𝘽𝙧𝙞𝙚𝙛 𝙈𝙖𝙧𝙠𝙚𝙩 𝙊𝙫𝙚𝙧𝙫𝙞𝙚𝙬
The stock market is continuing to climb a wall of worry, mainly because interest rates are peaking and inflation is expected to grow at a slower pace. The $SPX500 index has increased by 26% since its lowest point in October 2022, but this growth is mainly due to higher valuations of certain companies rather than broad market participation. Only a small number of companies have seen significant gains, while most stocks have not benefited from the rally. This lack of breadth in the market makes the overall upward trend less sustainable in the long term. Therefore, we believe it is wise for investors to be cautious and moderate their exposure to high risk investments.
Looking ahead, economic activity is expected to slow down further, and inflation is projected to decrease significantly starting in either the fourth quarter of this year or the early months of next year. It may take longer this time to cool down the economy because periodic injections of liquidity are still finding their way into the market. However, keeping interest rates in the range of 5-6% will have a significant impact on reducing excess demand in the next 12 months. We believe we are still in the early stages of a downturn in the credit cycle, so it's normal to see some episodes of market recovery before more sudden changes in sentiment and growth expectations. The full effect of tightening monetary policy is yet to be observed, and it's best not to prematurely assume that the new bull market has started.
We have reduced our overall exposure to the market, but we are still participating in the upside by investing in undervalued cyclical stocks. As the market anticipates easier financial conditions, gradually transitioning to a market-neutral position (with zero beta) seems more sensible. This approach helps protect the gains already made and provides portfolio protection at lower prices. Since we are still navigating unchartered territory, it's better to make slower and gradual adjustments to the portfolio's allocation, which should yield more benefits in the long run and minimize timing mistakes.
The portfolio's beta, which measures how fast the portfolio moves with the market, is currently at 0.46. This number takes into account both the investments that benefit from market gains and those that profit when the market goes down. Think of it like driving speed. The beta is automatically adjusted based on future predictions about the economy, financial conditions, and market factors like prices, volatility, and trading volumes. When there are big deviations from the expected trends, the speed of the portfolio is adjusted to allocate risk more appropriately. A beta of zero indicates expected significant market stress, while a beta of one suggests highly favorable conditions for riskier investments. We are currently in the middle range, but there's a high probability that it will be gradually reduced in the second half of this year.... Show More
