Stocks fell 6% last week, leaving them down 22% ($SWDA.L) for the year to date.
Our portfolio has lost 7% this year, as 15 percentage points of outperformance have not been enough to turn a profit. This is rare but it can happen in the worst years.
We have turned very bearish on the economy and, hence, the market.
1. It was reported last week that a New York Fed economic model predicts that US GDP will contract 0.6% in 2022 and 0.5% in 2023, and grow only 0.4% in 2024.
2. Investment bank Nomura predicts that a recession will start in the fourth quarter this year due to tighter financial conditions, weak consumer sentiment, energy and food price pressures, and geopolitical instability.
3. If there is indeed a recession, analysts’ estimates about future company profits are too optimistic.
4. There has been no capitulation. Most investors are still holding onto stocks.
5. The market rarely bottoms durably before the economy. We expect the economy to bottom in mid-2023.
Given this backdrop, the plan is to run an extremely defensive portfolio for the next 9-12 months, with lots of cash and a sprinkling of Healthcare, Telecom and other non-cyclical positions.
Currently, the market is short-term oversold and it would not be surprising if there was a bounce similar to the one we saw in May. In the 2008 and 2001 bear markets, there were 5 and 6 bear market rallies, but they were all ultimately followed by lower lows.
In general, we like risk-taking and run a risk-on portfolio most of the time, but there are exceptions. In particular, we do not like to take on risk when we believe a recession is approaching, yet investors have not yet capitulated. This approach served us in well in 2008 (portfolio return -16% for the year) and in March 2020. Although no one can know for sure if 2022-3 is going to be similar, we believe better opportunities to buy beaten-down stocks will come down the line.
Further de-risking saw us close all our remaining Financials positions except for $IBKR (Interactive Brokers Group) . $META (Meta Platforms Inc) was added, though this position is being re-evaluated at the moment.