Updated: Jun 28, 2022
Recently, there have been many news stories focusing on the economy. For example, a few big banks came out with recession warnings in April, and then Nasdaq almost fell 5% in a day. But when the news about consumption, earnings, and Initial Jobless Claims outpaced the target expectation, you saw the Market recover 3% within a day. Then, the Market went down again when the Fed implied yanking another 0.5 bps of interest rate in May. Suddenly, the Market got excited when Elon decided he “MUST” buy Twitter and Warren Buffett went shopping for $41 billion of net purchases in the first quarter. Regardless of the media hype, please don’t let the market drama get you down and lead you to make rash decisions. The resolution is to focus on the long game, not the Drama, and stay focused on the Financial and Economic data I am presenting every month.
Source: Wisdom Tree
According to a chart from WisdomTree as of 4/26/22, the best-performing sectors during the current stagflation environment are Energy, Staples, and Utilities. The worst has been Communication Services, Information Technology, and Consumer Discretionary. The sector performance has rotated from Growth to Value, precisely what I stated in the July and October Big Picture Newsletters. Last year, Rio Tino and Royal Dutch Shell went down in value on paper while the dividend payout was nearly 10% and 6%, respectively. This year, they are up with the same decent dividend payout, while the tech stocks I hold out, such as Apple, Google, and Microsoft are now down in value. On the surface, it looks like you should sell these technology stocks. However, the reality is when the oil price is over $100 per barrel, stop chasing Energy stocks.
For long-term growth, I see that Communication and Information Technology have reached the prices for accumulation. Take a look at Amazon as an example. AMZN has beaten its estimate in five of the last eight quarters with a PE ratio of 42.2. While many are concerned that Amazon is getting affected by supply chain issues, Amazon is not only an online retail company; it is more of a technology company, including Prime services, grocery, cloud computing, and data storage. It has a substantial balance sheet with $22.1 billion in cash and a solid clientele base.
Look at the chart below. The 5-Year Daily Bars confirmed that the current price dropped back down to the price in June 2020, almost at the COVID shut down a level. This is a good dip to start accumulating more Amazon as its valuations normalize for the rest of the year.
Source: Interactive Brokers Inc. Bloomberg
On the other hand, I like Microsoft coming out with a big earning surprise, but I am holding out on buying due to its pending acquisition of Activision Blizzard. I do not like the revenue I see from Activision's “Call of Duty” video game and other games. I don’t think it is a valuable purchase for Microsoft to enter the gaming world. Instead, I add more Nvidia with the same valuation with deeper discount.
Similarly, I don’t see that Walmart (WMT) and Costco (COST), which have estimated P/Es of 22.6 and 41.65, respectively, can continue an uptrend pattern for the rest of the year. I am positioning for some profit-taking. I am proceeding to add Consumer Staples positions such as Archer Daniels Midland Company and Dow DuPont Inc. The consumer demands for Carbohydrate Solutions, protein and vegetable oil, and Oilseeds are increasing. These two companies are positioned to benefit from higher food and material prices while staying innovative for cost control. Check it out, S&P 500 index is down 12.2% in the year-to-date period, and Daniels’ is up 20% year-to-date. As you can see from the Year-to-Date Sector Returns chart, Materials companies are sitting on symmetry between outperforming and underperforming sectors year-to-date. Materials companies are not down as much as Tech companies or the S&P 500, and not up as much as Energy either. They are my suitable protective positions.
I am also selling. I don't see the low momentum stocks improving their pricing anytime soon this year. Geopolitical risk due to the prolonged Ukraine and Russian war is concerning, and I don't see an end date. I am cashing out or partially selling the international index, emerging market index, and other European ADR. Other low momentum stocks are also on the watch lists to sell in May.
Lastly, we were selling or trimming high-yield bonds for almost six quarters, but I am now holding out and not selling. The current selling signs show that the fixed income downtrend is reaching exhaustion. You might see some big institutions coming back to buy Treasury or Muni Bonds this year. However, given the economic data released on 4/27/2022, the U.S. economic trade deficit in goods increased by 1.7%, while pending home sales, a leading indicator of the U.S. homebuilding activity and market, fell 1.2% in March. It further indicates the long-term recovery trend on bonds is not inevitable.
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