“This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing.”
- David Tepper, founder and president of Appaloosa Management
Happy Monday,
The S&P, Dow and Nasdaq were all up significantly in July. That followed a down month in June when the markets found little to celebrate. In July, the S&P was up 9.0%, the Dow was up 6.6% and the Nasdaq increased by 12.3%.
In our view, the market continues to be driven by two divergent realities. On the one hand, the Covid-19 recovery, job creation, and continued consumer spending are all pointing the economy in a positive direction. On the other hand, the markets are reacting to near-term inflation spikes in the U.S. (caused in part by the government support payments) and the global supply imbalance created by the war in Ukraine and Covid recovery. These two competing realities have upset the markets, but we are in this for the long-term, so we need to keep a steady hand and look to add value investments in the short and medium-term.
That said, July continued the "buy the dip" portion of this general market pull-back. We believe the markets will remain uncertain, with pullbacks becoming a regular event all year long. Our public equities portfolio, which still includes a significant amount of hedging, is up 7.5% on a one-year basis, and up an annualized 10.1% on a ten-year basis.
The S&P was up 9.0% to 4,130 in July as the markets continued the rotation into only the best value investments, especially those that are profitable and have reasonable valuations. Relatively strong Q2 earnings propelled many companies to highs that we have not seen in the past six months.
The Dow was also up 6.6% to 32,845 in July as the markets continued the rotation into only the best value investments, especially those that are profitable and have reasonable valuations.
The Nasdaq increased by 12.3% to 12,391 in July as Tech and Growth stocks bounced from the big drop in June and showed some strength based on good Q2 earnings results.
In July, Covid-19 deaths in the U.S. continued their sharp downward trend as we continue the endemic phase of Covid. In addition, the Fed implemented the third of 3-7 rate hikes in 2022 to help control inflation which has cooled economic expansion expectations. The last two hikes have been 75 bps which have caught the Fed up with their challenge to cool the economy, but not drop it into a recession. While there may certainly be more rate hikes in September and beyond, it is not likely they will be as high as 75 pts since the Fed is now "data dependent".
In August, we believe the public markets will continue rotating to value stocks with real earnings and low valuations and continue shedding growth stocks that have no earnings or have very high valuations. Back in January 2022 we increased the cash/bond part of our public equities’ portfolio to 60% and we expect to keep at least 30% liquidity in Q3 ‘22 so we can periodically take advantage of any market corrections.
We especially like the Financial, Industrial, Energy and Utility sectors where values are still very reasonable, and we like profitable growth stocks which should increase as the country opens back up for business. Morgan Stanley, Berkshire, Google, Apple, and Consumer Staples all continue to be top value selections as we view them as stronger and more nimble competitors in their respective sectors, and they do not have much exposure to Russia. Visit the investments page to view our Top 10 investments.
Thanks again for your consideration and ideas. Have a wonderful August 2022!
Best regards,
Marlene Oddo
Partner
PointFour Capital, LLC