Drawdown Clowns

Estimated read time: 3 minutes and 27 seconds

In this week’s market recap email

1. Market recap

2. Skills/methods I used this week

3. What's in and what's out of my portfolio

What Happened This Week

YTD returns:

• S&P 500: -22.51%

• Nasdaq: -30.53%

• Russell 2000: -25.32%

• Top holding position US Dollar ($UUP): +18.24%

On Wednesday the FOMC announced that they are hiking rates by 75 bps in a continued effort to fight the battle against inflation.

As we've said before in previous posts, raising interest rates amidst a slowing economy is a recipe for disaster. Unfortunately, the Fed has 'no choice' but to continue raising rates until inflation (currently ~8%) reaches their beloved "target" of 2%.

Thanks, Janet.

So not only is the economy going to continue to slow, sequentially, over the next few quarters, the Fed is going to be hiking rates along side of that for...all of 2023??

You've seen what their hikes have done recently to the market (puke).

Most 'economists' considered these hikes already priced in (wrong). Are all of the upcoming hikes priced in? Is this the bottom? 

Go ahead, pick bottoms - but let this next section put into perspective how difficult it might be to recover your losses.

Teaching Moment

What if I told you that the key to investing is NOT making money?

But rather, the key to investing is avoiding drawdowns?

Let's take a look at some of the larger drawdowns in recent history for the S&P 500 and understand how positioning incorrectly ahead of drawdowns can leave a bruise in your portfolio:

1973-1974: S&P 500 return = -47.09%

To get back to breakeven (i.e. the start of 1973) your portfolio would have to return +89%

It's math, stay with me here - you have $100 and lose 47.09%, or $47.09. Your balance is now $52.91 - to get back to $100 you would need a return of +89%

$52.91 x 89% = $47.09 in return --> add your returns back to the initial balance ($52.91 + $47.09) and you have your original balance of $100. Easy, right?

In this scenario, assuming you invested a lump sum into the S&P 500 and never touched it, it would have taken you until the year 1983 (10 years later!) to get back to breakeven.

An investment in the year 2000 with the Dot com bubble + financial crisis of 2008 would have taken until 2013 (13 years later!) to recover those losses. 

And how about more recently in 2022? The S&P 500 is currently down about -22.51%

You would need a return of +29% to breakeven.

In the history of the S&P 500 (95 years) that has only happened 10 times; more specifically, only ONE time since 2000 (29.6% in 2013).

Yes, I know what you're probably thinking - "If I keep investing money each year my average cost goes down"

Thanks Copernicus, I also took Finance 301 in college. While I do not disagree with that concept, I can't shy away from the difficulty of recouping MASSIVE drawdowns.

Simply put, the S&P 500 isn't built for massive returns - understand when it's the right time to add to a market and the right time to back off. Losing your hard earned capital is never a fun investment. 

I think it's pretty clear what our stance is, and if it's not clear, tattoo the entire first section to your forehead. 

In The Account | my top holdings 

1. $UUP - US DOLLAR

   1. This one is actually comical. Too easy.

On The Radar | positions I want to build / sizing up

1. NONE

   1. With the VIX hovering right around 30 there is no security in the entire world that's screaming buy

   2. When VIX >30, volatility is too high to expect a return in stonks

Off The Grid | removed positions / short selling opportunities

Short selling has been like shooting fish in a barrel, so when we get a bounce in these sectors I am going back in. For now, I'm respectfully booking gains after a blood bath of a week.

1. TECH - $XLK, $QQQ

2. FINANCIALS - $XLF, $KRE

3. BASIC MATERIALS - $XLB

4. RETAIL - $XRT

5. HIGH BETA - $SPHB

6. UTILITIES - $XLU

   1. No, not shorting Utilities. But removing this position with the 10yr still rocketing higher and VIX trying to break north of 30.

   2. This position, along with Gold, are "safe" bets that I like in the macro setup ahead, but the signal is telling me to stop myself out because it has a chance to continue heading lower.

Until next week....

-BW

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.