In my risk-averse 2023 investing strategy video https://www.youtube.com/watch?v=xQg0GQOW0Oc&t=9s here, I promised an in-depth follow up and explanation. This portfolio design was for wealthy clients worried about preserving their purchasing power. In other words, preserving wealth is the goal here. After being told to buy and hold indexes by legends like Warren Buffet, and losing 20%, people have a right to be worried. There is no guarantee of a V-shaped recovery, especially when every banker, businessperson, and their granny is calling for recession!
What started as portfolio design for wealth preservation then morphed into something larger than that. This is not just for the wealthy; this is for folks that have been told that the "stress free" way to invest is to simply "buy and hold," "buy the dip," and / or the social media influencers with their internet lingo calling these prices a "fire sale." There is just one issue with that. A massive issue. We are in a structural bear market.
20%+ Declines from ATH post WWII
This chart should just about speak for itself. Furthest to the left, you can see the March 2020 lows during the Covid pandemic. How did we rocket ship out of that? $14 trillion dollars in stimulus artificially propped up the economy. War and Cold War tensions in the 1960s kept manufacturing going, which propped up the economy, but the 60's and 70's were fairly choppy, to say the least. So the question is simple: what factors are there that indicate 2023 is going to be better for the Stock Market? There is a case to be made. There always is. And in other video / blog series, I will talk about potential stock picks, and bullish opportunities. From the above video, and in this blog, we are preparing ourselves for an outcome more like the dot com bubble.
What is important about this particular structural bear market is the number of times it appeared that "the bottom is in." Rips to the upside of 30, 40, 50, and even 60 percent occurred. And then? It just kept going lower, and lower, and lower. "Blue chip" tech stocks took 10-15 years to reach new all time highs from the burst of that dot come bubble. Perhaps the question we should be asking then is just how overbought and inflated did assets become in 2020 & 2021? For that, let's look at a series of images.
First, around the time of inception of Robinhood, retail investors have had unlimited access to the stock market, without the cumbersome process of working directly with financial professionals. As in the chart, you can see one clear trend, they’ve been buying stocks. At one point in 2020-2021, the price to earnings ratio was as high as 40! It has since returned to under 20, which is more reasonable. But do prices correctly reflect the macroeconomic outlook? Retail doesn't think so.
The put to call ratio is at historic, actually unprecedented, levels. Higher than in 2008. Retail is positioned for downside, and this poses a problem for central bankers and the traditional financial system as a whole. In options trading, the premium dealers, as in a casino, can be though of as "the house." You can't beat the house, right? Well, consider this: the fed funds rate is going to keep going higher, unemployment needs to go up, inflation needs to come down, and a variety of other stars need to align to stabilize markets. Stocks should go down. But if they do, and retailers cash in huge on their short positions, they will be beating Wall Street at their own game. Similar to the Gamestop fiasco of a few years back, this is an outcome that central bankers will want to avoid. Stocks should go down, but instead they will go up -- is that what I am saying? A classic short squeeze to force retailers out of the market is entirely possible, yes.
The Nasdaq here is holding a key level. Below 10,700, the next support level could be a floor all the way at 6,700. Why does that number sound familiar? That's from March 2020, i.e. the Covid lows. One could argue this is where the market was heading naturally, given the diminishing momentum in 2018 and into 2019.
Therefore, it would be perfectly healthy to retest those levels, and if it turns out we consolidate there before rebuilding the next leg up, that would be a good thing, right? Not sure, I don't make the rules! In any event, meanwhile, as in the photo above, 20% of the S&P 500 ($Spy / $Spx) is comprised of these macrocaps. Here's some food for thought:
$TSLA Pre-covid high: $64 Today: $109
$AAPL Pre-covid high: $80 Today: $130
$MSFT Pre-covid high: $186 Today: $237
$GOOG Pre-covid high: $76 Today: $88
$AMZN Pre-covid high: $109 Today: $83
$META Pre-covid high: $224 Today: $117
Aside from $META, which I'll discuss in other videos / blogs (because it's looking more and more like an entry for a long-term hold), it sure seems like there is room to fall further. This is more than about buys, holds, and sells, though. Markets are complicated, dynamic, and more complex than that. For reference, a Fed pivot is historically bearish for price action. Incredibly bearish. In other words, if we are expecting a flash crash of some sort once there is a pivot, then we need to melt up in the interim. This is a bullish case. Basically, "things are so terribly awful, that the market needs to go up before it falls off a cliff."
Okay, that seems like plenty of context setting (which we did not have in the YouTube video). Suffice it to say, for those looking to preserve purchasing power, maintain their wealth, and avoid the stress of checking the markets every day, the following portfolio was designed. Let's g through it.
25% into gold, silver, and metals miners;
25% into long term bonds / US treasury market;
Cash;
Low volatility dividend plays.
The case for metals in 2023 is an easy one to make. Hedging into historically sound reserve currencies is an obvious choice, especially if FIAT currencies start to lose purchasing power. The $Dxy (dollar) has already started to fall from its highs. There is also incredible demand for gold and silver for a variety of political reasons, its role as a utility (e.g. silver for electric vehicles), and from central banks. As for miners, their upside is higher than the metals themselves if conditions are right. The fed funds rate just needs to stabilize.
If stabilizing the economy is the Fed's goal, and the government wishes for the country not to spiral out of control -- and by the way, I pray to God this is the case -- then fixing the the US Treasury is obviously and undeniably one of the first things that need to happen. Long term bond performance has never underperformed stock markets during times of depreciation and macroeconomic headwinds. We have talked about this ad nauseam, so we will not go into further detail here. My price target for $TLT is $120, at the very least. And I hate giving price targets.
Use this chart (below, left) as reference.
The dollar is at a critical point. This one is straightforward: $Dxy falls, a variety of asset classes can jump in price. If not, as in the picture to the right, cash is king. This is a smart hedge, at least for the time being.
$O is commercial realty income, which pays a monthly dividend of 4.61%. This is a great long-term play, and hard to imagine it depreciating too far in value. $SCHD and $VYM pay ~3-4% dividends, and are generally safe indexes. This is a good hedge in the event that the market performs decently, in which case the stock itself appreciates, plus you get the dividend. $SPHD was only down ~2% in 2022, paying a ~3% dividend, while the rest of the market was down 20%. The case for dividend plays is that everyone wants a bit of cashflow, therefore these are likely to outperform markets even in the event of markets bleeding / stagflation.
Before we conclude here, we should list some institutional targets for the S&P 500 for the end of year 2023. A low of 3,400, a high of 4,500. That's a decent spread. But before you put too much faith into any of these predictions, remember that just about everyone had price targets of 5,000 at a minimum for 2022. To be fair, it is something of a fool's errand to be forecasting 12 months at from this point in time. We have to see inflation come down, China re-open (and "play ball" as they say), and geopolitical tensions resolve. And even then, nobody has a crystal ball. History may not repeat, but it certainly rhymes.
Looking at annual returns from 1928-2022 to the right, what do you think about 2023, as well as the above picks and analysis? Please let me know!
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