It is hard to come by good news lately, but as Warren Buffet says, “Be greedy when others are fearful and fearful when others are greedy.” Reports tell us that he has been following his mantra to the letter recently as he is finally spending his $146.7 billion in cash held at the end of 2021. Does this tell us the pain is over, or is he just getting started? Let’s recap some of the news weighing on the market first.
- China is still pursuing a “Zero COVID” policy that includes lockdowns of entire cities. This impacted factory production by -2.9% and retail sales by -11.1% from the previous year. Expect continued supply chain disruptions.
- According to the Bureau of Labor Statistics, inflation in the US is running at 8.3%, which came in higher than expected for April.
- Interest rates are increasing quickly, which is beginning to affect mortgage demand, with originations expected to fall 35.5% from 2021. The Fed again re-affirmed that they will continue to push for higher rates until inflation is under control.
- The traditional model portfolio of 60% equities and 40% bonds is not performing as expected this year as both fall simultaneously.
- Bitcoin, which some touted as an inflation hedge, has been down over 50% since November 2021, falling along with the market.
- Finally, the war in Ukraine rages on, creating supply questions for both energy and food supply. As just one example, Ukraine and Russia are both large growers of wheat (ranked #9 and #3, respectively). Number 2 ranked producer India blocked all wheat exports on May 13, 2022, in a reaction as a heatwave roiled their production as well.
In a major financial publication, I read that there is no place to hide in this market. While this environment does pose certain risks, it also provides massive opportunities. This brings me to the good news and what could be signs of progress ahead.
- Housing prices surged 23.8% since 2019, with half of this attributed to the surge in remote work, according to John Mondragon of the Federal Reserve Bank of San Francisco and Johannes Wieland from the University of California San Diego.
- While inflation is still running hot, it increased at the slowest pace in six months in April 2022, giving hope that we are moving in the right direction.
- While nobody likes paying more at the pump, the energy sector remains a strength, with Chevron shares up 47% this year and Occidental petroleum up 134%. Not surprisingly, both are large beneficiaries of Warren Buffet’s spending spree. As balance sheets improve, the ability to pump more oil will increase.
- The growing season is upon us in the United States, where farmers have already committed to planting 240 million acres of crops which is the biggest commitment in a decade. As the top exporting country, their supplies are needed more than ever to feed the world’s population.
- Traders can always be long or short. Given the zero-sum nature of futures contracts, commodity trading advisors seem to be more comfortable than most betting in either direction. Still, the same opportunity is available to all investors.
As a trader pointed out to me the other day, risk can be delayed but never eliminated. The average level of the VIX since 1990 is 19, which compares to a level of just under 15 from 2016-2019 before the pandemic hit. Expanding that time frame from 2016 through today, we have a daily average of 18.4, just below the long-term average. Some strategies do well in low volatility environments, including bonds and passive equity funds. Others thrive in conditions of high market stress like many futures traders, hedge funds, and other active investment styles. While I don’t know where we will go next, I know that it will be good news for some strategies. Now more than ever, a balanced portfolio is the key, so you can take advantage either way through the different cycles and sleep well while you are doing it.
Feel free to reach out with any comments or questions.