Riding the Rockies – Trading & Market Update – May 5, 2022

“Happy Cinco de Mayo!” If you have been monitoring the US stock market’s volatility, you may want to mix an extra shot or two of tequila into your Margarita this evening.

Here at Alpha Beta Gamma, we are closely monitoring the volatility that we are witnessing. As I write this, late Thursday afternoon, we are seeing the DJIA down -3.58%, the Nasdaq down -5.39%, and the S&P 500 down -3,95%.

In most of our portfolios, we have previously raised cash to a higher-than-normal allocation but at times like these, our 20/20 hindsight could focus on whether we should have or should raise more cash. We are not of a persuasion to sell into a market which is presenting volatility like this, without some indication of a high level of systemic risk.

At the present, we do not detect any significant increase in systemic risk…that is to say, the risk that the system, or the markets are somehow compromised or endangered. We believe that what we are witnessing is a classic sell-off and sector rotation based upon the Federal Reserve increasing interest rates back to “normal” levels. We think that the volatility is higher due to faster trading patterns in the markets, momentum driven computer trading, and a level of investor “fear” that is approaching a very palpable level that we refer to as capitulation.

We believe that we are beginning close to the “bottom.” Technology has been sold to a level of being oversold which presents, in our view, some significant opportunity. We believe that energy is oversold and is expensive at current valuations.

As our clients of longer duration know, we are of the persuasion that when everyone heads for the exits and get jammed in, we want to be on the floor looking for those things of value that the herd has left behind. At the present, we are now looking for the stock market valuation bargains. We continue to turn to technology where demand destruction appears to have been minimal, where balance sheets are generally in good shape with relatively low debt and higher margins. We are steering clear of many of the consumer discretionary names because we believe that higher inflationary-driven prices will dissuade consumers from spending their hard-earned dollars on discretionary items. We believe that long-term investors are well-served here by looking at some of the bigger names that have declined significantly today, like Apple and Microsoft. We believe that much of the price action relates to the concentration of these names in index driven Exchange Traded Funds.

We know that on days like today, our “fear radar” amps up, measurably. If you have been with our firm over the past, almost 20 years, you know that we view these days as first, the absolute wrong time to begin selling stocks. If you have been with us during these periods of time, you also know that we believe that it is the right time to begin looking for bargains in the portfolio. We have several strategies that we are beginning to deploy here to take advantage of these markets.

Finally, you should be aware of our “pounding the drum” over the past several months on the importance of adding a principally protected vehicle, like a fixed indexed annuity to a portfolio as an alternative to some stock allocations and as an alternative to bonds in a rising interest rate environment.

With higher bond yields, annuity pricing has improved dramatically over the past two weeks. There continue to be developed interesting strategies with uncapped upsides, especially through those products, protected by patent, which are offered by Annexus in partnership with Nationwide, AIG, Athene, North American and Securian.

As Cinco de Mayo evening comes into focus, we hope that you enjoy a Margarita, chips and salsa and recount this small battle in history as the Mexicans attempted to drive the French out of their country. (You may recall that the Mexicans had repudiated their national debt, “stiffing” the French, so Napoleon sent his legion to take over Mexico and extract repayment of the debt, along with Spanish and English troops, in 1861. The English and Spanish pulled out in early 1862. On May 5, 1862, a poorly equipped Mexican force under the command of General Ignacio Zaragoza defeated the French troops, killing roughly 1,000 of them. While the fighting continued for another five years before the French were driven out. Their defeat at Puebla in 1862 became of symbol of Mexican resistance to foreign domination.

A toast to freedom from foreign domination as we look ahead to the future.

Best regards,

 

Curt Lyman
Alpha Beta Gamma Wealth Management