Risk on. Risk off. Pundits spend a vast amount of effort trying to convince everyday investors that the world is teetering on the verge of either utopia or apocalypse.
Neither extreme scenario has materialized yet. But that doesn’t stop the noise. And pundits who lean in one direction on one day tend to reverse themselves without warning.
We’ve seen that cycle of extreme sentiment play out in recent days. A week ago, people said it was the end of the world. Guess what? We’re still here.
When you’re braced for the end of the world, relief can look a lot like irrational exuberance. We cheer. Sometimes we feel a little invulnerable.
But the truth is always somewhere in between. We aren’t invulnerable and we aren’t immediately doomed. Every day is both a day to take risk off and put risk back on.
Take A Deep Breath
I was thinking about this while preparing for my latest interview with Bloomberg Radio. (Listen HERE.)
After a few wild weeks, the VIX or “fear index” has finally retreated back below the 20-point level that divides normal volatility from true rollercoaster conditions. On the down days, Wall Street bet on disaster, taking risk off the portfolio across the board.
Then on the up days, it was all about the potential returns. Instead of selling, people showed up eager to buy everything at record prices.
They were betting that the future would be better than the past. Personally, I think they’re right. But not every stock will repay their confidence instantaneously.
Some stocks will need time to pay off. Until they do, they’ll test our patience. And when patience falters, the natural response is to give up and sell out.
The selling I’ve seen this week has come from small accounts and niche hedge funds dumping stocks they once loved. These are the “meme” stocks that mainstream Wall Street ignored until early this year.
Dumping these stocks shows that confidence has cooled. Patience is getting frayed. People are tired.
If you’re getting tired, take a deep breath. Ask yourself the simple question: how has the world changed since you bought your stocks?
Maybe the future has brightened or darkened incrementally. In that scenario, your stocks have a little farther to go . . . or a little less.
But unless that recalculation takes them past any reasonable sense of “fair value,” there’s probably no reason to sell. The stocks that attracted you initially are probably still as attractive.
When they aren’t, it’s either because the company behind them has changed or you have. It’s okay if you’ve changed. We all run out of patience and want to take a break.
Just don’t blame the company, the Fed or anything else. And remember, a lot of money is being spent to get you to run out of patience.
Wall Street is happy to take your stocks at a discount price. They want you to fold your hand so they can get your shares.
So has the world changed? We’re looking for earnings growth of roughly 8% next year . . . despite all the inflation, supply shocks, interest rates and all the other threats.
A few months ago, we were looking for 10% growth in 2022. The future is a little darker than it was. But we’re also another quarter into the growth story, so the base is higher than it was.
Whether it’s 8% or 10% growth, neither number is bad. It’s what I’d consider normal to bullish, enough to take the market as a whole up another 10-15% next year.
And if you’re in the right stocks, the numbers argue for robust gains. Never forget: you don’t have to settle for the S&P 500, which ensures that you have to buy losers as well as winners.
The broad market remains heavily overweight Apple, for example. Good company. But it’s a value stock priced like a growth stock . . . or a growth stock that just isn’t growing fast, depending on your point of view.
We don’t own Apple. You don’t have to either.
Cannabis Corner: The Pure Plays
Through all the week’s volatility, most cannabis stocks actually did well. My Green Gold Rush portfolio has bounced 2% since last Friday’s miserable close.
But it’s all about pure plays. Tilray is down on news that it’s buying a brewery in pursuit of THC-enhanced beverages.
Wall Street took the news as a sign of surrender. Management evidently isn’t confident that they can go their own way on traditional dried plant products.
They need to diversify into drinks. Canopy, the other drink-oriented grower, also lost ground this week.
But the pure plays led the way. Evidently confidence is the way to go in this group.
GreenTech Opportunities: EV On The Defensive
If you’ve been listening to my new weekly radio segments with Kevin McCullough, you know we love electric vehicles . . . but it’s been a rough week for the group.
Other than Tesla, there isn’t a lot of profit here. It’s a speculative theme. You need to be looking three to five years out in order to see your bet pay off.
And with Tesla back in the regulatory hot seat, the speculative plays are extremely vulnerable to a short-term crisis of confidence.
If you believe in EV, hang on. And if you don’t, go ahead and sell. I think this is the future.
It just might take a few years to see the results.