Our position and reputation for being bearish over the last 18 months have been well-earned but not representative of who we are. Our latest videos have hopefully provided some additional context. Because we exited the “Qs” in late 2021 at the peak, and the NASDAQ is still 14% below that peak, we have been afforded the luxury of being more patient than most. The last six months have allowed us to analyze market performance and our market re-entry. In short, it has allowed us to be more calculated and why timing matters.
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On the Back of Just Seven
Much to the dismay of some, KEY Advisors did not participate in the tech rally we’ve seen year-to-date. Yet, if you look at the market performance closely, it has really been comprised of seven particular companies. Forget what you knew about FAANG. It’s now the “Magnificent Seven.” No, I’m not referencing the 2016 movie. It’s the seven stocks that are keeping the S&P afloat this year. They include Amazon, Apple, Google, Meta, Microsoft, Nvidia, and Tesla. They have accounted for 94% of this year’s S&P 500 run-up. The remaining 493 companies have contributed about 5% of the total S&P 500 YTD increase of ~15%. Think about it, just seven mega-cap companies have had this amount of impact on the market. Take them out, and it is a much different story.
So What’s the Plan Forward?
Our macroeconomic data and fundamental investment analysis are still signaling rough waters ahead. July will likely be a clear indicator of economic headwinds. The market will receive Q2 corporate earnings reports and any earnings forecast revisions for the rest of the year. Given the macroeconomic conditions, we believe that many companies will report a deceleration of revenue and reduced profits. In late July, we’ll receive the advance estimate of our Q2 Gross Domestic Product (GDP) from the Bureau of Economic Analysis. Against the same headwinds, we believe we’ll see slow-to-no growth. However, the market has shrugged off bad news this year and our technical analysis shows there are still pockets of opportunities, so we’ll proceed with caution.
Our Summer Gameplan will focus on these areas:
Expanding our healthcare position
Defense and Aerospace
India, as an indirect play on technology
Retail (companies with strong fundamentals)
With the Indian Prime Minister in Washington this week for a state visit, it is another reminder that India aspires to be a hub for global manufacturing as an alternative to China. Global manufacturing powerhouses like Apple and Samsung have started accelerating their manufacturing investments inside India. Additionally, the IMF (International Monetary Fund) projects India’s Real GDP at +5.9% ahead of China at +5.2%. By comparison, the IMF projects the U.S. Real GDP is +1.6%, and why we’re looking at international growth opportunities. This movement is still in its early stages, but our data and analysis signal a good entry point. We continue to monitor this dynamic market and look to participate through select ETFs.
Pockets, Not Fields of Opportunity
Overall, we’re looking at sectors that have not performed well year-to-date and show opportunities for growth. However, we are not backing down from our bearish outlook at the macro level. We’re not out of the woods yet, and we believe that a recession is still possible. The reality of the macroeconomic pressures remains persistent, and it is very possible that these issues will eventually catch up to the market. A recession, of what degree of intensity is unknown, is still on the table. The data shows that the economy is slowing, and we do not believe the market has priced in a recession. To hedge our bets against these headwinds, we’ll maintain a strong cash position through money market funds. One positive side of higher interest rates is that our clients are getting paid to be patient with cash derivatives on the sideline.
The KEY in our approach and positioning will be to stay vigilant and active in our analysis and market moves. It is our opinion that the “buy and hold” strategy does not work, especially right now. As the market continues to cycle, we’ll allocate capital into sectors that offer opportunities for risk-adjusted growth while maintaining a strong cash position.
As we navigate the summer months, our KEY Advisors’ game plan reflects careful consideration and sector diversification. We’ve been able to be patient because we reduced risk at the right time. The luxury of having a higher cash position and the time to analyze market performance in these uncertain times have allowed us to outline a prudent game plan for the summer. We believe there are pockets of opportunity where we can put some of our cash to work while mitigating unnecessary risk. And, if the markets begin to reflect the fundamental macroeconomic reality, and we enter a recession, we’ll still be able to better capitalize on the markets when they turn lower.
We hope that our directional strategy is helpful to you and your family. It is always our recommendation that you speak to your financial professional before taking any action. After all, as fiduciaries, it is our obligation to do what is right on behalf of our clients, and that is to protect and grow their hard-earned wealth. Effective investment strategies require adaptability and customization, and Key Advisors Wealth Management strives to align its clients' portfolios with the ever-evolving market conditions.