What goes up, always comes down, that’s gravity. Same theories can be applied to the Global Equity markets. After the fourth quarter meltdown, markets have catapulted back to new highs. Dizzy yet? After 19 years on Wall Street, I have had the fortune/misfortune of seeing 3 Bull markets and 2 Bear Markets. In fact, I started my career in June of 2000 working for a hedge fund in New York. Watson Asset Management a $500 million-dollar hedge fund focusing on micro-cap securities. Companies under $300 million in valuations, which has given me an incredible opportunity to work with C Suite executives building businesses, observing secular trends and focusing on capital structure turnarounds. Having viewed thousands of companies and working with many exceptional leaders I have learned to look beyond the noise, filter emotions during times of uncertainty and focus on hard facts.
Hard facts are relevant data points that have proven accurate over the long term. Does that mean it’s right all the time, no. But it prevents you from the day to day noise. Why am I mentioning this today? Simple, as a firm, Alpha Street took a more defensive approach to our portfolio allocation as the Hard Facts continued to deteriorate. Fortunately, our defensive posture was offset by strong out performances in our equity portfolios. After 5 cycles, you learn to identify what works and doesn’t work in certain points in the cycle. Late cycle, which is what we believe we are in, companies with high ROIC (Return on Invested Capital), FCF and later cycle businesses do well. To date, that is exactly what has been happening. As the year progresses, value will begin to outperform growth stocks. Investors heavy in growth will begin to see higher portfolio volatility as investors reallocate into value names. Companies with cyclicality and high debt will likely under perform the markets. Investors should prepare their portfolios for the new environment.
Our internal models suggest the US Economy is slowing faster than current models suggest as leading indicators, Citi Surprise index and Purchasing managers index continue to decline in a rising stock market. Don’t take our word for it, here is our internal model.
Our internal model is the secret sauce to our economic grid we publish on a quarterly basis. Internally we update it on a monthly basis. You can see how the economy continues to deteriorate in living color.
Currently the S&P 500 is 2876.32 as our model continues to make new lows. At this point we remain on watch for a correction as the charts are finally suggesting exhaustion. We favor value stocks over growth stocks and have taken our technology exposure down significantly in our portfolios. We find positions in the big 4 technology companies to be most at risk. Time to take profits on FANG stocks.