Long Week
Posted on Sunday, January 23rd, 2022
Wow! What a week! While the week began with a much needed three day holiday weekend it soon became a very long week. The whole house came down with Covid. Well, except for Kevin and myself. I, technically, did not have Covid. The test said I was negative but I sure felt sick. Kevin has been going to school but when he is home he is hiding out in the basement. Covid hasn’t been too bad. It has just felt like a nasty head cold that seems to linger. I also don’t feel that great after drinking caffeine. Weird days.
The market didn’t help the mood around here. I get pretty grumpy when the market gets a little sideways. We did take a few calls from anxious clients this week – they had good reason. We haven’t seen this type of selloff in some time and perhaps we have all gotten used to the up days.
Why didn’t we see this coming? We did. We have learned over the years that in a game when you win 72% of the time the biggest risk is not taking risk. Investment returns are a direct result of time IN the market and not TIMING the market. The biggest risk is not taking any risk at all.
Jeremy Grantham is a well respected money manager. I have read and enjoyed his notes for years. Last week he predicted that the market is going to go down 50% in an apocalyptic crash. As we said, we have been reading Mr. Grantham for some time and he has predicted this many times. Maybe at some point he will be right. Here’s the thing – if you listened to Grantham in 2019 you would have gotten out at 2950 on the S&P. We closed last year at 4766. If the S&P 500 goes down 50% from its recent highs that gets you to 2400 on the S&P and you will have missed out on years of dividends. You are basically breaking even. Not taking risk is a risk. Also, to make you feel better, given the level of financial assets in our society it is not likely Fed lets the market go down 50%.
We knew the odds coming into 2022 and stated as much in our year end letter to our clients. A tightening Federal Reserve was bound to crimp stock prices. We moved away from tech stocks for all but our most aggressive clients. Most of our clients have very little exposure to tech. We also moved more money towards energy and gold which have both hung in there quite well. We also moved a large percentage of assets out of SPY ETF and into the equal weight version sidestepping some of the carnage in large cap growth. This has helped us avoid some of the nasty drawdown facing large tech. Overall, we are happy with how the portfolios have performed.
What’s Next? We have been viewing this as more of a pivot away from growth and into value rather than a crash. The beginning of the rotation has been harsh but the valuations of the big growth stocks are overwhelming the averages. The smaller energy sector is just not large enough to counter tech’s losses with its gains. This rotation will get less painful the larger energy gets and the smaller tech gets.
I know this has been a long post but hang in there. There doesn’t seem to be a good place to hide at the moment other than oil and perhaps gold. Gold looks like it is ready to go – finally. Don’t know why just yet so it is a matter of letting price dictate the narrative. If it goes up CNBC will tell us why. Ours is not to wonder why just buy it if it is going to go up in price. China is easing monetary policy while the US is tightening. China and emerging markets have been a bad bet for a year. Maybe it is their turn to lead.
While the market has priced in 4 rate hikes in 2022 the market is pricing in rate CUTS in 2024! The yield curve has flattened substantially this month. That screams policy error and recession. Perhaps the market has gotten a bit ahead of itself. There is an FOMC meeting this week. The options market has exacerbated the selloff. Perhaps the Fed may begin to soothe investor’s nerves and that will have the options players caught offside and we could see a big bounce. It will be an eventful week.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.