January 12, 2022•657 words
Throughout recent days, there has been a heavy sell-off of beneficiaries of the Corona crisis as well as tech stocks. Wall Street connaisseurs conclude that there is a shift from tech and growth stocks to "value" stocks. Almost forgotten stocks like British American Tobacco, Dow and BASF have gained in these times. Can the Fed's interest hike be the main reason for this? We'll try to investigate this issue.
Our Wikifolio was rather strongly hit by this shift. 30% of its portfolio value are invested in the 3x Nasdaq 100 ETF that leverages the Nasdaq 100 long by 3. With this position we had our maximum drawdown at 20.9 %. Fortunately, when markets started to recover yesterday, the heavy minus decreased. Berkshire Hathaway is the main reason why our Wikifolio is still navigated strongly in these difficult times. Warren Buffett's holding is the master captain of this portfolio since Jan 2021. So we are at a portfolio performance of -0.78% in 2022 so far. So we perform stronger than Dow (-0.82%), MSCI World (-1.48%), S&P 500 (-2.02%) and Nasdaq 100 (-4.51%).
Many market participants were surprised by the sell-off. So were we. There are two key topics being discussed currently - they all come from America and are all related to the Federal Reserve.
The first topic is skyrocketing inflation (at 6.8% in Nov 2021). Jerome Powell is now additionally pressured by democrats as the main victims are lower income people. So, one important issue to analyze here is the main sectors that are affected by inflation. Let's check them:
Growth in 2021
compared to 2020
But the highest and most worrying inflation takes place at commodities.
- The WTI oil prices have doubled since Dec 2020,
- coffee prices have climbed by 81.9%,
- cotton by 49.4%,
- wood by 43.3%
- corn by 29.9% and
- sugar by 26.7%.
(Source: teletrader.com on 12 Jan 2022)
These are comparisons to the prior year. Growth rates at this size are really worrying - for housebuilders, people living on the rural area, textile manufacturers or agriculture. American politicians now try to find ways to decrease prices and also search for help by the Federal Reserve. What's setting them under additional pressure will be highlighted by the second topic:
Interest rate hikes have a tremendous affect on consumption in America. In the United States many households are deeply indebted and heavily rely on their income of labour. The financial life in Anglo-American countries is very different to Western European countries. Payments are usually executed via credit cards, student loans have to be repaid, real estate prices weigh heavily on the fixed cost tables of families and health-related costs are much higher than in Western European countries. So, the key thing that has to be kept in mind here is the following: The higher the federal interest rates are risen, the less money can be spent on products as the debt and fixed cost share of many family's household income rises strongly.
Jerome Powell is in a very difficult situation. It's not surprising at all. Keeping interest at such low levels for such a long time must have an affect on inflation at some point of time. Now, it has. And the American dream of affording everything you can on credit or loan starts to crumble. Especially in case of rising interest rates.
The conclusion check.markets draws from this situation is to stay with our strategy.
We invest in
- low-indebted companies
- generating high operating and
- free cash-flow.
Inflation should be a chance for (tech) companies to raise (low subscription) prices by double-digit figures. This could have an affect on earnings and revenues that companies could profit from in upcoming quarters. Let's see where this hick-hack on this topic leads us to.
check.markets' market indicator is LONG. We stay invested and are optimistic about the upcoming weeks.