines show the S&P 500 running flat while the VIX was trending up and spiking hard.
When this condition appears we're fairly assured that the market is about to deliver and honest to goodness correction. There is good news in all this drama. Stocks will reprice lower (On Sale), and investors will seek out more conservative investments (S&P 500 Index funds, Target, Walmart, P&G, J&J, Chevron, etc.) to reduce their exposure to risk. The important take away for long term investors is that all the biggest trends in the economy are still intact, we're just getting a new opportunity to buy into those trends. This decline in the market doesn't mean that AI, machine learning, solar energy, EV's, battery technology, robotics, genomic medicine, fintech or cloud businesses are suddenly failing. Long term investors will want to stay allocated to those areas but be sure to own a collection of lower risk, less volatile stocks too.
What About All Those Risks?
Each one of the risk factors I mentioned above deserves its own post. For now I'll give my brief, blunt view.
COVID-19 Risks: The virus is not the risk anymore, we are. Our behaviors will determine outcomes.
Social Unrest: We really need to stop fighting with ourselves. I like Axon Enterprise in this space.
Covid Variant Risks: See #1 above. Variants develop from repeated transmission. Stop that and you end or at least limit variants. The virus doesn't care what you believe. The virus will spread, injure, kill and mutate, based on your actions and the behavior you advertise to your tribe. I like VBI Vaccines in this space.
Inflation Risks: This is a red herring; Inflation is a Myth. The more you worry about inflation and pass it along to others, the more real inflation will be. There are ways the government can help reduce inflation, but ultimately technology will bring inflation down. Technology is deflationary. If inflation is a fear, we all are to blame. Maybe it feels good to blame politicians, billionaires or the money printers; but it's all you and I. You had to have that house when lumber and copper were at peak prices, that's inflationary. You wanted to take that driving vacation when oil supplies are at lows, that's inflationary. You ordered out more and had backyard BBQ's when agricultural products were in short supply, that's inflationary. When you headed back to work, did you arrange a carpool or use public transportation? You probably drove in a car alone, that was inflationary. In many parts of the economy, all of us are creating demand spikes for goods and services that are in short supply. Our collective behavior will drive inflation more than the massive money printing will. Ultimately prices will stall and fall back to earth and when that stall occurs it may be your job that's at risk. For those concerned about inflation I suggest looking deeply at your job and consider if it can be replaced by technology. I like gold and bitcoin in this space.
Tax Policy Risks: This is real and worrisome. The tax policy pendulum always swings too far in both directions. Tax policy that slows job creation and innovation will be bad for us all. Tax policy that equitably pays for infrastructure and encourages new job creation will benefit everyone. Ultimately our divided Congress will reduce this risk.
Government Over-Spending Risks: While tied and somewhat contradictory to #4, I'm less worried about this one, mainly because spending on infrastructure is so long overdue and infrastructure spending is where we all get the biggest return on our tax dollar investments. The challenge is defining infrastructure for the next 50 years and investing appropriately. I like Caterpillar, Deer, Martin Marietta, Nucor and a bunch of other infrastructure companies in this space.
Global Conflict Risks: Two things have the biggest impact on markets and inflation, war and interest rates. Conflicts around the world should be a serious concern for everyone. These conflicts are the result of failed diplomacy which means we need new ideas, maybe new people, but certainly a new diplomacy everywhere in the world. The new conflicts are in many cases efforts to acquire resources, lock up trade routes and acquire political influence. I like Lockheed Martin and Raytheon in this space.
Cyber Security Risks: This is probably #1. No longer are we talking about having your Facebook account hacked, now we're actually experiencing shutdowns in our nation’s infrastructure. The Colonial Pipeline hack should be the inflection point for the Federal government to take serious and immediate action. No longer can the TSA be in control of pipeline security, this is a job for the NSA. Crowdstrike is my favorite investment in this space.