By Barbara Kollmeyer
Closing the door on a brutal August, investors are stepping into the worst calendar month of the year , and maybe pining for October, which, it should be noted, has had its share of historical pitfalls .
As if everyone isn’t tense enough, bubble expert Jeremy Grantham is warning that we’re in the last throes of a superbubble that’s about to burst . (In fairness, he’s been crash calling for roughly a decade.)
Still, if the big one is out there, it helps to be prepared. Our call of the day comes from Real Investment Advice portfolio manager Michael Lebowitz, who thinks we still may be early in that bear market. He offers up a simple bear market wealth strategy, as buy and hold won’t work in a sticky inflation environment.
He explains in a blog post how RIA repositioned clients’ portfolios to brace for a bear market at the start of this year.
“Sensing the Fed was about to pull the liquidity rug from the markets, we started reducing our risk starting on the first trading day of 2022. Not only did we sell shares to reduce our gross equity exposure, but we rotated from higher-beta growth stocks to lower-beta value stocks,” said Lebowitz.
It cut the percentage allocated to stocks and the types of stocks held, which he said has helped RIA portfolios outperform their benchmarks and all primary stock indexes to date in 2022. He provides a chart showing this strategy’s benefits during the Great Financial Crisis.
As he explains, $10,000 was invested in two scenarios in 2004. The buy-and-hold Scenario A was fully invested at all times, while B is the same except during the 2008 bear market — when it went to 50% in the S&P 500, the rest in cash earning 0%. Dividends were reinvested for both.
Scenario B came out stronger because equity exposure was cut in half for two years, said the adviser. This strategy helped his portfolio came out 41% stronger in that period, while similar action in 2020 and 2022 would have meant even better returns, he said.
In follow-up comments to MarketWatch, Lebowitz said RIA cut exposure in terms of allocation and shifted toward lower-beta (less volatile) value stocks at the start of 2022. “We will likely maintain a smaller-than-normal equity allocation until it appears the Fed is truly going to pivot,” he said.
“We gravitated away from tech toward utilities and healthcare, for instance. We also kept our inflation hedge/exposure up with energy and some materials companies,” he said. Some of his holdings include NextEra Energy /zigman2/quotes/200558509/composite NEE +0.05% , Duke Energy /zigman2/quotes/201480230/composite DUK 0.0000% , AbbVie /zigman2/quotes/202428675/composite ABBV +0.08% , Abbott Labs /zigman2/quotes/203724446/composite ABT -2.34% , CVS Health /zigman2/quotes/209664499/composite CVS -0.47% , Albemarle /zigman2/quotes/200578017/composite ALB -6.05% , Exxon Mobil /zigman2/quotes/204455864/composite XOM -3.04% and Devon Energy /zigman2/quotes/209479244/composite DVN -2.95% .
“Lower beta and less exposure has been a big winner thus far,” he said, noting his portfolio was beating its benchmark by 5% by the time the market peaked two weeks ago. He also outpoints value outperforming growth, noting a 9% drop in the iShares S&P 500 Value ETF /zigman2/quotes/206097129/composite IVE -1.68% versus a 22% drop in the iShares S&P 500 Growth ETF /zigman2/quotes/208542267/composite IVW -2.03% so far this year.
Lebowitz believes markets are facing liquidity headwinds as the Fed shrinks its balance sheet and focuses more on sticky inflation than the economy.
“This Fed is tasked with a far different task than the Fed we are used to,” said Lebowitz, who worries investors haven’t grasped that. “What concerns me is that this time it’s different.”
Chip makers are dragging stocks /zigman2/quotes/210598065/realtime DJIA -1.41% /zigman2/quotes/210599714/realtime SPX -1.83% south , with Nasdaq /zigman2/quotes/210598365/realtime COMP -2.04% losses out in front. Bonds /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y +2.41% /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +3.19% are again selling off, oil /zigman2/quotes/211629951/delayed CL.1 -3.38% and gold /zigman2/quotes/210034565/delayed GC00 -1.63% are down and the dollar /zigman2/quotes/210598269/delayed DXY +0.78% is climbing. Bitcoin /zigman2/quotes/31322028/realtime BTCUSD -1.04% is just under $20,000.
Tesla /zigman2/quotes/203558040/lastsale TSLA -6.73% is down on shaky demand for China EV makers like Li Auto /zigman2/quotes/219811686/composite LI -2.28% . Meanwhile,, a COVID-19 lockdown is hitting 21 million residents of China tech and auto hub Chengdu .