Stock Portfolio Updates: Volatility Swells Cash Holdings
By: Christopher Mistal
July 14, 2022
This time may feel different, much different than recent economic retreats and corresponding bear markets. But each bear market and recession has had its own set of circumstances and triggers. Covid economic shutdowns in 2020, subprime lending in 2008 to 2009, dot-com euphoria ending and 9/11 in 2000-2001 and on and on. However when the bear ended, and economic growth resumed there was always one common outcome: a new bull market for stocks. It seems quite reasonable to expect a similar outcome this time around.
Because the causes of bear markets and recessions have varied and neither usually begins nor ends on a set schedule a precise date for the current bear’s end remains elusive. We can, as we have been opining in recent months, speculate that the bear is likely to come to an end sometime later this year, most likely in late Q3 or early Q4 based upon historical data.
In the following table of S&P 500 Bull, Bear, 10% Corrections and Recessions since 1948 we have added the current bear market. This table differs from the data found on page 134 of the 2022 Stock Trader’s Almanac. In this table we have used the commonly cited in various media 20% decline as the definition of a bear market. As of July 16 close, S&P 500 was down 20.7% in 191 calendar days from its closing high on January 3. Compared to the average bear market loss of 33.2%, the current bear has actually been rather typical and mild thus far. Considering the compression in cycles that has been observed recently it would also seem reasonable to anticipate the bear finishes in less than the average 376 calendar days recorded by the previous 12 bears.
[S&P 500 Bull, Bear, 10% Corrections and Recessions since 1948]
We still believe that the current bear market will come to an end later this year, most likely around midterm election time. We believe yesterday’s hotter than expected 9.1% CPI reading actually improves the odds of a final bottom later this year as it is likely to force the Fed to accelerate its rate hike cycle even further. The sooner the Fed gets to a point where inflation is slowing, the sooner they can pause or perhaps even stop hiking rates. Historically, the market has enjoyed its best performance when the Fed was inactive or making minor adjustments to rates. Until that time arrives, cash may be the least risky asset to hold in your portfolio.
Stock Portfolio Updates
Over the last five weeks since last update through yesterday’s close, S&P 500 declined 7.6% while Russell 2000 fell 8.7%. Over the same time period the entire stock portfolio slipped 0.2% lower, excluding dividends and any fees. A sizable cash position, that currently stands at approximately 84% of the total portfolio, aided in avoiding the vast majority of the market’s decline. As a reminder, we are not targeting a specific percentage of cash. The current balance is the result of heeding stop losses when reached and by being patient for a more favorable risk/reward setup in the market.
Broad market weakness in early June had the greatest impact in the Large-cap portfolio. Even traditionally defensive positions were not spared. In total seven stocks were stopped out of the portfolio. Constellation Energy (CEP) was the first to get stopped out on June 14 with a 44.9% gain. CEP was spun off from Exelon Corp (EXC) earlier this year and was not a new trade idea. EXC was also stopped out in June. Due to its spin off of CEP, EXC was closed for a loss of 11.9% however, the overall trade was positive due to CEP’s gain.
Also stopped out in June were Ameren Corp (AEE), DTE Energy (DTE), Duke Energy (DUK) and DT Midstream (DTM). Sadly many of these stops were classic whipsaws that occurred right around the lows in June. As recession concerns have grown and Treasury bond yields eased, many have rebounded. Once again it would appear that the market’s volatility can sweep into any sector.
Brookfield Infrastructure (BIP) was stopped out just after it split 3:2. Softening energy prices and broad market weakness in June appear to be the key reasons for BIP’s decline. Rather than rush back into these positions, we will elect to remain in cash and await a better opportunity.
Despite numerous upgrades in recent weeks, Warner Brothers Discovery (WBD) continues to decline. Like CEP, WBD was a spin off and our patience has worn thin. Sell WBD. For tracking purposes it will be closed out of the portfolio using its average price on July 15.
On a positive note, MGP Ingredients (MGPI), in the Small-cap portfolio bucked the market’s trend and climbed 8.1% higher over the last five weeks. At today’s close, MGPI was less than $3 from its 52-week reached on July 5. MGPI is on Hold.
All positions are on Hold. Please see the table below for updated stop losses and current advice for positions not covered above.
[Almanac Investor Stock Portfolio Table]