This is the first edition of my Quarterly market outlook. I’ll be writing on the themes I see playing out and things I’m watching throughout the year.
China Tax-Loss Reversal
I see coming strength in Chinese companies playing out this year. A lot of the weakness from last year was due to a misunderstanding of the CCP and Chinese stock market in general. As I wrote in my last post, I’ve started building a position in KWEB.
While I don’t see the entire trade playing out this quarter, I’m looking for confirmation that selling is over and strength taking over. Tax-loss harvesters that are still bullish on China will likely take positions this quarter after the 30 days for wash sale have passed.
Earnings
Earnings kicked off this week with some of the banks reporting today. JPM dropped 6% likely from overly optimistic expectations. We’ll have to see what happens in the next couple of weeks.
Financials in general are likely to benefit from the increases in rates but I think most of the money was made on the run up with rate rise expectations. I’ve held BAC for over a year now during the run and it’s been a nice one. I’m not bearish on the banks but I’ll keep my eye on the yield curve slope to see what happens.
BAC is cut overdraft fees which is a good sign. Banks usually increase fees when they’re not making a good spread on deposits. It’s a way for them to increase the yields on deposits. Banks have ways of making money even at 0% interest rates. It can be a great business if you do it right.
My interest will be in seeing how earnings play out in the other sectors. If we have a good earnings season I think we’ll continue to see strength. If it’s a bad one the Fed will be the dominant force on markets until the next quarter.
Value Stocks
We’ve seen a shift from growth stocks to value recently. Mainly due to interest rates rising which make getting cash flows sooner more appealing. Growth stocks, which have the majority of their earnings in the future, have seen weakness.
Most of the “growth” stocks I know are doing quite well. The drops we’ve seen in the Nasdaq are from stocks which I would consider meme or hype stocks. You won’t see them a decade from now as the companies with actual business models take market share. They’ll also have pressure from the big names like we’ve seen in automobiles. GM and Ford rising, while RIVN and LCID dropping. Nothing against the latter but I think liquidity and being able to raise money will dry up in the EV space. When that happens, cash flow is what matters.
The investors that I know invest in those stocks are looking for “risk” assets. Not necessarily good companies, but stocks that have the potential to triple. The only problem is if you open up that side of the distribution, you also open yourself up for the other. I don’t see them having the same staying power as the investors in the traditional names. TSLA being the exception, that one is going to Mars.
The Fed
J. Powell is likely to lead the markets after Q1 earnings. He walked back on his comments for huge rate hikes but higher rates are coming nonetheless. Three rate hikes are forecasted and bond purchases will be coming down. This should give gravity to a lot of the riskier investments as bonds become more interesting.
Rates are still very low and will be even after three rate hikes. The yield curve is what I’ll be looking for. As long as we keep the upward curve I see rates as beneficial.
We might see some drops in the longer term rates as inflation expectations fall. I’ve been tracking TLT as it’s come down.
The best case scenario is the yield curve shifts up without any flattening. If steepening occurs financials might still have some upside left.
As far as inflation goes, I’m not too worried. I see inflation as a supply problem and companies are finding ways around. Ultimately, the best hedge against inflation is a good business. The Fed needs to appear to be worried about it to make sure expectations don’t take control but I don’t see anyone worried.
Most people I know are quitting their jobs for better conditions and better pay. Myself included.
That’s what I’m watching this quarter, we’ll see how things play out. Check out some of my other content in the sidebar and leave a comment down below with any thoughts.