(Please enjoy this updated version of my weekly commentary published April 4th, 2022 from the POWR Growth newsletter).
First, let’s review the past week:
We are basically flat with the S&P 500 up an entire 7 points, which is kind of nice following the ups and downs of the past few weeks.
As discussed in the Intro, I don’t have a strong opinion about the market’s near-term direction. I do think it will matter a lot in the near-term but not so much in the long-term.
Let me share my thinking: After the market’s blistering rally over the last 3 weeks, some dip is likely.
And, it makes sense that this dip could be significant given that none of the issues that triggered the correction have really improved or resolved like Russia or inflation. The most charitable thing to say is that they have been priced in.
But, if the correction truly is over, then we could see a shallow dip or just some high-level chop that ends in a continuation of the rally.
Given this state of affairs, I think the best approach is to remain patient and just wait for more evidence to emerge that increases chances of making low-risk, high-upside trades.
We have done a good job of finding longs that are trending higher while avoding certain parts of the marekt and having an above average cash position to take advantage of opportunities that emerge.
Strongly Held Convictions
In the process of organizing my thoughts for today’s webinar, I obviously had to filter my ideas and present what I think are my best ideas. And, I figured that would be an interesting and useful item to share in today’s commentary.
While my opinion on the broad market (especially right now), I’d deem as a loosely held conviction that I’m willing to change based on new evidence, I think it’s more prudent to talk about strongly held convictions that I am much more confident in.
Today, I will talk about 3: opportunity in auto stocks; thoughts on precious metals; and betting on the US consumer.
Autos
I talked about the recovery in auto manufacturing. At full capacity, the US produces just over 200,000 cars per month. Currently, we are at about 120,00 due to supply chain issues.
Based on commentary from automakes and chip companies, I believe the worst is behind us. Therefore, I’m very interested in automakers and particulalry auto parts stocks.
These have been crushed between 20 and 40% during the market correction.
So, now, we have the atractive combination of earnings growth and low valuations which implies massive upside.
Precious Metals
The next strongly held conviction is that precious metals are in a bull market and will be making new all-time highs later this year.
Now, this is certainly a change in tune as I have typically been bearish on gold and dismissive of gold bulls especially over the last decade when their predictions of hyperinflation due to QE proved to be false.
But, it’s clear that the Fed is taking a dovish stance even despite its rate hikes. From last August to now, the 2-year Treasury yield has risen from 0.2% to 2.4%. But, I think inflation has risen even more during that period in time.
So, it could be argued that policy from this perspective, policy is more accomodative today than it was in August.
I think this is what has been lost in the endless commentary about the Fed’s machinations and supposed retirement of the word ‘transitory’.
I think this circumstance is bullish for precious metals and equities especially compared to the alternative of the Fed hiking rates substantially enough to actually choke economic activity to push prices lower.
Precious metals ultimately respond to real interest rates. And, I believe they are going to stay low through the Fed’s hiking cycle.
The US Consumer
This was more of an aside during the presentation that become something more fully-formed in the ensuing hours.
One thing that I was wrong about in Q1 was I was expecting a sharp slowdown in consumer spending. And, it seeems that the market was also expecting this outcome based on the sharp declines in retail stocks during Q4 and Q1.
Yes, consumer spending slowed but it eked out a positive figure even adjusting for inflation. This was despite no stimulus payments and all sorts of subsidies and benefits available last year.
This also makes me think of widow-maker trades. These are long-term trends that destroy careers (and make widows) because traders can’t help themselves from betting on a reversal.
Some examples are betting against Treasuries as they trended lower from 1980 to 2020. Similar situation with the JGB and the Bund.
In terms of the market right now, this makes me interested in retail stocks particularly those catering to the higher-end who would be unaffected by inflation and likely benefit due to higher stock and home prices.
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SPY shares were trading at $453.12 per share on Tuesday afternoon, down $3.68 (-0.81%). Year-to-date, SPY has declined -4.30%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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