11/13/2022

Signs of life?

Volatility remains persistent, but there is a sign of hope in the markets. But is this hope really here to stay?

Today, we will begin by recapping the events of this week, which reflected significant volatility but left us with positive signs for growth and stabilization.

Then we’ll discuss what investors can do as the market evolves.

Let’s dig in.

Market Rally

The market closed out a volatile week with the largest gains in months fueled by growing hopes that inflation in the U.S. is coming under control.

This has been an eventful week. Many were watching the ongoing drama between two of the most notable crypto firms, FTX and Binance, to start off the week, which quickly devolved into a crisis that is expected to result in major losses for institutional as well as retail investors.

FTX filed for bankruptcy on Friday, capping a volatile week with a major loss in crypto.

Stock investors were rattled by the events, which precipitated a market sell-off during the week, but by Thursday, fresh new data on inflation led to a quick reversal.

Investors rejoiced on Thursday as the latest report for October shows the consumer price index increased by 7.7% in October from the same month a year ago…

Which is down from 8.2% in September…

And significantly less than 9.1% in June (the highest in four decades).

The core CPI, which excludes volatile energy and food prices climbed 6.3% in October from a year earlier, which is down from 6.6% in September (the largest increase since August 1982).

The easing of inflation in October gives hope to investors that the Federal Reserve might not have to raise interest rates as high as previously anticipated.

As we have noted in previous newsletters, the Fed is aggressively lifting rates to combat inflation, hoping that higher borrowing costs will curb hiring, spending, and investment. Fed officials raised the benchmark federal-funds rate by 0.75% last week, which is the sixth increase this year, bringing it to a range between 3.75% and 4.00%.

Thursday’s inflation report likely leaves the central bank on course to raise rates by a half-point next month, but it casts doubt on how much higher the rates will be increased by next year.

The report offers investors a glimmer of hope that rates may not go much higher than 5% going forward…

Because October’s inflation report indicated that price pressures are cooling down, stocks sky-rocketed…

Which is a rapid reversal in the trades that have dominated for the past year.

Treasury prices pushed for a large rally, resulting in a drop in yields.

The dollar reversed course.

Tech stocks trimmed some of their losses from earlier in the year.

The S&P 500 added 0.9% on Friday, and the tech-heavy Nasdaq added 1.9%, capping the largest two-day gain since November 2008.

In particular, Amazon added 4.3%, which led to a total gain of 11% for the week…Alphabet shares rose 2.6% and were also up almost 11% for the week.

Seems all very rosy…but we have some thoughts we will share momentarily. Keep reading.

What Pandemic?

Beijing took actions this week to ease its pandemic restrictions, which added to the positive mood in the markets this week.

The world’s second-largest economy has taken a toll on global growth by imposing lockdowns and restricting travel…

But health authorities in Beijing noted on Friday that they were shortening the time that travelers must stay in quarantine and reducing mass testing…

Which sent prices for Brent crude oil up 2.5% to $95.99 per barrel.

Temporary?

The joyous mood in the market may lead many to believe that things are about to turn the corner.

But who’s to say for sure?

In our previous newsletters, we have discussed that the signs of bottom are not quite here yet.

In fact, some analysts and investors think the size of the market’s reaction to the inflation data wasn’t justified.

The term “temporary bear market rally” has been heard on the street many, many times recently.

So what does an investor like you do?

You may need a different approach

In today’s challenging market environment, regardless of the recent positive news this week, the best way to invest is to focus on assets that have low correlations with one another.

Correlation is a measure of how closely a group of assets move together. The higher the correlation, the more their prices move together during any particular period of time.

The lesser the correlation, the less they move together.

Most individual stocks have a high correlation to one another and the overall stock market in general.

If the stock market is down, there is a strong likelihood that most of the stocks you’re invested in are also down.

When the market is up, times are good…

But a portfolio of highly correlated stocks in a down market can be painful.

As the Fed has aggressively hiked rates in recent times, stock prices have been faced with downward pressures as companies face higher borrowing costs, reduced consumer spending, and a sluggish economy.

So holding highly correlated stocks is a tough proposition currently.

As billionaire investor Leon Cooperman, the founder of OMEGA Advisors, says, “In a bear market, he who loses least, wins.”

This is why finding the hidden gems that prosper regardless of how the market performs is the key strategy to pursue.

So how do you find low-correlation investments?

Find investments that will go up and down based on factors specific to the investment, not the rest of the market.

As you can imagine, successful low-correlation investing takes effort.

But incorporating this knowledge into your existing investment portfolio can have a dramatic positive impact.

This is where the team at VJ equities comes in.

We are hard at work uncovering the next big stock plays for you, which we believe, based on our research, will be poised for significant moves.

We will return later this week with more information.

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