A note from Clay

Markets once again moved higher in November. As of the end of the month, the S&P 500 was up more than 14% from its October 12th low, illustrating how quickly a bear market rally can emerge.

In an effort to combat inflation, the Federal Reserve has raised interest rates at the swiftest rate in history. And by many measurements, it's working. Inflation continues to fall, and the labor market has begun to show some cracks.

The notion that the Fed may be guiding the economy to a “soft landing” has intensified.

A “soft landing” would probably look something like interest rates stabilizing around 4.5-5% in 2023, inflation continuing to retreat towards historical levels of 2-3%, unemployment remaining below historical averages, and economic growth moderating but still remaining positive. This would probably be positive for stocks and could lead to a meaningful recovery in valuations.

In contrast, a “hard landing” would likely look like inflation levels rising again in Q1, the Fed being forced to push interest rates higher than 5%, and then a prolonged contraction in economic growth and high unemployment. Despite the declines we’ve seen, there could be room to the downside from here in this scenario. 

In reality, it likely won’t be so black or white. The entire system is highly sensitive, so even minor changes can materially alter the end state. With that in mind, we remain focused on investing in companies that we believe can grow their earnings and free cash flow per share across market cycles vs. trying to forecast the outcome of monetary policy in a messy macro environment.

So, where do we think we stand? 

According to data provider Refinitiv, the current level of CEO confidence is nearly as low as it was in 2001, which has historically been a reliable indicator of future corporate earnings per share. Typically at the end of a bear market, companies begin to revise their earnings expectations down. In the third quarter, we didn’t see this play out on a large scale.

While one would expect to see earnings expectations take a hit like in past bear markets, history doesn’t always repeat itself (though it does rhyme). 

Regardless, valuations have been cut virtually across the board, and opportunities to invest in potential multi-year compounders at discounted valuations will continue to materialize.

On the alternatives side, Apollo and Carlyle continue to see unique opportunities in the real estate and credit markets. As I mentioned last month, credit continues to be very interesting right now, with yields in the credit markets the highest they’ve been in over a decade.

Building a multi-asset class portfolio by investing in income-generating asset classes like real estate and credit to complement growth-oriented investments like stocks, crypto, and venture is a time-tested way to potentially generate stable returns through market cycles.

I’d be remiss to mention the story that stole headlines for weeks. FTX, one of the world’s largest crypto exchanges, and its associated crypto hedge fund, Alameda Research, filed for bankruptcy. Fraud, misuse of customer funds, and a laundry list of other allegations have arisen – an example of how a bear market tends to uncover many bad actors before it’s said and done. Expecting ongoing ripple effects, we took the opportunity to increase our cash reserve in the crypto portfolio and continue to be positioned relatively defensively.

My team, our partners, and I all continue to work hard as we seek to protect and grow your capital. As always, we appreciate your trust and are here to answer any questions you have as we head into 2023.

Head to the Titan app to see your personalized November portfolio recap. Simply update your app and click here or scan the QR code below.