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Capital 19 Catch-Up

Weekly Index Movement

S&P500-5.1%
Nasdaq-5.7%
Aussie All Ords-4.4%

It wasn’t looking like that bad of a week as late as Thursday morning, but the last two hours and all of Friday were an absolute disaster for anyone long stocks. Both the S&P 500 and Nasdaq had their worst days on Friday since May 18th and their worst Fridays since April 29th. The fact that markets have seen worse days so recently illustrates just how bad of a year it has been already! Given the declines this week, it’s looking like the latest rallies failed even before getting a chance to test their respective 50-day moving averages.

For the S&P 500, Friday’s close was 2.4% above the intraday low from 5/20 and just 0.03% from the closing low on 5/19. For the Nasdaq, it was a similar result as it closed 2.8% above its intraday low on 5/20 and 0.67% above its closing low from 5/24.

It certainly does look like US markets will retest their lows in coming days and we suspect blow past them to make a new low for the year.

What should you do about this?

That depends on your investment term. Long-term investors should get their shopping lists ready as stock prices are starting to look cheap. There is no need to rush out and buy right now but at this stage of the game we are closer to a bottom than a top. If you have held positions this far, there is little point in bailing out now.

Short-term traders should focus on playing things to the downside.

One way to do this is to buy an inverse ETF. We like SDS – ProShares UltraShort S&P 500 or the more tech-focussed QID – ProShares UltraShort QQQ Trust.

These ETFs are designed to move 2 times the inverse of the relative index on a daily basis.

For example, if the SP500 drops by 1% then SDS will go up by 2%

These products are a great way to hedge your long stock exposure or to profit from further downside moves.

Give us a call if you want to discuss further.

What kicked off this selling on Thursday and Friday.

Two things happened last week. First was the 10year Bond yield went over 3% on Thursday to 3.055%. We remember back in December 2018 the same thing happened and the market did the same vicious sell-off. Back then the Fed came out and stated they would lower rates. That was on boxing day and the market promptly recovered.

This time we have a Fed that will be increasing rates.

And it was this fear of further interest rate increases that sent the market into a spin on Friday when May’s Consumer Inflation was released.

Headline CPI came in at +8.6% year-on-year and Core was +6.0% year-on-year. Both figures were higher than expected and show inflation is not slowing down.

Consumer inflation has three big inputs. Gasoline, Food and Rent.

As you can see, Gasoline inflation is about as high as it has ever been but whereas in the past it has fallen from these peaks, this time around it is holding the highs.

(another reason to go and buy energy stocks. Even Warren Buffet agrees. He recently bought a big position in Occidental Petroleum OXY)

The story is a bit different with food which is still climbing rather than stabilising at a high price. There are no signs of this slowing down yet.

And then you have rent, which is a similar story to food. High and climbing higher.

What does all this mean? Food, Gas and Shelter are 42% of headline CPI and we’d guess +90% of how actual consumers perceive inflationary pressures. All three are very high and 2 are very high and growing. This does not give much confidence that US inflation is peaking, which is why markets took this report so badly.

The side effect was pushing the 10yr yield up another 0.12% to 3.17% and forecasts of where interest rates will end the year increased also. Most likely is now 3.25%-3.50%

The Fed meets this week and will announce an interest rate rise of +0.5%. The press conference will be important because if Powell can provide some clarity of future monetary policy, this will calm markets.

The selling isn’t so much because rates are going up, the market knew this. It is because this unexpectedly high inflation print made markets doubt they have a good handle on just how much they will go up. Powell can change that with the right words.

For now we need to keep playing a defensive game. It is too early to jump into growth stocks. That time will come, it just isn’t right now. We suspect there is more pain to come first.

Energy is about the only place you can hide at the moment (we will stop hammering on about this one day, I promise). Or get an allocation in QID and/or SDS and profit from the further selling.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.