Hello and happy Groundhog Day to each of you!
I’m obviously no match for Punsxutawney Phil (see picture) but, as I will describe in this month’s update, I think we are in for harsh macroeconomic “weather” over the coming months.
Current Market Conditions
As surmised in last month’s Vailshire client update, it is increasingly obvious that both real economic growth and inflation have peaked in 4Q 2021 or January 2022. While this may seem boring and irrelevant to the majority of people, it has massive effects on most major asset classes and, therefore, strongly affects our portfolio positioning.
When there is trouble beneath America’s economic hood, risk-on assets are usually the first to suffer. Bitcoin, the world’s freest market, and US small cap stocks were the first to sense the coming trouble. Both of these assets peaked in early November 2021, and have been steadily declining since that time.
Large cap US stocks remained relatively unfazed until the end of 2021, but then reality set in as the new year began.
In the month of January, the total S&P 500 return (including dividends) was -5.3%. The NASDAQ returned -9.0%. Bitcoin fell -16.7% after falling a whopping -18.8% in December 2021!
As for me, I flipped from neutral to decidedly bearish in early January 2022, after listening to Federal Reserve Chair, Jerome Powell, speak about their 2022 game plan. I won’t bore you with the details but, in short, the Fed is getting increasingly hawkish at (I believe) exactly the wrong time.
The last time we had a similar set-up–slowing economy, decelerating inflation, hawkish Fed–was in 4Q of 2018. Similar to today, the stock market turned south and bitcoin nosedived in the months of November and December 2018. These declines led to the now-infamous “Powell Pivot,” in which the Fed chair abruptly ceased his hawkish rate hikes on Christmas Eve and instantly turned dovish. The market loved this about-face and began another massive bull run higher, which lasted until 1Q 2020.
It will be interesting to see how Powell handles a very similar set-up this time around. So far, he is using the same (losing) playbook and the markets don’t like it. Until he pivots, I think it is wise to remain defensively positioned.
Strategies for Vailshire’s Separately Managed Accounts
Last month, I was leaning bearish. Today, I am outright bearish from a macroeconomic perspective.
As such, I think it is wise to position our SMA portfolios defensively for the foreseeable future. It should be noted that the last time I saw a similar amount of red flags in my data and positioned our Vailshire portfolios in a highly defensive manner was in late-February 2020. For those who are paying attention, you may recall that March of 2020 was a famously terrible month for risk-on assets, including US stocks and, especially, bitcoin and bitcoin proxies. I am expecting a similarly rough patch for many assets over the coming months.
Even though I have great respect for our capital efficient stocks over the long-term, my near-term bearish outlook caused me to completely SELL out of these positions last month. Once the foreboding macroeconomic outlook passes, I believe we will be able to purchase shares of these great companies at even lower prices than most are trading at today. Time will tell if this is a good decision, but I think it is smart to play it safe.
As for my favorite macro asset, Bitcoin–which is simply the world’s best money and savings technology–it continues to trade as a “risk-on” asset. Therefore, I have completely removed it from our Vailshire portfolios until a more opportune time.
Once my data shows that we are at or near the bottom in price declines for the above-mentioned risk-on assets, I plan on slowly rebuilding our positions from scratch. Doing so should ensure extremely profitable long-term gains for us as macro conditions improved.
Certain safe haven assets tend to perform surprisingly well in “risk-off” environments. We will remain positioned for profits in these holdings as the economic conditions deteriorate.
Finally, not every country is currently in “risk-off” mode. As these countries’ prospects become obvious, we will invest in their associated ETFs as the opportunities arise.
We will continue to add and remove all investments based on the same full-cycle systematic investment approach that we have been using for the past few years. As underlying market conditions become more or less favorable, so too will change the aggressive/conservative tilt of our portfolios.
Depending on your financial objectives and individual account investment privileges, Vailshire’s separately managed accounts are currently allocated in the following manner:
- 0% select capital efficient equities
- 58-73% cash
- 0% bitcoin, Bitcoin infrastructure, and related digital assets
- 2% select foreign ETFs
- 25% long-dated US treasuries
- 0-5% short S&P 500 ETF
- 0-5% short NASDAQ ETF
- 0-5% long volatility ETN
If you are a Vailshire Client, feel free to log into your Vailshire-managed account(s) at Interactive Brokers and see how your own portfolios are positioned. (It’s a good idea to log into your accounts at least quarterly, just to make sure your settings and demographics are up to date.)
For those clients who wish to actively hedge against anticipated declines in the equities markets but do not see them within your account(s), you will need to log into your Vailshire account(s) at Interactive Brokers and apply for trading privileges in “leveraged or complex exchange traded products.” If you do this, please let me know so I can begin trading/investing on your behalf.
Vailshire in the News
I was recently honored to be a guest on two very popular investing-related podcasts:
On February 1st, this interview with Jay Gould was released on YouTube. (Approx. 2 hours long.)
On February 2nd, this interview with Preston Pysh and The Investors Podcast was released. (Approx. 1 hour long.) — At the time of this writing, it has not yet been released on YouTube… but keep your eyes open for it.
Both Jay and Preston are seasoned investors, educators, and podcasters, and do a bang-up job with their expert interviews. I think you will enjoy both of them.
If you would like to hear more about my current bearish macro outlook and related investment implications, then these podcasts are for you. Please give them a listen and let me know what you think!
Conclusion
In my view, we have just entered a period of tough macroeconomic conditions. Such conditions warrant defensive positioning within our portfolios, including removing our “risk-on” assets and materially increasing our “risk-off” exposure.
While this approach may not be very exciting, it is sometimes necessary as a wise approach to capital preservation. And, as underlying economic conditions improve, our portfolios will be flush with cash and ready to purchase fantastic assets at prices (hopefully) far below their current levels.
With such a systematic and currently conservative approach, I am highly optimistic about our opportunities throughout 2022… whatever conditions we face!
Above all, I am here for you and happy to answer any questions or concerns that you may have. I am honored to have you as an important member of the growing Vailshire family.
Living well and investing wisely with you,
Jeff Ross, MD, MBA