Technically Speaking – December

January 10, 2023

I am sure we can all agree that 2022 was not a year to celebrate. Not only did the financial markets perform badly, worst percentage performance since 2008, but there was too much sorrow, negativity, and turmoil. As the world began rising from the pandemic, we have seen a worthless war with Russia and Ukraine and the highest inflation since the 80’s. We now approach 2023 with cautious anticipation.

Just a mere 14 months ago the SP500 was making new highs at 4800+, the economy was moving forward, and unemployment remained low. Then Federal Reserve (Fed) finally woke up and realized their forecast of transitory inflation was completely wrong. We never felt it would be transitory due to shortage of labor and nobody is going to take less wages once they are given the increase. The Fed was caught in a bind as inflation started to roar and the administration not only didn’t offer fiscal solutions, they actually fanned the flames with bizarre policies. Energy prices were rising so instead of allowing drilling they decided to increase regulations and ask our middle east FOES to help bring down oil prices. The foes obviously didn’t listen and decided to cut production, leaving the administration to tap our oil reserves. Oil prices and gas prices have fallen, albeit temporarily and unless we have real long-term policies the administration moves will just be political moves before an election. The ineffective current congress has left Powell no choice but to use his monetary tools. He knows he must raise interest rates in order to curtail the high inflation and is getting no help.

My concern now is Congress and the Administration continue to fan inflation by passing Trillion-dollar spending bills. This only adds to the pressure and handcuffs the FED leaving them no choice but to continue raising rates. The more Powell raises rates the more this very good economy will slow down and fall off a cliff. You are now seeing corporate layoffs; consumers are spending less and corporate profits are falling. Most indicators are lagging indicators and will start showing a massive slowdown in the next 3 months if we continue down this path. I don’t understand why Congress will not put in policies that will work to reduce inflation so Powell can stop raising interest rates. It makes no sense to me that they want unemployment to rise when we don’t have enough workers for all the jobs available today. What we don’t have is enough qualified workers for the open positions.

There is good news. The economy is strong, and Powell is sensitive to what interest rates are about to do to the housing market, which is an economic engine for sustaining a growing economy. He is trying to navigate a softer landing. Hopefully, he can pull it off and history is on our side. Only 4 times in history has the market been down 2 years in a row. That doesn’t mean we won’t go down first then rally back. Even if the Markets are down again next year, history shows the next 3 to 5 years are abundantly profitable. Interest rates slow the economy and Powell will halt the increases and eventually pivot to reduce rates again. That is unlikely to happen in the immediate future, but we could see it as early the second half of 2023.

Going forward our plan is to continue to mitigate risk, stay cautiously invested and keep cash on the sidelines for opportunities. No one can predict the future, so many predictions are incorrect, but we work every day to do the right thing and be invested in the right places, both in equities and in bonds. Times like this are challenging for all money managers, but we will get through this. In early 2021 we moved all of our long-term bond holdings to short term and from there we went to individual investment grade rated bonds & Treasury bonds. During the market rally in August, we took an “inverse” position that goes up when the market goes down. We look for opportunities when the reward is greater than the risk and will reduce our positions when the risk is greater than the reward. We believe in mitigating risk by hedging, raising cash positions and using the inverse funds.

Our plan is to look for a possible move higher in the first part of the year. I believe the markets will be restrained by liquidity so we will not have the buying power to go much higher that SP 4100 – 4300. If this happens, we will become very cautious and use the strength to further mitigate risk in our portfolios. We do believe the combination of higher debt levels and high inflation will eventually slow the economy and corporate profits. This may create a risk off environment which will generate some selling and eventually get investors to throw in the towel. I believe worst case scenario is SP 500 falling to 2800 – 3200. The valuations at that level would be incredibly enticing for a long-term buyer.

The question is asked, why don’t you just sell everything and then buy back at lower level. Answer is simple, nobody knows, and most predictions are inaccurate. When the markets bottom and turn, there is no bell and markets usually turn up and leave investors in the dust waiting for the signal. We take the approach of having a quality core position and we adjust the exposure to risk as we deem appropriate. We will mitigate risks if the markets rally too strongly, and we will buy if it falls to oversold conditions. We want to make sure we have a core investment so when the markets do turn, we are participating.

Goodbye 2022 and Hello 2023. Being an optimist, I look forward to the challenges knowing success lies on the opposite side.
Happy New Year and Good Health to All

Dean Greenberg