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A SimpleVisor subscriber asked us a poignant question; we think the answer is worth sharing. Simply put, we were asked if we had any hedges in the portfolio and how we might hedge in the future. We currently do not have any shorts or option hedges in place. However, we have trimmed some positions to reduce our equity holdings and increase cash. Cash can be a great hedge in this environment. It earns over 5%, but more importantly, if there is a correction, it allows us the means to buy stocks at discounted prices.
As we note daily in our Market Trading Update within our Commentaries, we are not expecting a sharp drawdown but a market that may go nowhere over the next several months, albeit with some volatile up-and-down movements. We may take a few additional steps if we change our forecast and grow concerned that the recent correction may have more legs. For starters, we may hedge by further reducing our equity exposure, thereby increasing our cash position. We may also add to our bond positions if we believe bond yields will fall with a declining equity market. As we have in the past, we may add short positions, be it inverse ETFs and or option strategies for our high-net-worth clients. Further, if the rotation trade continues, we may replace some large-cap exposure with small-cap and/or value stocks. Such a hedging strategy worked well in the dot-com bust.
The graph below charts the price return from the S&P 500 peak in 2000 through 2006. As shown, small caps were a good hedge and produced robust returns.
What To Watch
Earnings
Economy
Market Trading Update
Over the last few weeks, we have seen a normal and healthy rotation out of mega-cap growth companies and into other market areas. Small and mid-cap value have done well but are now overbought, while the mega-cap growth companies are oversold.
While this rotation could last a bit longer, the technicals of the “Mega-cap” stocks, represented by the Mega-Cap Growth ETF (MGK), are becoming more compelling. With MGK very oversold and on a deep “sell signal,” a tradeable rally looks quite probable. However, such will likely not be the case until after the mega-caps report, and share buybacks can be restarted in the next few weeks.
We added to our AMD position a bit yesterday and are looking for an opportunity to add back to our Mega-caps soon. As we noted previously, given that the bulk of earnings come from these mega-cap companies, we seriously doubt the dominance of these stocks is over…at least for now.
JOLTs
The number of job openings in the JOLTs survey fell slightly from 8.23mm in May to 8.18 in June but was above the consensus of 8.00mm. While the headline data was solid, the underlying data points to weakness in the labor markets. We have witnessed the same type of discrepancies in the BLS employment reports. To wit, the hires rate fell from 3.6% to 3.4% and is now the lowest since the early days of the pandemic. Moreover, excluding 2020, it is at a ten-year low. Further, the unemployment rate was almost 7% in 2013, when it was last at 3.4%.
Also noteworthy is the quits rate. The second graph shows that it has steadily declined and is at three-year lows. Quits are a good barometer of employee confidence. When employees are confident they can easily find another job, typically higher paying, the quits rate rises. Thus, this report points to broad employee consternation, which may be one factor behind sagging consumer confidence.
P&G- Another Consumer Company Feeling The Effects Of A Slowing Consumer
On Monday, we highlighted McDonald’s same-store sales, which had declined for the first time since spring 2020 when the pandemic was raging. Like McDonald’s, P&G’s CEO noted that its customers are tightening their purse strings. Its earnings slightly beat estimates, but sales fell short and were flat compared to last year. It appears that P&G, like many retailers, is struggling to pass on higher prices and is increasingly in the position of having to discount prices to drive sales. P&G also reduced forward guidance as its CEO acknowledges it is “in a challenging economic and geopolitical environment.” As shown below, P&G shareholders are not taking the news well. The shares are down over 5% on the day, erasing nearly half of the shares’s 2024 gains.
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