An Excerpt from Last Sunday’s Newsletter

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Situation.

Right now the macro “winds” are so strong that they are driving the show. During 2020 and 2021 the pandemic created large ups and downs in the marketplace, which created a lot of opportunity for gains. 

And before that we had a massively long and steady upward climb and a classic demonstration of The Business Cycle, where the market has ups and downs but overall steadily climbs.

Right now we are in different territory than either of the two above scenarios. Frankly, The Fed is a major influencer in the market right now. As Fed Chairman Jay Powell speaks, the market moves – literally at the moment he speaks. The Fed has a charter to manage inflation and prices, and also considers unemployment. The Fed has many ways in which it can affect the overall economy (of which the markets are part of). 

Here are three key ways The Fed affects the economy

1. Adding or subtracting money (dollars) from the economy. In short, The Fed buys and sells government bonds/securities. When The Fed buys then they are adding money to the economy. When The Fed sells they are subtracting money from the economy. They do their buying and selling every month in the billions of dollars range. Massive amounts of money. Currently, The Fed is tapering. This means that they are buying less and less right now (remember, buying adds money to the system). In January, they will buy $60 billion in bonds; in December they bought $90 billion in bonds; in November they bought $105 billion in bonds. So they are buying less and less, but still buying which releases money into a system that has high inflation. They know not to slam on the brakes, but they are indeed braking as a response. Before now, The Fed was pretty darn confident that inflation was the result of disrupted supply chains, therefore creating a supply-and-demand imbalance/change. They have backed off of that position and acknowledge that the inflation is two-fold now: supply chain disruptions and how many dollars are in the system. So they are adjusting.

2. Changing the interest rates. The Fed has signaled that they will make 3 rate hikes in 2022. Expectations are that the rate hikes are in 0.25% increments. Currently, the rate is at 0-0.25%. So money is extremely cheap right now. That made sense when getting through the pandemic (and for other reasons). But when you keep rates that low for awhile new problems develop. Long story short, there’s too much money in the system and borrowing it is too cheap and easy. Economic behavior changes when rates change, and those changes are deemed important now. Again, you might think The Fed should “do more sooner” but what you really want from The Fed is small and timely corrections. They are indeed a bit behind right now, in my opinion. But if you are not in the center of your lane, do you yank the vehicle back or correct it smoothly? That depends if you are about to hit something; The Fed sees no calamity about to occur, so it is making a smooth and controlled correction. I see no calamity either, and want The Fed to be poised about the corrections to create the infamous “soft landing.”

3. Poise in their communication. This may be annoying for some people, but the overwhelming majority of people need to hear poise. If The Fed Chairman sounds frantic, it can create panic. Panic doesn’t suit investors, or the economy at large, well at all. Panic is a problem. I see a need for corrections, and I see the corrections I’d like to see, but I am not panicked. The Fed has the tools they need for this scenario, and it is using them. Frankly, I would have done what The Fed is doing but a quarter sooner. I have no choice but to defer to The Fed here. Again, my money is in the markets right now, and I am adjusting accordingly.

My adjustment?

Simple: with value stocks I am methodically buying a day’s dip on a great company that I already have in The OIC Legacy Portfolio. If that dip is based on meh news that doesn’t materially change the company’s outlook, then I add to my position, especially if I see a 3-5%+ dip. I love that. These are companies I already own and love – I’m buying a 3-5% dip for sure. This is what I did for years with The OIC Growth Portfolio. Now it’s the value stocks’ turn.

And with growth stocks I am watching closely for companies that are way over punished for the macro economic driven shift from growth to value, and then I will make bold, large plays adding to existing positions – and perhaps start new positions on great companies that I may have missed previously that just became cheap. This is what I did for years with The OIC Legacy Portfolio. Now it’s growth stocks’ turn.

See the trend? At any given time, conditions can be ripe for both methodical moves (with stocks that are working their way up) and boldmoves (with stocks that are caught up an a massive macro environment pushing them down).

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