Market Swoon - Deploying Capital

Market Swoon

Inflation, interest rates, employment, Fed taper, pandemic backdrop, Washington wrangling, supply chain disruptions, slowing growth, and the seasonally weak period for stocks are all aggregating and resulting in the current market swoon. The month of September saw a 4.8% market drawdown, breaking a seven-month winning streak. The initial portion of October was met with heavy losses as well. Many individual stocks have reached correction territory, technically a 10% drop, while the Nasdaq is also closing in on that 10% correction level. Many high-quality names are selling at deep discounts of 10%-30% off their 52-week highs. The outlook for equities remains positive after the weak September as the economy continues to move past the pandemic. During these correction/near correction periods in the market, putting cash to work in high-quality long equity is a great way to capitalize on the market weakness for long-term investors. Absent of any systemic risk, there’s a lot of appealing entry points for many large-cap names. Don’t’ be too bearish or remiss and ignore this potential buying opportunity.

Deploying Capital

For any portfolio structure, having cash on hand is essential. This cash position provides investors with flexibility and agility when faced with market corrections. Cash enables investors to be opportunistic and capitalize on stocks that have sold off and become de-risked. Initiating new positions or dollar-cost averaging in these weak periods are great long-term drivers of portfolio appreciation. Many household names such as Starbucks (SBUX), UnitedHealth (UNH), Apple (AAPL), Amazon (AMZN), Micron (MU), Adobe (ADBE), Qualcomm (QCOM), 3M (MMM), Facebook (FB), Johnson and Johnson (JNJ), Mastercard (MA), Nike (NKE), PayPal (PYPL) and FedEx (FDX) are off 10%-30% from their 52-week highs. Even the broad market indices such as Dow Jones (DIA), S&P 500 (SPY), Nasdaq (QQQ), and the Russell 2000 (IWM) are significantly off their 52-week highs. All of these are examples of potentially buying opportunities via deploying some of the cash on hand.

The Negative Sentiment

In a nutshell, rising inflation expectations and the realization of these inflationary pressures could cause the Federal Reserve to change policy course sooner rather than later. Additionally, the CPI reports will become more significant as these readings are used to identify periods of inflation. Therefore, the recent CPI readings are resulting in a much stronger influence on the Federal Reserve’s monetary policies hence the recent taper guidance.

Supply chain disruptions, specifically in the shipping channels, have led to rising freight costs that have escalated shipping costs dramatically for many companies. They include freight and higher labor costs, rising demand for transportation and products, shortages in computer chips, oils, and chemicals, and higher commodity prices.

The Federal Reserve indicated that the central bank is likely to begin withdrawing some of its stimulatory monetary policies before the end of 2021. This pivot in monetary policy by the Federal Reserve sets the stage for the initial reduction in asset purchases and downstream interest rate hikes. As this pivot unfolds, risk appetite towards equities hangs in the balance. The speed at which rate increases hit the markets will be in part contingent upon inflation, employment, and of course, the pandemic backdrop. Inevitably, rates will rise and likely have a negative impact on equities.

Rising Rates

More robust the CPI readings will translate into a stronger influence on the Federal Reserve’s monetary policies and downstream interest rate hikes. The Federal Reserve is reaching an inflection point to where they will need to curtail their stimulative easy monetary policies as inflation, unemployment, and overall economy continue to improve. As a result, their long-term monetary policy of low-interest rates and bond purchases will inevitably need to pivot to a scenario of higher rates to tame inflation. As a result, investors can expect increased volatility as these critically important CPI reports continue to be released through the remainder of 2021 and into 2022.

Conclusion

The coalescing of inflation, interest rates, employment, Fed taper, pandemic backdrop, Washinton wrangling, supply chain disruptions, slowing growth, and the seasonally weak period for stocks are resulting in the current market swoon. Many individual stocks have reached correction territory, technically a 10% drop, while the Nasdaq is also closing in on that 10% correction level. During these correction/near correction periods in the market, putting cash to work in high-quality long equity is a great way to capitalize on the market weakness for long-term investors. For any portfolio structure, having cash on hand is essential. This cash position provides investors with flexibility and agility when faced with market corrections. Cash enables investors to be opportunistic and capitalize on stocks that have sold off and become de-risked. As investors grapple with the prospect of downstream rate increases, pockets of vulnerabilities throughout the market have been exposed and present buying opportunities via deploying cash-on-hand within your portfolio structure.

Noah Kiedrowski
INO.com Contributor

Disclosure: The author holds shares in AAPL, AMZN, DIA, GOOGL, JPM, MSFT, QQQ, SPY and USO. However, he may engage in options trading in any of the underlying securities. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. The author is the founder of www.stockoptionsdad.com where options are a bet on where stocks won’t go, not where they will. Where high probability options trading for consistent income and risk mitigation thrives in both bull and bear markets. For more engaging, short duration options based content, visit stockoptionsdad’s YouTube channel.

One thought on “Market Swoon - Deploying Capital

  1. I’m amused when economic opinions mention “inflation” and “transitory” in the same sentence. It’s like a doctor telling a patient they have liver cancer, but don’t worry, it’s a recent thing, likely transitory…

    Once price inflation establishes in an economy it becomes self-perpetuating and stopping it requires stern measures. The Fed knows what needs to be done to stop the inflation, but that medicine can’t be administered because it would force the U.S. Government to default on debt payments.

    We live in interesting times.

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