In our view the appropriate strategy is to be optimistic, be invested, but be careful as you build your buy list. As we said two weeks ago, there are ways to approach an elevated market in an intelligent way:
- As stocks rise, move your stops up.
- Take some profits in the highly extended names — or consider taking out your cost basis entirely. This will give you cash to allocate on dips.
- If there are positions in which you have profits that you prefer not to take, hedge those positions with options or with appropriate inverse ETF proxies.
- Maintain an up-to-date buy list on which you can act when a decline occurs.
- Have price targets for your purchases, or average in over a period of a few weeks.
A correction will come sooner or later, and given the levels of stimulus being deployed by U.S. policymakers, we believe it will present an opportunity to buy desirable themes at better prices. The bigger “policy mistakes” that might prompt a more fundamentally defensive stance will come later; for now, they are not yet visible on the horizon. What is over the horizon is another question, and one we will address in future letters.
Much of our current market view can be found in the commentary above. U.S. markets are clearly in a blow-off phase of uncertain duration. For now, the market seems to be rotating away from the mega-cap growth names. Small and medium companies in the fast-growing sectors that we have often mentioned are leading. The themes are still several areas of technology and beneficiaries of new environmental policy. Much ink has been spilled in coverage of the “Reddit Rebellion,” but day traders continue to make up a small part of the U.S. and world stock markets, while longer-term oriented private and professional investors are still in control of the market trends.
Our favorite areas are our long-standing “usual suspects” — cybersecurity, networking and the cloud, artificial intelligence, big data, telepresencing, fintech, e-commerce, business digitization, certain semiconductors, innovative medical technology and biotech, electrified transport, decarbonization, novel recycling technologies, and new compostable and biodegradable plastics, among others.
We also continue to like emerging markets, particularly India after its recent budget announcements, and certain tech-strong Asian markets, including South Korea and Japan. We note that when a correction comes, they will not be immune.
Gold, while it is languishing, will eventually see its day, and investors should not neglect it. Cryptocurrencies are risk assets, and are behaving as such; we think it makes more proximate sense to consider bitcoin as an ultra high-beta speculative instrument rather than a long-term hedge against inflation and government malfeasance. That’s true for now, but the accumulation of bitcoin by some corporate treasuries is a solid sign that that is beginning to change. Elon Musk is a charismatic cowboy of rambunctious capitalism, but when we see more staid and sober companies holding some of their cash in bitcoin, that may be a real needle-mover.
Thanks for listening; we welcome you calls and questions. If you’d like to discuss markets with us or bounce thoughts off us, give us a call.
Don’t forget to register for Guild’s quarterly conference call on Thursday, February 25, at 10 AM Pacific: “Euphoria Doesn’t Last: How To Maintain Discipline To Maintain Capital.”
