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Since our June 20, market insight this year, the Vanguard total world stock market ETF (VT) has not broken out in either direction. We reached a low in June that was not matched since 2020. Although no large move higher has happened, the markets may have found a more fair value around the current price level. Without a lower price than in June, investors could begin to see a light at the end of the tunnel if markets gain positive momentum.
Stock values are not as overbought as they once were around the beginning of 2022. While the downtrend is still intact, we are not seeing as much of a sell off in recent weeks like we did earlier this year. Stock indexes like VT have found some support around this price level. After a consolidation, markets could break out with more volatility as investor sentiment changes.
While we are aiming to protect capital more in a down market, we are looking months and years ahead for good investments. We do not expect the stock market to be down over a longer timeframe. We plan on using our different portfolio allocations to capitalize on the stock values before they get back to all-time highs. Aside from our normal investment process, we are looking for a few things to lead us out of this market downturn. First is things that are relatively stable as far as downside risk or pricing power goes. Companies or ETFs that can withstand changes in inflation, and continue to grow will be valuable once the bullish rally is strong enough to sustain. Otherwise, some investments have been hit hard and possibly oversold already. In that case, we will look to capitalize on their relatively cheap prices once they maintain a more positive (long term) trend and (short term) momentum.
U.S. annual Consumer Price Inflation (CPI) posted its largest increase since 1981. After the Fed raised interest rates again, some people thought that would directly impact inflation. However, the CPI number rose to 9.1% year over year. Inflation has not been transitory and may be out of control. The Fed will play it as they see fit at their next meeting, which seems like a similar interest rate hike is in the cards.
We have seen a calming down of commodity prices such as copper breaking its strong upward trend and falling in recent trading. While the CPI data may be lagging behind the commodities themselves, inflation is showing signs of peaking in terms of asset prices. The Invesco Commodity Basket ETF (PDBC) reflects a bunch of commodity price values such as oil, copper, and corn, to name a few. The chart below shows one year of (PDBC) price data as of Thursday, July 14, 2022.
StockCharts.com
Oil prices along with commodities seemed to be one of the last things to fall as stocks and bonds tumbled down much sooner in the year. Last week we sold the last of our PDBC positions after seeing a break in a well-sustained trend.
With that move in commodities, we expect housing data to take some time to catch up. The contracting market environment does not bode well for that sector. We will probably wait a while to add the real estate sector back into our tactical equity model.
Not many investments are being used as a safe haven with gold, bonds, crypto, and stocks all down a considerable amount in recent months. Because of that, we are holding much more money market funds (cash) than usual.
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Our last portfolio reallocation: 5/19/2022.
The weekly market insight provides a window into the process we use in our investment management process. At Breakaway, we believe markets are always changing and require a nimble yet data-oriented approach.
Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.
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*Lucia Mutikani. “U.S. annual consumer inflation posts largest increase since 1981”. Reuters. 7/13/2022. https://www.reuters.com/markets/us/gasoline-food-drive-us-consumer-prices-higher-june-2022-07-13/
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