Three Minute Digest for May 11, 2022: Catch a Falling Knife

Ann Miller |

There is no straightforward way to describe the market sell-off we are experiencing as other than brutal. But we caution against equating your Affinity Capital portfolios with the overall markets. Your individual portfolios have held up well in relation to the major indices that are highlighted in the financial press.

Our portfolios currently average 30% in cash and throughout the year we have exited most specific sectors that have been hardest during this downturn. This includes international equities, traditional bond funds including investment grade and high yield corporate and municipal bond funds, small, mid, and large growth funds, and specifically the technology sector which are represented in the NASDAQ.

Why are the markets selling off?

There is little good news for the markets, including surging inflation, rising interest rates, geopolitical turmoil, lower economic growth projections and continued supply chain disruptions. In January, the 10 Year Treasury yield began at 1.52%. As of today, it hovers above 3.00%. That is an approximate 100% increase in a little over four months! The bond markets are often overlooked by investors as a key to evaluating future economic conditions as well as the health of the stock market.

See our Three Minute Digest for March 31, 2022 for an explanation of Treasury Yields.

Our Investment Toolbox

Affinity Capital utilizes a variety of tools to manage portfolios. In broad terms, we use both fundamental and technical analysis to evaluate both the markets and investments. A large contingent of money managers and especially mutual fund managers are singularly focused only on growth or value and growth stocks are leading the sell-off. We have sold our primarily growth-oriented positions. Why focus on a specialty in growth when growth is out of favor? We do believe that growth will again be an attractive area in which to invest and with 30% in cash, we are ready … but why ride it down?

Our use of Fundamental Analysis includes assessing the value of a security relative to its peer group or to the markets. We also evaluate the economic outlook as a whole. These are just two examples of dozens and even hundreds of available data points available for review.

Technical Analysis or Charting involves looking at statistical trends, such as movements in a stock's price and the number of shares trading. It is evaluating the supply and demand of a security. Are more people buying or are more people selling? Again, there are hundreds of data points and methods to utilize.

During a market selloff, we rely heavily on technical analysis. As you have seen by the sell confirmations you have received, we have been both reducing and/or outright selling weak positions since the start of the year. As mentioned, with an elevated level of cash we look to take advantage of reinvesting at what we believe will be opportune times.

Catch a Falling Knife

Going forward we obviously see more volatility. While rebound rallies are likely, the trend is certainly down. The technology heavy Nasdaq has been the main source of trouble as it is primarily growth stocks, and they are the first casualties of a double dose of surging inflation and slowing growth. The Nasdaq is down over (25%) for the year, and we believe a further (8%) decline is likely. At that point, it will either be the bottom of this sell-off and a good point to invest or it is the top of the next downturn. You may see new investments but if the markets resume their downturn, we may quickly retreat. Navigating a market such as this is referred to as “Trying to Catch a Falling Knife.”

As always, please feel free to call us with any questions.