Capitulation and Resurrection

Capitulation and Resurrection

By Jason Prattes

Good news lies in the bad news that Bloomberg published at 4:33 a.m. in New York on Tuesday morning, Oct. 18th: “The sentiment on stocks and global growth among fund managers surveyed by Bank of America Corp. shows full capitulation, opening the way to an equities rally in 2023.”

Capitulation meaning investors have surrendered and let go of any hope for stocks, at least in the near term. On Wall Street, traders talk about maximum pain as the requisite to a sustainable rebound, and the B of A survey “screams macro capitulation, investor capitulation, start of (Fed) policy capitulation,” the bank’s strategists noted.

In the survey, half of the managers said they are skimping on stocks (“underweight equities”), their portfolios have the highest level of cash in 20 years (6.3% of total assets),  83% of them expect global profits to decline next year, and 91% say a 10% profit gain is unlikely.

The survey covered 326 global fund managers with almost a trillion dollars under their watch, and it was taken Oct. 7th to the 13th.

That is the big picture. It is backed up by this small picture: on the morning after the Bloomberg report, a friend of mine, as they say on “The Sopranos,” got a surprise email from Schwab, regarding a $45,000 purchase of Tesla stock made the day before.

He never made the purchase, he knew nothing about the account cited, so, he calls Schwab customer service to inquire. Turns out his 84-year-old mom made the trade in a  separate account; he had mentioned to her that TSLA was down 45% or so this year, despite routing the world’s largest car makers in the new EV race.

At least she was putting her money somewhere other than an annuity.

When an octogenarian great-grandmother casts caution aside and invests in a volatile, futuristic stock, it may be a sign from the universe that some investors already have begun to look past the recent pain and want to invest in the recovery.

Some superstar stocks are down so sharply from their recent highs that, at some point, the plunge may be deeper than the downturn in their business prospects. Here’s a breakdown of the five FAANG stocks from Nov. 15 last year, when all but Apple hit their recent highs, to the close of trading on Thursday, Oct. 27th:

Facebook (META) is down 70% to $98;  

Amazon is down 32% to $111;

Apple is down 20% to $145;

Netflix is down 50% to $296;

Google is down 35% to $93.

Yet Facebook has a reach of almost three billion users. Amazon holds almost a 60% share of all online sales in the U.S.  Apple is… Apple. Netflix has over 200 million customers and is Hollywood. Google holds 87% of the global online search ads, and, with Facebook, holds a combined 50% share of the global online advertising market over all.

A safer way to go is to buy bigger buckets of stocks in S&P 500 sector funds to spread your risk over a greater number of smaller investments. Look for sector dogs, the worst-performing areas among the various business sectors.

Example: the broad S&P 500 is down 20% year-to-date, while the S&P 500 Communications Services sector ETF XLC is down 38% YTD. My pick is a related ETF, XSW at State Street Global Advisors, down 32% year-to-date.I also like the Parnassus Core Equity Fund (PRBLX), down 22%; and the Goldman Sachs ActiveBeta large-cap equity ETF, GSLC, down 21% year-to-date.

Even when you are on a keto diet, you have to add broccoli, spinach, and other veggies to your ribeye steak and lamb chops, and in investing, you should balance your diet of stocks with some portion of bonds. An equal mix of three different bond ETFs serves this purpose well: the Guggenheim Total Return Bond Fund Institutional Class (GIBIX), the Baird Short-Term Bond fund (BSBIX), and the short-term PGIM Short Duration High Yield Income Fund (HYSZX).

Always buy in only gradually, in small bites at a time, and build up without selling as time goes by. As the old saying puts it, there always is a bull market somewhere. #StayStrong

Jason Prattes of Prattes Wealth Partners in Newport Beach, Calif. advises executives, entrepreneurs, and professional athletes.

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