Hugo Angelo Lucien Manenti
Hi everyone, Lot of action in the market, so I thought I’d share my views! Overall, the last two weeks have been tough and very volatile – more than I expected. Even if the $SPX500 looks fine on the surface, breadth has continued to narrow. This means that only a handful of stocks are pulling the market, which is not a great sign. The Russell ( $IWM ) took a bad hit and has barely held support. Let’s take a look at what happened since my last post. 𝟭) 𝗖𝗼𝘃𝗶𝗱 In addition to the delta variant creating one more wave in Europe, we are seeing the emergence of a new, more contagious variant – Omicron. This has added to the nervousness that I highlighted last Thursday. I’ll do my best at summarising what we know. It does seem, based on data in South Africa, that Omicron is highly transmissible and able to escape immunity. It will likely make vaccines less effective, although still pretty good at avoiding severe disease. The impact could be somewhat similar to Delta – a bad covid wave, lockdowns, etc. You know the drill… 𝗛𝗢𝗪𝗘𝗩𝗘𝗥 Early indications are that Omicron cases tend to be mild. That would actually be good news, as this potentially new dominant variant would cause less hospitalisations and less deaths. Many epidemiologists expect Covid to me more transmissible and less severe over time... which would be great. As a conclusion – we know that we won’t get rid of covid. We know that vaccines offer good protection against severe disease, but are not very effective at stopping transmission. We also know that protection declines substantially after 6 months. Based on the above, the “best case” that I see is that covid becomes less severe over time, requiring only the most vulnerable people to get a booster every year. Just like the flu. IF Omicron is a step in that direction, then this is good news. The “worst case” is that Omicron is actually as deadly as Delta but more transmissible. This would be mitigated by vaccination and general preparedness – we know how to live and work with covid. Still, expect slower growth in services and more inflation in goods. 𝟮) 𝗧𝗵𝗲 𝗙𝗲𝗱 J-POW told us yesterday that after all, inflation was not transitory… no kidding! We have been saying that for a year. Still, we need to understand that he is stuck between a rock and a hard place. 1) If they accelerate taper and raise rates, they may hurt markets and the economy, in order to rein in inflation. If a new wave of covid disrupts supply chains, inflation will remain elevated, while the economy weakens. This would mean stagflation – bad news… 2) If they do nothing and inflation remains high, then the economy will suffer, and they will get the blame for it. In addition, inflation has become political, and Democrats will get trounced at the midterm elections if they can’t bring it under control. My perspective is that the economy has shown a lot of robustness – Q4 GDP growth is forecast at over 8%, consumer spending is strong, and employment data is looking good. The economy is no longer in a state of emergency. Hence, I see nothing wrong with accelerating tapering - subject to Omicron not wrecking the economy. 𝟯) 𝗛𝗼𝘄 𝗱𝗼 𝗜 𝗽𝗹𝗮𝘆 𝗮𝗹𝗹 𝗼𝗳 𝘁𝗵𝗮𝘁? Honestly, I have very little appetite to position the portfolio for / against a covid wave and for / against inflation / deflation / tapering, etc. There is just way too much uncertainty, and it is a bad idea to “play the headlines” in those conditions. My strategy is to invest is strong companies for the long term, not to bet on macro events that are outside of my control. The reality is that societies, economies and markets have proven to be resilient. We have learnt to adapt, and it would take a VERY nasty variant to change my opinion. That doesn’t mean that I am sitting on my hands. As mentioned last Thursday, I closed my investments in $BKNG (Booking Holdings Inc) and $LUV (Southwest Airlines Co) as it became clear that covid cases were trending back up. That saved us from an even nastier drop on Friday and yesterday. But that’s the whole point – anticipating rather than reacting. Once the event hits, it is too late… We have a well-balanced, diversified portfolio, and that is the best protection that one can have against the unexpected. Zooming out, this drop is barely a blip in a strong market. And as with every drop, the best strategy is to be patient, buy the dip (if you can), and hold on to your winners. 𝗖𝗼𝗻𝗰𝗹𝘂𝘀𝗶𝗼𝗻 & 𝗢𝘂𝘁𝗹𝗼𝗼𝗸 There is a lot of uncertainty in the near term, and nervousness among investors / political leaders. Personally, I am using this drop to add funds to my other account. This is not a recommendation – we all have our own risk tolerance, and there is no guarantee that markets will bounce in the near term. Medium-long term, the bullish thesis remains fully intact – Q4 data is VERY strong, and it proves that there is a lot of pent-up energy in the economy. I see no reason why this would not continue for 12-24 months. All the best, Hugo
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