We’ve had one of the most volatile periods in living memory over the last month and below are our current thoughts and actions.
We can’t know what President Trump’s next move is going to be and it’s pointless trying to predict it and what the reaction might be to it. What we can do is focus on our process and this is particularly helpful at times like these because it incorporates not just the fundamentals of the companies we own, but also the top-down macro view and the technical picture.
The message from our macro work is caution; there is more volatility likely, and defence is the best strategy in the near term. We say this because not only have equities been weak, but the bond market has also been under pressure, as has the dollar. Added to this a high level of volatility as measured by the VIX index and credit spreads getting wider all point to increased risk.
He’s certainly made it worse, but the rate of change in revenue in sectors like tech had already started to deteriorate. His tariff pronouncements have added a great deal of uncertainty. How much of a bargaining tool they will be, we will just have to see.
Our model picked up a slowdown in the economy in late February and it is currently modelling a reacceleration starting in the Q3 timeframe. So, a turn in the economy is something we anticipate, and the market will discount this ahead of time. Investor sentiment is also rock bottom as measured by all the usual surveys which is also helpful as bad sentiment is usually required for a bottom to form.
The part that really excites us is this idea of new leadership. The Mag 7 stocks have been front and centre in this correction, and we believe it’s unlikely that they lead us out when things improve. EPS numbers are being cut for all the Mag 7 names, and this is typically when they underperform. We don’t own any of the Mag 7 stocks currently.
We have expressed caution in the portfolio by selling higher beta stocks and keeping proceeds in cash.
We have added to some defensive areas too, like consumer staples and gold miners. These two sectors have performed well as the market has corrected and this is often a precursor to a change in leadership. There is very little strength to be found in the tech sector - we are underweight tech with a 11% weighting vs 30% for the S&P 500.
Markets like these are difficult to navigate and this is why we split the fund into core names, that we want to hold through the volatility, and tactical names where we seek to pivot into areas that are performing better. Those areas are certainly defensive right now and we wait for better times before we get more aggressive in our positioning.
We are watching the market very closely for signs that conditions are improving and will move quickly when they do. Leading indicators of improvement will be a fall in volatility and tightening credit spreads, and higher lows in the equity market.
It is interesting to note the improved performance of Bitcoin in the last few days. This asset class is often the first to move and responds well to improved liquidity. This may presage a period of better performance from equities in the near term.