Now’s a good time to take some profits.
As far as I know about market rallies, my instinct tells me the rally will continue to go on.
I mean, money is flowing, people think we have seen the bottom.
Especially when you’re getting headlines like “Stocks Have Already Bottomed. How We know?”
The Dow has sneaked past the bear’s eyes.
And it’s already up 19%, from the bottom in earlier September. The S&P 500 is up 12% over the same period.
The Dow could possibly go back up past 36,000. The S&P 500 could possibly go back up past 4,000. But don’t take my word for it. I’m just plucking numbers from thin air.
I mean, what do I know about market predictions? I only (try to) collect great businesses.
What’s driving this bear market rally
First, in yesterday’s meeting, the Fed said they could slow down rate hikes (but more on that later), which is a good thing since this tells me actual inflation could have slowed down.
US mortgage rates have fallen, and other currencies are strengthening against the USD, which means capital is flowing back to emerging markets — or riskier assets.
I mean, the market can go from believing nothing will go wrong to believing that nothing will go right, in a flash. That’s Mr. Market. Well, at least that’s my reality of Mr. Market.
The kind of delusional optimism that will continue to push the rally on.
Or what it’s called – a sucker’s rally.
The same delusional optimism that a bold investor once said Tesla could reach $4,000 per shares in 2025.
Market cycles tend to average 33% down before they recover, some could take longer, some could be shorter – and we still have more room to go.
There are still places where they have yet to sort things out.
The UK is still in some sort of recession — fighting inflation and dealing with their fiscal deficits.
China is still dancing along the put your one leg in, one leg out covid policy. In the most recent news, Shanghai has asked new arrivals to stay from public places for five days, starting today.
That means, people going to the 26 million populous city are barred for close to a week, including restaurants, shopping malls, supermarkets and even internet cafes.
Then, the war in Ukraine still rages on.
But what’s crucial here, tech companies, being the broader part of the S&P 500 index, have shown stunning numbers of job cuts:
- Meta Platforms: 11,000 layoffs
- Snap: 1,200 layoffs
- Twitter: slashed by half
- Alphabet: plans for 10,000 job cuts
- Amazon: plans for 10,000 job cuts
- Also, Apple has also stopped hiring
The thing is, when global companies freeze headcounts and cut budgets, these big companies are just getting started. What about the small businesses that drive the bulk of economies?
When businesses project gloomy time ahead, they cut spending. For consumers?
Instead of buying that thirteenth fridge, perhaps you might stick to just one.
Or perhaps just grab dinner from the hawker stall downstairs, instead of dining at Haidilao.
Well, it’s what’s looming on the horizon that could catch almost everyone by surprise.
“Most Federal Reserve officials say slower rate hike pace appropriate ‘soon’”
That’s what I got from this morning’s paper.
I wouldn’t take this as a sign of renewed optimism. At the end, it’s not how fast or how slow interest rates go up.
And who knows, the Fed could have rates go beyond 5%, since rate hikes have toppled the yield curve to a shape that doesn’t make sense for any bond analyst.
When the yield curve inverts, this is a warning signal (see red circles):
The yield on the 10-year bonds are now lower than the 2-year bonds. This is because institutional investors are worried about the economy, and decides to lock in the yield by buying long term bonds.
And this could very well also affect how businesses are run.
Businesses borrow less, slow down expanding, people will spend less as a result and so forth.
The inverted yield curve today is showing the strongest sign, and at this point, you really hear the recession bells ringing louder and louder.
That’s why, now’s a good time to take some profits.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
does getting profits off the table include local bank shares? or probably in q1 2023?
Thank you for reading. Well, depends on your portfolio. For me, I’m not selling any of my bank shares at the moment, because they form the core part of my portfolio. And I’ve bought them at a good price.
But I’ll take profits on other positions that are overvalued, and also take the chance to cut away my weaker stock positions (for instance, companies that are fundamentally weak). I shared this with my Diligence members just last Saturday on this.