To The Moon

The S&P 500 in 2023 has gained on market optimism that the Federal Reserve will be at the end of the rate hike cycle and inflation is starting to trend down. Also fueled by a boom in AI driven stocks, the S&P 500 is up by 16.51% (as of July 3, 2023 close), while the tech heavy Nasdaq Composite is up 33.02%. 

Here is my approach to the second half of 2023.

Large Cap Growth Stocks Trade at 5% Discount Only

Growth Large Caps at 0.99 of Fair Value

My portfolio consists of mostly large cap and mid caps in the growth space. They are Microsoft, Meta, Apple, Amazon, Salesforce, Veeva & Alphabet, which vary from 83% gain to 10% gain. The only lagging one is Disney, which is down by 21%.

From Morningstar's North America Market Outlook Q3 2023 report, in the growth investment style stocks covered, large caps trade at 0.99 of its fair value and mid caps trade at 0.95 of its fair value. 

US stock market trades at 5% discount to fair value

In the 700 over stocks covered by Morningstar on U.S. exchanges, the U.S. equity market now trades at a price/fair value of 0.95, which represents only a discount of 5%, leaving almost no room for market of safety.

As reported by Morningstar, their analysts feel that the rate of economic growth will slow sequentially in the third and forth quarter of 2023, and then bottom out in the first quarter of 2024. With slowing economic growth, tight monetary policy and reduced credit availability, the market gains will be limited over the next few quarters.

Stay out of growth large caps if you weren't already invested in it as the boat has left

If you were not invested in these large caps that have driven the S&P 500 this year, I would highly recommend staying out of it totally, as there is now more downside than upside potential. Do not chase the bull. Current prices are at best a hold, assuming you had bought stocks like Apple, Microsoft, Nvidia, Meta, Tesla & Amazon at a much lower prices. Only Alphabet is still rated 4-star and under fair value as of today.

Start to look at other sectors that have underperformed this year

Returns by sectors 

As I am invested in technology, communication services and consumer cyclical sectors, I will be looking out for other opportunities in sectors that have underperformed this year. In particular, I will be looking at financial services and healthcare sectors.

One of the finanicial stocks I am building a position in is Intercontinental Exchange, which is the parent company of the well-known New York Stock Exchange. The company generates revenues on equity and equity option execution fees and fees related to futures trading. In addition to that, Intercontinental Exchange is a major provider of mortgage technology, having acquired Ellie Mae in 2020 and a planned acquisition of Black Knight in 2023.

Morningstar has a fair value of $131, which is 29.5 times projected 2023 earnings and 2023 EV/EBITDA of 17.4. The fair value represents a 14% discount from Monday's close of $112.93.

China and losening monetary policy

With news coming out of China that their recovery from Covid reopening has not been that great as previously expected by analysts, I will be expecting a easy of monetary policy from the People's Bank of China. Youth unemployment has been at a high of 20.8% lately, and the Chinese government will need to react before things spill out of control. 

The fair values in Chinese stocks like Alibaba, Pinduoduo & JD.com look very attractive, ranging from 32% to 60% discount on their fair value, but investors need to understand that China can be unpredictable at times and must be willing to ride a rocky boat, and hopefully the boat doesn't crash. 

One last thing

iShares 20 Yr+ Treasury Bond ETF

If you have managed to get this far in the article, my last recommendation would be to load up some bonds. The above is the historical price of TLT, which is the 20 year treasury bond ETF, vs the Fed Funds rate.

As it is expected sometime in 2024 that the first rate cuts will be coming, there is a likelihood that interest rates on the US 10 Yr Yield have likely peaked. The TLT is the most responsive to the US 10 Yr Yield, as such the TLT is close to a probable bottom. If your portfolio is mostly equities but no bonds, the TLT will be a good addition to gain exposure to some bonds. I have previously discussed why the TLT is the better choice, compared to other shorter term ETFs like IEI, IEF, ISTB & SHY.

The key point is when the US treasury yields falls, bond prices appreciate. This is in reverse to 2022, which US treasury yields rise, bond prices fall. As such, investors stand to look at potential future capital gains next year and into 2025, and the Fed Funds rate get cut.

US 10 Year Yield close to resistance line in blue

@TigerStars 

@CaptainTiger 

$Meta Platforms, Inc.(META)$ 

$Intercontinental Exchange(ICE)$