Cogito

Investing in the Second Half of 2018

Posted in finance, investing by qmarks on July 8, 2018

What a ride this has been!

Since 2008 when we started the high liquidity low optimism period, the market bulls proven to be right for every bearish opportunity, just name any: Brexit, Greek debt crisis, plunge in oil prices… Even the investor bet for Dow to reach 25,000 in one year was too pessimistic, it surpassed 26,000!

But then the October 2017 came; Fed is dimming the lights on bond buying party and musical chair game begins. Some will win, some will lose. And some are born to sing the blues!

Trump’s tax cut was a good shot in the arm of the market earlier this year. Companies either distributed or bought back the shares through cash generated by tax cuts. But decreasing unemployment and increasing oil price (surging above $75) will trigger inflationary pressures and Fed may increase rates four times instead of three. Nevertheless the shape of the yield curve which is almost inverted is another concern for the officials deciding on rate hikes.

The second half of this year will be bumpy as shown by elevated VIX levels. Tech stocks are still in favour. Financials to be the next but the shape of yield curve is impacting the carry trade; banks are having hard time to borrow short term and lending longer duration because liabilities will reprice faster than assets or loans in a rising rate environment, pressuring net interest margins. Utilities and pipelines are out thanks to tax cuts and FERC decisions, respectively. REITs are not in favour because mortgage rates will shrink the Funds from Operations because of increasing interest costs.

So what’s left?

Not emerging markets for sure! Trade skirmish or some call it yo-yo is here to stay.

Energy and consumer discretionary. The rise of these two sectors returns will continue in the second half reflecting the expansionary period of business cycle. Once these sector valuations peak, it will be the time to switch safe heavens when they are cheap.

For now TQQQ the 3x leveraged NASDAQ index is my favourite but I’ll be quick to sell when it drops about %10 from its high. For energy, iShares IEO or State Street’s XLE are my choices. For discretionary, I’m picky on the stock level such as Netflix and Amazon.

As always, be business minded when it comes to investing. Your risk appetite should reflect your investment horizon.

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