Portfolio Update + 2023 Outlook

FIRST: I believe the fed is in a tough spot with rates. They can’t stop raising rates or lower rates until inflation has clearly subsided or they run the risk of hyperinflation which would be a horrible outcome. So In the March statement this week, the Fed essentially said they plan to raise rates by 0.25% in May and then based on the dot plot below, they’d be done hiking. However, Powell said they don’t plan to cut rates in 2024.

However, Jerome Powell did mention that the issues in the banking sector would cause more regulation and tighter lending standards which would slow down economic growth. Essentially, doing the job of another rate hike.

So I think if there’s no crazy bad event between now and the Fed’s meeting in May we will get another 0.25% rate hike.

I also believe we will see 1 - 2 rate cuts by the end of year which is generally a good thing for the stock market. When rates go lower, lending is cheaper for companies, and owning stocks is more attractive for investors.

The problem is, what would have to happen to the economy in order to cause the fed to lower rates this year (because they currently don’t plan to)

We would either need a very negative “shock” which could come from more banking system issues (I hope not) or just weaker consumer spending. Either of these scenarios would likely lead to increased unemployment and a worse recession than what is currently expected.

Earnings season starts in April so I think that will be our first insight into this. I’m expecting earnings to be weaker and guidance to be worse than what the market currently expects.

CONCLUSION #1

There are a lot of unknowns right now. I for sure am making sure I have a savings cushion built up, I’m not taking on any loans to do big projects, and I’m putting off big purchases for the time being.

SECOND: I believe the broader U.S. stock market is trading at too high of a P/E multiple, given our current rate environment and what I believe is on the horizon for the broader economy. The SPY is trading at $395 and a blended P/E of around 18. I think we’re likely to see forward earnings expectations come down as the economy weakens so a more reasonable P/E would be 15 - 16. This would compensate for reduced forward earnings.

EOY SPY Price Scenarios 
Bear Case: $315 and a P/E of 15. This would be a roughly 20% drop from here
Base Case: $346 and a P/E of 16.5. This would be a roughly 10% drop from here
Bull Case: $390. Essentially trading sideways from here

One quick anecdote. AI has created another wave of bubblish behavior that I just don’t think is healthy. NVDA is an AMAZING company. But it’s trading at a blended P/E of 76 in a really tough macro environment. I’m happy for anyone who owns NVDA so far, but that just isn’t realistic for a company as large as NVDA in this current environment.

CONCLUSION #2

For friends and family that are 10+ years from retirement, I’m telling them to just leave everything alone. They mostly just own something like and S&P500 index in a retirement fund or something. I’m also telling them to plan for ~5% forward returns instead of 9% which has been the historical average. It does

For myself, I’m much more focused on actively managing my portfolios and I’m trying to be positioned to profit from a potential downturn. This is dangerous, foolish, and probably not worth the time, but it’s what I’m doing.

So I see no reason for myself to be long the broader market. I will look for very high-quality stocks to own at great prices, but I want to have the cash to take advantage of great prices.

THIRD: Okay so I believe we are near the end of the rate hikes, I expect weakness in the economy, and I expect rate cuts this year or next year.

This is why I’ve been shorting with SQQQ and SARK. The problem with those two funds is that they are only designed to be held for a short period of time. Because of the mechanics of each fund, they will both lose value over the long-term.

The chart below shows SARK and ARKK over the last year. ARKK is down 43% and SARK is down 8% even though it’s the inverse of ARKK. That’s because of the mechanics of the fund. You can see how from May - June, they moved in opposite directions. ARKK dropped a bunch and SARK was up a bunch.

So shorting via these ETFs is tough because you can get fried if ARKK moves higher and you can get fried if it moves sideways or takes a long time to go down.

The timing has to be almost perfect which is very, very hard.

TLT 20-Year Treasury Bond ETF

So a better option is probably to just buy TLT if I think rates will come down and the economy will weaken. That’s exactly the type of scenario where bonds generally due well. Take a look at what happens when rates go down (orange line). TLT performs very well.

Now if I’m wrong and rates go higher, TLT will get crushed. Over the last year it’s down 18% while the SPY is down 12%. This is because rates have moved so much higher over the last year. Worst case scenario for TLT

CONCLUSION #4

Owning SQQQ or SARK is extremely risky and not meant for long durations. If I’m bearish on the economy and think rates are coming. TLT might be a much better option.

MY CURRENT PORTFOLIO

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