October Equities: Making the most of volatile market conditions

US Market Correction, our thoughts

Most investors were caught off guard when the S&P 500 wiped out 3 months of gains in 3 days in early October declining from highs of over 2900 to nearly break below 2600 (-10%). We welcomed this newfound volatility, aware that macroeconomic issues had been on the horizon for some months now, allowing some investors an excuse to become skirmish amidst changing prospects of global growth and political uncertainty.

When asked to explain this is what I came up with: “There are a number of reasons investors may use as an excuse to cash out; trade wars causing declining profits for companies / some goods increasing in prices, midterms potentially causing a halt to deregulation and tax relief in the US with the House no longer controlled by the Republicans, Italian politics / anti-austerity may cause a Euro decline and second referendum, QE done - FED and ECB aren’t doing free money anymore - loan repayments going up across auto, mortgages, credit card and student debt, China house of cards is looking pretty shaky, IMF has brought down forecasts for global growth (there are breakout cases of Emerging Market inflation), people are looking at high P/E tech that has led the US and questioning valuations / peak earnings and global portfolio managers are being mandated to de-risk amidst lacklustre global stock performance and increasing fund withdrawals.

But a lot of this is noise for the US markets; earnings are still great, the US is booming (PMI/NMI still excellent) with tailwinds from lower taxes and regulation, the US manufacturing and energy sectors are rebounding, a booming economy should be able to withstand rising interest rates, Republican setbacks are an issue but a lot of policy can be done across the bend / via executive order and the trade wars should be much less impactful than people think (supply chains are already moving outside of China - Vietnam, Cambodia etc.) with a likely resolve at the G20 at the end of November” Generally we still remain bullish for S&P outperformance and alpha over the next two years, likely breaking above 3000 in the coming months. We have welcomed this market volatility as it has allowed us to take a more active and opportunistic approach, further highlighting new buying opportunities and identifying new pockets in the market for increasing short exposure.

The European markets represent an interesting opportunity; many UK stocks with great financials have been depleted over the last two years mostly due to unfounded political noise. What's more declining economic growth in the EU, likely shake ups in the May 2019 MEP elections and the possibility of trade spats with the US (Germany has the third largest trade deficit with the US) gives a potential for further downside in the Eurozone area as sentiments change and political/economic uncertainty begins to creep in - France, Germany, Italy, Spain, Portugal etc.

We had many trading ideas had amidst this new evolving market situation: Square, Roche, Amazon/Facebook, Aurora/Canopy, Netflix and Dortmund/Xing. We were also able to successfully short the VIX (peaking in the mid-20’s) as we agreed volatility was overdone.

Square

Financial services, merchant services aggregator, and mobile payment company based in San Francisco, California.

Third Quarter 2018 Results

They continue to be a monopoly leader in the small/mid cap point of sale business segment, expected to achieve over $5bn in annual revenue in 2019, with plenty of international expansion possibility; recovery to a new high should be quick over the next 3-6 months.

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