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| By Nilus Mattive |
The COVID pandemic created a very clear reset line for the financial markets.
Initially, as the entire global economy ground to a halt, we had panic and wholesale selling of most assets, particularly stocks. The major U.S. indexes dropped roughly 40% in the blink of an eye.
Then, as it became clear that governments around the world were willing to print as much money as needed to combat the slowdown … and as the pandemic itself started to wane … we saw an equally sharp rally take hold.
Less than a year after the March 2020 plunge, the S&P 500 was hitting one new all-time high after another.
Going into 2022, we saw an interim top followed by a retracement. The latter was largely fueled by concerns over red-hot inflation numbers.
Ultimately, 2022 became a rare instance of both stocks and bonds posting outright losses in the same year, while other assets like real estate and art took the lead because of their proven inflation-fighting powers.
By the summer of 2023, stocks were heading back up as inflation started moderating and a new narrative about artificial intelligence took over the airwaves.
Which brings me to the present time …
Back on July 11, I told you how quickly things could turn in a frothy market like the one we were seeing.
Then, a week later, I explained why so-called “diversified” index funds were actually exposing millions of investors to massive losses if — or when — the tech stock mania started to fizzle.
Well, the timing of those warnings couldn’t have been much better.
Just a few weeks later, we have already seen the entire market narrative change.
A Fortune headline summed it up perfectly: “Wall Street Is Getting Nervous About Businesses Betting the Bank on AI.”
Everyone is right to be concerned.
After all, Alphabet (GOOGL) reported strong earnings on July 23, but the company continues to spend billions on AI-related projects without seeing much of a return on its investments.
The stock dropped sharply in the wake of the report release, as did other big tech names.
A few days later, Microsoft’s (MSFT) earnings revealed less than stellar results from its AI investments, too.
And we’ve gotten equally problematic reports from Amazon.com (AMZN) and Intel (INTC) among others.
All of that has sent tech stocks reeling.
Of course, as new concerns over the tech sector started taking root, we also heard the chatter switch back to the Federal Reserve. Namely, talk that the Fed will start cutting its target interest rate in September.
On July 31, the Fed mostly reinforced that view during its policy meeting — through some subtle language shifts in its press release and comments made by Fed Chief Powell during the post-meeting conference.
The latest jobs figures — which saw the unemployment rate jump to 4.3%, substantially higher than expected — have sealed the deal as far as most people are concerned.
In fact, based on both interest rate markets and surveys, there is now near certainty that the Fed will at least cut rates by a quarter-point in September.
Many believe it will be a half-point cut. And some forecasts are calling for three separate cuts before the end of the year.
All of this has caused a shift in the markets, especially in what stocks investors are favoring.
My friend and colleague Sean Brodrick pointed this out recently, noting that as the Nasdaq and other “growth” stocks started slipping, several other categories picked up steam.
They include homebuilders, regional banks, small caps, REITs, value names and gold.
Traditionally speaking, many of these groups perform well when interest rates move lower.
Some also do well as economic conditions weaken — particularly certain dividend-paying value stocks and gold.
If you’re already a Safe Money Report reader, this is great news!
In fact, everything is happening EXACTLY like the roadmap I laid back in our January forecast issue. This is exactly what I said the first four steps would look like:
“Here’s my basic operating roadmap for what is most likely to happen in the year ahead:
- We will see the Fed keep rates where they are as long as possible and continue trying to talk down inflation and suppress market expectations for a pivot. They might even enact one last surprise rate hike to further those goals. But either way …
- Because there is a substantial lag between interest rate policy actions and their effects on the fundamental economy and financial system, we will see some corners of the markets — or many areas — start breaking. Some outside catalyst could spark this as well.
- At this point, the stock market will start dropping sharply, especially the riskier and more economically-sensitive names — including high-flying tech shares. (Defensive dividend-paying stocks will hold up better as they always do.)
- Bond prices, particularly longer-dated U.S. Treasury bonds and other safe havens, will rally sharply. Yields, which move inversely to prices, will be coming down.”
Sound familiar?
Meanwhile, in Safe Money, we’ve continued to use the eight months since then to our advantage — loading up on higher-yielding, interest-rate-sensitive, defensive investments in both fixed income and equities.
And those moves are already paying off handsomely.
For example, my recommendation to buy Altria (MO) in the middle of June was showing a 16.4% open total return through the end of July … before the stock’s substantial dividends had really even had a chance to kick in.
Compare that to the S&P 500’s flat performance over the same time period and it’s easy to see exactly how defensive stocks like this can keep a portfolio safe and growing even during major turbulence.
A larger study of all the open recommendations I’ve made since taking over Safe Money Report at the beginning of 2023 revealed 12 out of 13 in winning territory, too.
And even factoring in our one paper loss, the overall average result of my recommendations has amounted to an open total return of 32%.
That’s IN ADDITION to four separate closed profits we’ve already taken ranging from 24% to a staggering 197%!
Quite frankly, I expect even better results going forward as our foresight leads to even more outperformance.
Why?
Because my approach is all about staying ahead of the crowd … diversifying into a wide range of assets … and always choosing safety over the new hot thing.
Looking at the current Safe Money Portfolio,that’s obvious.
We do not own technology companies, which have looked wildly overpriced for quite some time …
We started loading up on fixed-income investments when prices were down, and interest rates were up …
We have solid holdings in gold, silver and related mining shares …
We have allocations to several different crypto funds for extra diversification away from U.S. dollars …
Plus, we own additional hedges — everything from funds that sell options to a small position in an inverse ETF.
From here, we will continue following the plan I outlined at the beginning of the year — especially the part about favoring fixed-income and keeping the equity portion of our portfolio in high-quality, defensive income stocks.
Whether or not you’re a subscriber, I recommend you consider doing the same.
If you aren’t, I urge you to check out this new presentation on what’s at risk next.
Best wishes,
Nilus Mattive
