FCA - If Ever There Was A Time To Play Defense...
2023-09-01 21:30:00 ET
Summary
- Given the fact that equity valuations are so extreme and at such a precarious time in the economic cycle, it’s probably wise to maintain a defensive position in the markets.
- In fact, I would argue that it calls for maximally defensive positioning. For most, this likely means simply reducing equity allocations and raising cash; for others, it may mean utilizing some sort of a hedge.
- Either way, with risks so elevated, a heightened focus on protection of principal seems appropriate.
Given the fact that equity valuations are so extreme and at such a precarious time in the economic cycle, it’s probably wise to maintain a defensive position in the markets.
In fact, I would argue that it calls for maximally defensive positioning. For most, this likely means simply reducing equity allocations and raising cash; for others, it may mean utilizing some sort of a hedge.
Either way, with risks so elevated, a heightened focus on protection of principal seems appropriate.
That said, macro risks should never prevent you from taking advantage of truly attractive opportunities in the markets when and where you find them. The opportunity in energy stocks is a case in point.
Their stellar performance last year, even as the broad stock market suffered, suggests there is a rotation trade that may not have fully run its course just yet.
Considering the fact that the stocks are still cheap (offering some margin of safety) and the fundamentals in the energy markets are still very bullish, an overweight position here continues to be justified.
As noted on the blog this week, there is also an opportunity in Chinese stocks today which trade at a significant discount to their U.S. counterparts.
Sentiment is extremely negative towards the country’s economy, even though markets suggest the reality may not be nearly as bearish as the popular narrative would suggest.
Any improvement in economic signals or investors’ perception of them could play the catalyst for a major turnaround in the equity markets here.
Turning to bonds, while interest rates have risen to levels that look attractive relative to recent history, there are few signs that the rise in the long end of the yield curve has reached its zenith.
With inflation still elevated and little evidence the Fed has been successful in sustainably bringing it back down, it’s hard to argue there is much value there, either.
Add in the fact that the supply/demand dynamics mean there could be more “turbulence” ahead and favoring the short end of the yield curve seems to make a great deal of sense.
Finally, the most compelling opportunity today may be in the precious metals. The growing risks of both a weakening economy and a further rise in long-term interest rates is a unique situation most investors have not faced in their lifetimes.
Should both come about simultaneously it would almost certainly play a catalyst for investors to seek out a true safe haven and only gold would seem to fit the bill. Paired with a bullish technical setup, an over-weighted allocation here is only prudent.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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If Ever There Was A Time To Play Defense...