Saturday 27th August 2022: Market Volatility. It's always there, but sometimes it gets worse, or better, depending on your point of view. Volatility can cause the market value of our portfolios to whip-saw up and down, which can be a concern for some people, but it also tends to throw up opportunities. If you've done the work in advance and have a decent shopping list, you can take advantage of these sharp drops to pick up stock in companies you want to hold more of. On the flip side, when the market gets carried away and overshoots to the upside, that can be a good time to trim positions or even exit some investments that have become overpriced, with a view to possibly shifting that cash into other companies that have more upside from here. Monday is likely to be one of the "down" days. The following is from Marcus Padley's Saturday morning newsletter:

So much for the benign Jackson Hole speech. I’m not sure the ASX 200 chart (above) matters much – apart from the fact that the Australian market is a tale of very different sectors (you should look at the banks and resources sector charts quite separately), if we are going to worry about ‘the market’ we should be looking at our market later this week to see if this two-month rally can defy the US sell-off that happened last night (unlikely) and whether that sell-off reverses or extends.

Dow Jones down 1008 points which is 3.03% (Collins Class rule in effect). The NASDAQ took it the worst down 3.94% with the S&P 500 down 3.37%. The VIX volatility index popped 17%. SPI Futures down 104.

Dow Jones stocks overnight on Friday:

Not what the doctor ordered and these are not the headlines we were after this morning:

• Wall Street ends in hole after Powell’s Jackson Hole speech.
• Stocks slide, dollar rises as Powell spooks market.
• Investors shun risk as Fed pushes 'higher for longer' rates

Here are the quotes that did it:

• "Reducing inflation is likely to require a sustained period of below-trend growth. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain".

And:

• The Fed will raise rates as high as needed to restrict growth, and would keep them there "for some time" to bring down inflation that is running at more than three times the Fed's 2% goal.

And:

• "The historical record cautions strongly against prematurely loosening policy. We must keep at it until the job is done". In other words, don't expect the Fed to dial back policy until the inflation problem is fixed (rates to stay higher for longer). 

And let's throw some Voodoo in - Beware the Ides of September. We roll into September on Thursday - statistically the worst month of the year in the US. The average September S&P 500 return is -0.6%, the worst for any month. Since 1945 the market has only risen 44% of the time in September. The S&P 500 has rallied 18.9% from June to the recent peak. There are a few profits to be taken. The newswires are talking about a period of profit taking on nervousness ahead of the Fed Meeting on Sept 21. There is also a jobs number and a CPI number before the Fed Meeting. Shoot first ask questions later.

NASDAQ chart - same picture.

OVERNIGHT TABLE:

Some of the Fed Headlines

• Fed’s Powell says “we must keep at it until the job is done”.
• Quote: "These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain".
• Powell warned that the U.S. economy will need tight monetary policy "for some time" before inflation is under control.
• Recession fears return.
• Concerns that interest rates will peak later than expected.
• The Fed remain data driven – policy “will depend on the totality of the incoming data and the evolving outlook”.
• US 10-year bond yield continued to rise - up 6bp.
• It is interesting to note that the chances of a 75bp rate rise (As opposed to a 50bp rate rise) at the next FOMC Meeting on September 21 fell from 64% to 61.5% overnight. It seems the bond market isn't too fussed, suggesting the equity market may have overreacted.

• Gold slides after Powell doubles down on tight monetary policy.
• Copper retreats from eight week high after Powell warns about rate hikes.
• The IMF deputy managing director immediately adopted Powell's lead saying "Central banks must act decisively to bring inflation back to target and anchor inflation expectations". The room was full of international central bankers. They all take home the same message. She talked about temporary supply shocks having a broader and more persistent effect on inflation.

Other market headlines

• The PCE (personal consumption expenditure) price index fell from 6.8% to 6.3% in July (good). But Powell said "a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down".
• China regulators tell banks to ramp up lending.
• China’s reliance on foreign battery metals poses a challenge to the Chinese EV industry.
• Mexico creates state-run lithium company to go live in six months.
• Volkswagen, Mercedes-Benz team up with Canada in battery materials push.
• Global nickel, lithium and cobalt markets to be in surplus in 2022 - that comes from an analyst at a Chinese state-backed research house.
• Indonesia to raise coal and gold royalty rates next month.
• Indonesia to issue nickel export tax rules in Q3.
• Copper market in 66,000 ton deficit in June 2022.
• Rumour that Apple has put in an offer for Electronic Arts.
• US and China reach landmark audit deal in Boon for Chinese tech companies.

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Source: MarcusToday's Saturday morning email today. For this sort of data and analysis, MP's newsletter, MarcusToday is good value in my opinion and not just for the overseas news, he does do a decent job of keeping us up-to-date with the Aussie sharemarket as well, with three newsletters every trading day, a morning newsletter (to prime us for what happened overseas overnight and what to expect during the coming day in terms of what the market is looking for, main data points that are going to be released, major companies that are set to report, etc.), then a mid-day email to let us know what the market has done during the first half of the trading day, including all the major moves, followed by an end of day (EOD) newsletter which wraps it all up and includes those companies that made new 12-month highs and 12-month lows during the day, the major movers, market sensitive announcements, etc. There is also a company database that can be accessed and a number of other features that comes with an MT subscription. He also offers a 14 day Free Trial (no credit card required). I encourage people to check it out if it sounds like something you would derive value from. I've been a subscriber for many years.

One word of caution however is that he often completely misses stuff that occurs with microcaps and other smaller companies that are outside of the S&P/ASX 300 Index, so a company like GR Engineering (GNG), which I hold, won't get coverage in his newsletter, and I've never heard him mention Lycopodium (LYL), another company I hold which is not even in the All Ords Index. So many of the smaller companies that are favorites here on Strawman won't get much or any coverage. However he does cover most of the ASX300 and ALL of the ASX200 quite well.

Something to remember about Marcus Padley is that his background is Stockbroking, and then he got into the sharemarket newsletter game, and now he also manages money for people because he runs a couple of managed funds. When he started the funds management side, he was initially very reactive, tending to "sell everything!" whenever a major market move spooked him, such as what happened last night in the US. That tended to cause him to underperform because he usually missed the bounce when the market shrugged off whatever had it bothered previously. In other words, Marcus was selling out when the market had a severe down day, and then buying back soon after it had recovered - because those recoveries can happen very quickly, and you can easily miss them. Also, it's hard to know that it IS a recovery until the market has already gone up by a decent percent, by which time you've missed out on all of that upside if you'd previously sold out. But that was then, and this is now. Marcus has changed tack a little of late...

Here's what he had to say this morning about his intentions on Monday:

I’m going to hold the line on Monday and see what comes. No knee-jerk reaction. Let’s see if Wall St follows through on Monday night or reverses. There are a couple of things holding me back from immediately going bearish:

• A lot of what Powell said was a simple reiteration of previous ‘headline prudence’. A commitment to get on top of inflation. He was talking in front of a room full of Central Bankers, many of whom (Europeans) have a significantly more dangerous inflation problem if not (an energy) crisis. What else could he say? He may have overstated it for the audience.
• Inflation is peaking in the US.
• The bond market (they’re a bit smarter than the equity market) didn’t react.
• The odds of a 75bp (as opposed to a 50bp rate rise) on Sept 21 actually fell overnight (less aggressive, not more).
• The Technology stocks are only 3% of our market. They were the hardest hit in the US. We will outperform.
• The Resources sector trend is still ‘up’.
• Our Banks won’t mind the idea of higher rates.
• Commodities didn’t sell off hard (Recession fear is not so bad) but let's wait until London opens again (Tuesday – they are on holiday on Monday).

What would cause us to go bearish, cash up, or give up for September:

• If the sell-off follows through.
• The charts look pretty horrible (NASDAQ and S&P 500).
• If commodity prices turn down (at the same time as BHP going ex-dividend).
• If the banks react badly (should be OK).

Bottom line – I’d like to see the next day’s trade in the US to see if it follows through as a theme or ends as a one day panic. This strategy portfolio is not for trading, it’s for market timing. It's slow moving. It's for investors. It's not supposed to be highly reactive. Yes, the charts look peaky and this may just set the trend but let’s hold a moment and see what comes. Plus Australia should be relatively immune to the Tech sell-off. No need to panic (there’s never a need to panic).

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"There's never a need to panic" eh? I agree, however I believe Marcus' reaction to similar events in previous years might have best been described as "panic", or, as he often puts it, "shoot first, ask questions later".

Good to see he's starting to view things more sensibly as a fund manager now, rather than in his previous stockbroking role where a higher volume of trades tended to be considered as a good thing and being on the sidelines was usually the place to be whenever there was significant uncertainty. That "sidelines" stance rarely works. It only works when you have impeccable timing (in a good way). I am a firm believer in "time in the market" rather than "timing the market" and Marcus seems to be slowly coming around to this way of thinking, even though he will still sell down on Tuesday if things go further pear-shaped on Monday (and Monday night in the US) - as he has explained above.

For the likes of you and me however, I reckon that volatility throws up opportunities. I tend to remain mostly fully invested most of the time, however there's always the option to sell out of some companies (or reduce exposure) to free up funds to invest in something else with more perceived upside from current levels (in terms of price).

For that reason, I don't dread the sort of days that Monday may turn out to be. I look forward to them. As long as your portfolios are full of (or mostly full of) companies that can withstand a variety of economic scenarios and operating conditions, do not have excessive debt, have a good position within their chosen industry/industries, have excellent management who make superb capital allocation decisions and think like shareholders (business owners rather than just business managers), and have whatever else is important to you personally, then "Bring It ON!"