Since I last penned my commentary (my apologies for the delay) I have experienced the end of the quarter, beginning of the new quarter, the Jewish High Holidays (which end last Sunday), the final but extremely hectic end of tax season (common for me, most high net worth individuals, business owners or the truly lazy) on October 17 and last but not least, the beginning of the professional hockey season. Go Knights Go! So, while I had not taken my eye off the markets, something had to give and that was writing some commentary. While what I am about to write has been playing in my head, it was not on paper (or shall I say Microsoft (MSFT) word).
Let me start off by giving a little three-quarter review of the financial markets. To put it in a nutshell, they stunk. Across the board. It was the equivalent of the 100-year flood (more on that to come). Every single major asset class was lower – stocks, bonds, and precious metals. The only exception was the energy markets – crude oil, natural gas and finished products such as heating oil and gasoline. As to the 100-year flood hypothesis, read this article in Reuters, titled“ Classic 60/40 investing strategy sees worst return in 100 years. How about 40/60? “by Lucy Raitano. As you can see, there was nowhere to hide in 2022, if you are a traditional investment manager or investor. Also do not ever believe those guys hawking gold and silver on TV. They are right less often than a broken clock.
Guess what, our best investment strategy through end the of September was our Energy strategy, which we launched last year at just the right time. Of course, clients who turned down the offer to enter that strategy did so because it was, in their minds, too risky. Our worst performing strategy was, to nobody’s shock, Growth, which is mostly high beta and technology stocks. Our Dividend Value portfolio was down by low double digits, better than bonds or stocks. Clients who listened to me after 2020 and moved assets from Growth to Dividend Value, got their reward of a balanced portfolio while selling Growth rich and buying Value cheap.
So far in October, every strategy has advanced, with Energy being the top dog followed by Consumer Discretionary.
I believe that the worst for stocks may be close to an end. Yes, interest rates may rise soon, albeit at a lesser pace. Even better, Pinhead Powell might see the horror show he has created and begin to flatten or even lower rates sooner than expected. I doubt he has the mental acuity to see what happened in the fourth quarter of 2018, but more on that to follow.
Had you shifted some assets from Growth to Dividend Value as I suggested on multiple occasions, it might be time to flip the trade back into Growth or ponder sprinkling some of the assets into Consumer Discretionary or Energy. Call me to discuss your options. It also might be a suitable time to add fresh money to your portfolio.
The Standard & Poor’s 500 (SPX) bottomed out at about 15.75 times trailing earnings. 2019, the last pre-covid year, the SPX traded at around 19.75 times earnings. With the 10-year US Government Bond Trading at 4.03%, the equity equivalent, according to the Fed Model, would be 25 times earnings. I typically use 20 times earnings as my fair value for stocks. Currently, the estimate for SPX earnings in 2023 is 235 to 239. At midpoint it is 237. So, unless there is a major earnings recession (not necessarily an economic recession) then I expect higher prices ahead for the SPX.
A word on bonds. If you owned bonds a year ago, you are feeling the pain of the 100-year flood. At the beginning of the year, the 10-year US Treasure stood at 1.51%. At the end of the September quarter, it stood at 3.65%. Your principal loss was theoretically 17.88%. Less your coupon returns of 1.13% you netted a total loss of 16.55%. How will you make that loss back? Two ways. You hope that the rates on the bonds return to about 1.51% (good luck with that) or your hold your bonds another 9 ¼ years to maturity. With the ten-year as I write at 4.03%, the bond pain is even worse.
Losses in stocks can easily be made up in a shorter period. Let me put it another way, while Growth has had a terrible year, no way to hide it, as I write, we have given up gains since mid-April of 2020. Furthermore, we are up nearly 26% since the Powell Plunge of the 4th quarter of 2018. More on that in the next paragraph.
Historically, according to my research, going back to 1950, in the 16-quarter election cycle, the best performing quarter is that of the fourth quarter of the mid-term election year and the second-best quarter is that of the following quarter. That was until the Powell Plunge of the 4th quarter in 2018 when the SPX dropped a depressing 13.96% only to rebound 13.07% in the first quarter of 2019. That rebound occurred once investors and traders saw the foolishness of Pinhead Powell’s actions and the reflexive gift the markets presented at the end of 2018. That lunacy flipped the best and second-best positions in the 16-quarter returns, but only by a fraction of a percent.
As I write (late at night on October 26, 2022, or early October 27 in the Eastern time zone), the SPX rose 6.83% since the end of September 2022. Despite some poor tech earnings and poor economic reports, such as inflation, the market is reading bad news as good news. That typically occurs when the market flips from a negative to a positive bias. Of course, we all await Apple (AAPL) to report results, after the close today. It could be a game changer in either direction. Estimates are for earnings of $1.27 on revenues of $88.9 billion. OF greater importance than earnings results are management’s guidance and commentary of their end markets.
By the way, Enphase (ENPH) reported results after-the-close on Tuesday. On Wednesday, the solar power stock rose nearly 10% or $26.28. It is still off its 52-week high of $324.84 but I believe with a strong market it can eclipse that price.
[ Please note that all returns are averages across many accounts in the same strategy. Returns may differ from account to account based on several factors including but not limited to account size, deposits, and withdrawals]
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC was long AAPL, ENPH, MSFT, SPY, SPXL L- although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, (LVAM) an investment advisor representative, specializing in high net worth private wealth management. LVAM is affiliated with Kingswood Wealth Advisors Services, a registered investment advisor. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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