Stocks closed the third quarter with a 5% loss and have now fallen 25% for the year to date.
Our strategy has performed better, losing 7%, because:
1. Value stocks have outperformed this year. The value stock index $VTV is down 14%.
2. Our stock picks outperformed $VTV by a few percentage points.
3. We have been cautious since June and have kept the majority of the portfolio in cash, thus avoiding most of the September fall.
Following the sharp drop over the past few weeks, some of the best traders we follow have turned optimistic because the market is oversold, investors are pessimistic and positioning is defensive. Also, markets tend to rally into the year end.
Set against this, an earnings recession is coming in 2023, and this is probably not yet in the price.
Also, the risk of something “breaking” is high.
Our intuition is that there is a 75% chance that the markets rally into the year end because of current oversold conditions, before falling again next year. Our target remains 3000 on the $SPX500 index.
t the same time, we think there is a 25% chance that something breaks before then, and lower levels are reached in Q4 already.
We don’t like these odds, so maintain a defensive posture. Our view is that the main task for investors over the next 6-12 months is to preserve capital, and that it will be possible to make big money in (the right) stocks again after the economy bottoms.
𝗣𝗼𝗿𝘁𝗳𝗼𝗹𝗶𝗼 𝗰𝗵𝗮𝗻𝗴𝗲𝘀 None.