Portfolio Update: Market Going Lower on Recession Outlook
Jerome Powell Sent a Clear Message, My Original Thesis Was Invalidated. We Should Price in a Deeper Recession.
One of the most important parts of investing/trading is to know when your thesis is wrong and how to identify what can invalidate it. When you see a change in the thesis, you pivot quickly. In this NewsLetter, I am going to explain what happened last week and where the markets are to go.
I think this gets worse but I don’t look at it as a bad thing, but more of an opportunity for investors. We are going to take more of an optimistic, opportunistic, viewpoint on how to manage and benefit from the volatility. We, at BluSuit, will run a long/short portfolio.
Over the past few months, since the May/June time frame I mentioned that peak inflation expectations are behind us and that the market bottomed. In many ways that seemed to be the case. Both the stock market and bond market began rallying under the assumption that Powell would cut rates in 2023. I, and the credit/equity markets were working under the assumption that the Fed would conduct a “soft landing” which means that the Fed would raise rates above neutral (thought of as 2.5%) and lower upon further economic weakness. This is why stocks and bonds have rallied… Till now.
All of this Changed Following Powells Remarks
There is one specific detail he said that made it extremely clear, that invalidated the idea of the worst behind us. If you missed the short message Jerome Powell sent to the markets, here is his speech:
From his speech, there is one paragraph that stuck out the most:
“Pain to households and businesses” is a much different tone than soft landing. This “pain” will now become expected. What this now means is that Jerome Powell is going to do everything to kill inflation and keep it down. Even if that means he has to sacrifice the economy. A shallow recession and strong jobs market wont do the trick in his view. He clearly said “pain” in coming and we are no where near a pivot.
This is a clear change of tune from the June meeting, where he appeared to come off more Dovish.
In This Weeks NewsLetter We Are Going to Cover
Technical levels and where valuations should end up on the markets.
The Feds Rate Hike Path
My portfolio strategy, defensive positioning and the opportunity ahead
What a Full Blown Recession Means for Equities and Levels Where the Stock Market Will Head to
We need to start thinking about the S&P declining 50% from top to bottom, on a fundamental rationale, being a real possibility.
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