September 2023 Monthly Commentary
Greetings Team!
For those privy enough to read into the future as I am, Time magazine will be publishing an article entitled “Never Offline” in their September 22, 2014 edition.
Setting aside being comedic or perhaps obnoxious, this headline grabbed my attention.
Many of you know me well enough to surmise the correlation. Steven & SBOT are never disconnected from the markets. Some people, including my husband, call it an addiction.
Despite feeling as if I am waking up to “clown world” and the associated feelings on a daily basis, there are major risks to the economy on the table.
Although we don’t usually give updates in the middle of the month, we felt this one was necessary. In the interest of time and to clearly summarize the risks on the table, I am going to be brief, and bullet point oriented.
Volatility is increasing & we are looking at potential turbulent times ahead. Fear index/cracks in economy have increased dramatically over the past two weeks. This is something we need to advise you that we will be taking advantage of, even though the market will be topsy-turvy.
Factors driving near-term concern include:
- Oil price increase (Delta Air Lines issued a profit warning last week after increasing forward guidance just 6 weeks ago)
- Continued dramatic rise in the yield curve combined with the Federal Reserve keeping the window for future rate hikes
- Intel issuing chip demand decrease warning
- Commercial & Residential Real Estate across some domestic markets coming to a halt while others are still experiencing dozens of offers over a weekend over asking price
- Credit stress in some fixed income markets
- Government shutdown & ongoing strikes
- China real estate debacle
- Consumer credit card debt at all time highs and rising at levels never seen along with associated payment increases with interest rate hikes
- Employers are about to start announcing layoffs creating a domino effect (companies are bloated during a time of decreasing demand) or as I call it, “demand destruction”
- Pandemic era tax credit program for small businesses/non-profit organizations on pause due to either govt dysfunction or fraudulent claims.
- Student loan repayment restarting
- Continued adverse inflation reports until demand destruction kicks in across enough markets to reduce the overall numbers being used to determine interest rate policy
In summary- any domino could fall causing a quick correction across markets. The Fed, given they backed themselves into a data-driven organization will not respond in an emergency fashion- would probably be delayed 60, 90 etc… day response to begin rate retracement. This will deflate the bubble they created during the pandemic and since 2008 once and for all, creating massive opportunities.
Our Strategy across PM – de-risk further, eliminate any outstanding exposure in particularly vulnerable sectors of market including financials, real estate, transports. Energy, another example could be the least vulnerable of the most vulnerable sectors.
As the Fed pivots, value will appear in large cap space, discounted dividend cash cows. These are the type companies sitting on piles of cash (record levels) waiting to pounce as we have been patiently awaiting. Merger &Acquisition activity will resume! Small and mid-sized companies, biotech and others parts of growth equities, who rely on lending to grow, will directly benefit from the debt relief. As a result, they will recover sooner in the market cycle upturn.Opportunities will quickly emerge in dislocated segments of fixed income markets. As money market yields begin to decline (before first actual rate decrease), money will begin to reverse & flow into the above mentions opportunities. The “institutional money” will move quickly, and no one will sound the bell here. Retail investors at this point will still be moving into cash, missing out on the upside …. Again.
Timing can’t be pinpointed, but many factors such as those I mention above are converging and can at any time cause a shift in market psychology which could precipitate a sharp downturn. The events become the explanation but the change in psychology is what drives the decline. Everyone should be alert to relevant signals including volatility swings, reductions in liquidity, erratic price action, contradictory news, government, and corporate attempts to talk up and defend the markets, and so on. Selling could be indiscriminate creating (or further improving) some tremendous values. It’s a time to be ready to move and act quickly. There will be some excellent buying opportunities in the areas mentioned above and in fixed income.
As you know, we have been waiting for this day to arrive! This cycle has taken too long to play out.
We are prepared to manage through and more important take advantage as we have always done! There will be some additional pain in the near-term. Typically, the biggest pain precedes larger gains!
Thank you & looking forward to a great October together!
Onward & upward always!
Any opinions are those of Steven Schmitt and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information contained in this commentary does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
