To The Moon

The stock market is like waves & tides. Do not mistake the waves (price fluctuations) for the tide (macro). Don't be distracted by the waves. It is different when the tide goes out as there would be new lows.

We get into the stock market with the intent to make more money. When we are able to invest, this puts us in a privileged position. This implies that we have excess compared to many who still struggle with food & fuel insecurity. The irony remains that many are lamenting over their investment losses while many more do not have food on their table. What a first-world problem.

Below is an extract from a recent IMF publication dated December 2022:

As Europe approaches the cold winter months, governments face difficult policy choices as they seek to protect consumers from soaring energy bills in an environment of generally high inflation. Wholesale prices for natural gas were on averageseven-and-a-half timeshigher in the summer of 2022 than they were in early 2021. Even though they have since fallen from their highs at the end of the summer, they remain well above their early 2021 levels and could rise again ahead of the 2023–24 winter. There have been steep rises in the cost of coal and crude oil, too.

Inrecent work, we estimate that high energy priceshave raised the cost of living for the average European household by about 7 percentthis year relative to early 2021—adding to inflationary pressures from disruptions to food shipments and supply chains (see Chart 1).

Source: https://www.imf.org/en/Publications/fandd/issues/2022/12/helping-europe-households-Celasun-Iakova

How should we navigate through such times?

Let us spend within our means and avoid leverage. We should invest what we can afford to lose. Let us set aside “cash for crash”.

Review of our income and expenses.

This can be a good time to spend time as a family to take stock of our income and expenses.

CNBC news article about the lack of emergency funds facing Americans

Set aside emergency funds.

I encourage all to have funds for 6 to 9 months so that there is no panic should we lose income sources during this time. This will give us some breathing space. Unfortunately, 63% of US citizens are living paycheck to paycheck.

Source: https://www.cnbc.com/2022/12/15/amid-high-inflation-63percent-of-americans-are-living-paycheck-to-paycheck.html

• Big-ticketed items. If there are plans for big-ticketed items like home purchases or family vacations in 2023, this will be a good time to plan on savings so that we can set aside sufficient funds for these. In lieu of the current interest rate environment, it is essential that we look into the total costs of ownership over its lifespan before making any decisions.
• Delay of big purchases. If we are able to delay the purchase of a new family vehicle, we should consider using the existing one or relying on public transport for a season. This is especially the case coming to new homes as it would take years for us to service the mortgages. With interest rates expected to rise along with persistent inflation, we need to check on the affordability of such items. For reference, some have recommended not spending more than 30% on our property.

Review of our investment portfolio.

The year-end is a good time to review our portfolios. For the non-performing instruments, let us review their fundamentals before considering “cut losses” or “take profits”. It is a time to shortlist great companies that are likely to survive and recover strongly from the current market downturn. Personally, I have a shortlist of companies that I plan to add to my portfolio but it would be a while before the market recovers. Thus, it is a good time to save “cash for crash”.

Consideration of the macro factors.

It is difficult to include all macro factors in our investment considerations but it could be dangerous if we exclude macro factors totally. Ukraine is a good reference for how a geopolitical event led to food, fuel & financial tensions globally. It is not possible for us to know exactly how the market behaves. However, it would not be a stretch to hope for the best and be prepared for the worse in our “prediction” of the market.

1 year chart of S&P500 as of 28Dec2022

1D S&P500 chart with indicators

From the above chart, the long-term trend (200 days moving average line) is pointing to a downtrend. MACD indicator also points to a downtrend. A wedge looks to be forming alongside a golden cross. A golden cross happens when the MA50 line cuts the MA200 line from the bottom, typically a bullish signal. However, we can take comfort as the trading volume has been reducing, a sign of weakening of the current (down)trend. The macro can affect the price of a stock and sometimes, even fundamentals. Can we imagine what would happen should the USA and China enter into a military conflict?

Personally, the market should see a strong comeback when the Ukraine conflict ends. Unfortunately, the US-led West need to choose (soon) between providing for their own citizens and providing bullets for Ukraine. Peace demands the leaders return to the negotiating table.

Shortlist of great companies.

This is a good time to start identifying great companies (showing growing revenue & profitability, minimal debts, good market size, competitive advantage and more). Some can argue that the current prices of these great companies are very attractive (after imputing a margin of safety). However, the macro looks to worsen. As the world divides and moves away from globalization, this is inflationary in nature. It is hard for a company without debts to go under. However, we need to watch out for companies that rose to prominence with promises of disruptive technologies. Weakened by a lacklustre global demand, their lack of profits and piling debts will bring them under. The increasing interest rate hikes will be the final nail in their coffins. Let us consider tax loss harvesting and cutting loss before things get worse.

Conclusion

There would be some short-term rallies but let us not mistake the waves for an outgoing tide. In a bear market, the magnitude of decline would surpass that of the magnitude of a rally. What should we look out for would be improving GDP, inflation under control and low unemployment as signs of a market recovery. Unfortunately, things should get worse before they get better. It is not a time to give up but a season to save up so that we can catch the next tide for wealth accumulation.

$S&P 500(.SPX)$ $NASDAQ(.IXIC)$ 

@TigerStars