The Power of One Pundits, analysts and investors had spent the first half of February flailing their arms over the most recent Consumer Price Index (CPI) and retail sales reports that showed prices growing faster than expected in January, walking back expectations for Federal Reserve rate cuts.
[Goldman Sachs economists have dropped expectations for Federal Reserve interest rate cuts in 2024 to four from five previously, with the first reduction not coming until June.]
A slew of generally good corporate earnings reports kept hope alive, but in fits and starts. Amazon and Meta, for example, beating expectations. But Apple reporting weakness in the Chinese market. Talk of a market rally running out of steam became pervasive on the business channels.
[Goldman Sachs economists have dropped expectations for Federal Reserve interest rate cuts in 2024 to four from five previously, with the first reduction not coming until June.]
A slew of generally good corporate earnings reports kept hope alive, but in fits and starts. Amazon and Meta, for example, beating expectations. But Apple reporting weakness in the Chinese market. Talk of a market rally running out of steam became pervasive on the business channels.
The Power of One Company
Then a single company, Nvidia, reported quarterly earnings after the market’s close last Wednesday. One word: blowout. The "insatiable demand" for the company's artificial intelligence chips sent the stock ripping more than 16%, adding $277 billion to its market cap in a single day and leading the company to flirt with a $2 trillion valuation. And oh, by the way, propelling the U.S. stock market to a record high, pushing Fed worries into the background.
Just how fast is Nvidia growing? The company expects its current quarter revenue to be in the ballpark of everything it brought in during 2023.
Despite inflation jitters and earnings ups and downs, all three major market averages look poised to notch respectable gains for the month.
How is March Shaping Up?
Earnings are largely done. Wild cards remain. The cautionary notes from last month are still valid. In fact, in a recent 60 Minutes interview, Fed Chair Powell flagged geopolitical risks as the greatest threat to the world economy.
Back home, investor sentiment has thoroughly baked in a “soft landing” scenario, an over-confidence that could make the markets more vulnerable to overcorrections.
On the positive side…
And For What It’s Worth…
Elon Musk suffered one of the biggest legal losses in U.S. history recently when the Tesla CEO was stripped of his $56 billion pay package in a case brought by an unlikely opponent, a former heavy metal drummer.
As reported by Reuters, Richard Tornetta sued Musk in 2018, when the Pennsylvania resident held just nine shares of Tesla. The argument centered on the overly chummy relationship between board members and Musk, and their apparent rubber-stamping of the pay package that Musk dictated.
The case eventually made its way to trial and on Jan 30 a judge sided with Tornetta, voiding the enormous pay deal for being unfair to him and all his fellow Tesla shareholders.
"His name is now etched in the annals of corporate law," says Eric Talley, who teaches corporate law at Columbia Law School. "My students will be reading Tornetta v Musk for the next 10 years."
The power of one individual.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
Then a single company, Nvidia, reported quarterly earnings after the market’s close last Wednesday. One word: blowout. The "insatiable demand" for the company's artificial intelligence chips sent the stock ripping more than 16%, adding $277 billion to its market cap in a single day and leading the company to flirt with a $2 trillion valuation. And oh, by the way, propelling the U.S. stock market to a record high, pushing Fed worries into the background.
Just how fast is Nvidia growing? The company expects its current quarter revenue to be in the ballpark of everything it brought in during 2023.
Despite inflation jitters and earnings ups and downs, all three major market averages look poised to notch respectable gains for the month.
How is March Shaping Up?
Earnings are largely done. Wild cards remain. The cautionary notes from last month are still valid. In fact, in a recent 60 Minutes interview, Fed Chair Powell flagged geopolitical risks as the greatest threat to the world economy.
Back home, investor sentiment has thoroughly baked in a “soft landing” scenario, an over-confidence that could make the markets more vulnerable to overcorrections.
On the positive side…
- The core Personal Consumption Expenditures (PCE) index, released just this morning, rose at the slowest annual rate since March 2021, matching Wall Street forecasts. The PCI strips out the cost of food and energy and is closely watched by the Federal Reserve.
"Fed officials have signaled they do not need better news on inflation to cut rates, just continued good news," writes Oxford Economics deputy chief US economist Michael Pearce. "With the trend in inflation still downward, gradual rate cuts this year are still on the table." - Daily record highs across the S&P 500 are signaling that the rally is broadening, helping to ease investor worries about a market too concentrated in the AI names.
“There’s space for bullish sentiment and positioning to be further supported,“ writes Goldman Sachs analyst Cecilia Mariotti, “especially if we start seeing a more meaningful rotation out of cash and into risky assets and laggards within equities.” - Year-end S&P 500 revisions keep edging up. UBS is predicting 5,400. [The S&P 500 is currently at 5,080.] Barclays recently added 500 points to its target - now 5,300 - with a bull case of 6,050 if Big Tech can keep up its current trajectory.
And For What It’s Worth…
Elon Musk suffered one of the biggest legal losses in U.S. history recently when the Tesla CEO was stripped of his $56 billion pay package in a case brought by an unlikely opponent, a former heavy metal drummer.
As reported by Reuters, Richard Tornetta sued Musk in 2018, when the Pennsylvania resident held just nine shares of Tesla. The argument centered on the overly chummy relationship between board members and Musk, and their apparent rubber-stamping of the pay package that Musk dictated.
The case eventually made its way to trial and on Jan 30 a judge sided with Tornetta, voiding the enormous pay deal for being unfair to him and all his fellow Tesla shareholders.
"His name is now etched in the annals of corporate law," says Eric Talley, who teaches corporate law at Columbia Law School. "My students will be reading Tornetta v Musk for the next 10 years."
The power of one individual.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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