The Sleep Well Portfolio at a Glance
The End is Near
SPY (Large Caps)
Grinding higher and crushing volatility is the name of the game right now. In this time of calm, I made an effort to analyze each recession of the 70s in detail. These recessions are very different than the ones in 2000 and 2008. We call these inflationary recessions. I wanted to look at what ended them. Specifically, was it the Fed or was it inflation? Each asset recession ended when the rate of change Year over Year inflation peaked. This would put the current asset recession over in Septemberish of last year. Growth is slowing and there are still headwinds but it is increasingly likely that the bottoms for the asset recession have been put in. This next correction will likely pull that portfolio aggressively into the markets again.
One Month Risk Calculation – Risk Increasing
TLT (Bonds)
When inflation is falling fast it gives us a fantastic opportunity to buy bonds. We are on the backside of the inflation spike and the backend of the yield curve is stabilizing. Then let's add that the belly of the yield curve is also pulling back. This is the classic collapse stage and signals the very end of the bear market. One last hurrah for bonds then back into another inflation spike.
One Month Risk Calculation – Risk Decreasing
GLD (Consumer Goods Inflation)
Gold has been our best asset year to date. We have used it many times during this bear market and will likely continue to in the collapse stage. We are very close to the end of this bear market and gold has its best days during this stage. Soon we will shift out of it and back into growth assets. That time will likely be in the coming months.
One Month Risk Calculation – Risk Unchanged
UUP (US Dollar Relative Deflation)
The dollar gets crushed at the end of an inflationary recession. People that focus on the dollar strengthening during a crash will be in for a surprise. UUP is currently off the menu. Still, it is our least volatile asset so de-risking with UUP is likely in volatility events.
One Month Risk Calculation – Risk Increasing
IWM (Small Caps)
Small caps are in a precarious spot. Small caps are the most sensitive to US growth. IWM near its lows confirms what we have been saying for quite some time. The US is slowing down and will continue to over the coming months even more. The recession is nearly over for Small caps but we need to have more patience in this one.
One Month Risk Calculation – Risk Increasing
EEM (Emerging Markets/ Relative Inflation)
EEM will be our bread and butter over the next bull market. The common narrative will be the death of the dollar as the Fed backs off. When the dollar goes down, emerging markets prevail.
One Month Risk Calculation – Risk Decreasing
Drivers for Current Portfolio Allocation
Overall, we have the end of the recession in sight. Unlike the recession of 2008,2000,2020, this one is an inflationary recession rather than a deflationary one. This means that the collapse stage will act differently, and the capitulation stage happens earlier.
Every recession plays out a little differently but follows the same recipe. This recipe is that of the 1970 recession. Not as deep but it started the boom-bust inflation cycle that plagued the US for the next decade and a half. We will need genuine growth to come out of this one and growth. Growth is coming back at the end of 2023 but will be mild. Inflation will likely remain near 4% and the Fed will tighten into the next bull market capping returns. This is what happened in the 71-72 bull market.
May you ADAPT to markets and Sleep Well,
SWP Team
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