The long-term view of the market, the earnings that justify the pricing of companies, the rate at which those earnings grow, and prevailing interest rates, all lead me to conclude that we are free-falling to “normal” pricing for the S&P 500. I believe the S&P 500 should be in the 3,300 to 3,600 range, we are now just under 3,700 and yes, it could go below the normal valuation.
We have remained essentially invested but eliminated all but a handful of higher growth companies. We compare our returns against the S&P 500 and the NADAQ indices, because they are readily available and cost next to nothing to own. While we have the flexibility to hedge the portfolio in most accounts, we have managed to reduce our risk, and therefore outperform our benchmarks, simply by raising the cash from the sale of riskier stocks early in the year.
Risks:
The Fed raising rates too high - too fast, the US Treasury selling too many mortgaged backed securities (quantitative tightening) for the housing market to absorb, Putin’s expanding ambitions, China’s desire to have Taiwan, and no market capitulation.
The Opportunity:
Higher growth equities, as were previously held in our Mid-Cap Model have declined by 45% since January. Yes, this category of stocks was valued against the backdrop of 0% interest rates, priced as if every possible positive event had already occurred, and needed to adjust to the world as it exists in the 4th Quarter of 2022.
When the only good news is that all the news is bad, it is time to review our aggressive-growth buy list. While this market may feel like the plane is going down, I encourage investors to simply tighten their seatbelts and expect more volatility.
There are 25 great higher-growth companies that we have owned and have been following for years. Now is not the time to venture out, but soon enough the better times will be upon us.
Look at these three companies to own for the long haul:
Generac Holdings (GNRC) down 37% year to date
Hertz Global Holdings (HTZ) down 31% year to date
LAM Research (LRCX) down 47% year to date.