October 16, 2023
40% Off Rack
I went shopping at our local outdoor store this weekend. They were having their big pre-Winter sale. I found something very special on the 40% off rack that felt like foreshadowing and opportunity all at once.
Socks
Yes, I found these on the 40% off rack and wow was I excited. The shop had racks and racks of expensive socks for sale but here in a small basket, I found these Darn Tough , good American socks at 40% off. No other styles, no other brands, no other colors, just Darn Tough American socks at 40% off. This of course was no accident; it was a sign.
I had to wonder, does the shop hate America? Was there something wrong with these or maybe people just don’t like the look? Darn Tough is my favorite brand of sock. They are made in Vermont with a LIFETIME guarantee, no questions asked. I have never returned a pair because they last forever, made of high-quality Merino wool and just the right thickness. Full retail is $23 for a single pair of these gems, and I was thrilled to get them for $13.80. As I walked proudly through the weight room this morning, the compliments and my patriotic pride grew.
But my socks also made me think about market opportunities.
What else can I buy for 40% off in the financial markets?
Turn Fear Into Opportunity
Last week, I talked about the Change of Seasons that is clearly occurring in the markets across all asset classes. We are shifting into a stagflationary environment. On Friday, Gold, Silver, Commodities and Energy had one of their best single day performances in several years. This of course reflects the sticky inflation that we all know and feel. At the same time, on the same day, bonds of all types outperformed stocks which reflects the growing weakness in the economy. How strange that inflationary and recessionary asset classes could rise together…. unless you begin to see, understand and respect the reality that we are entering a stagflationary environment. Then it all makes sense. Keen market watchers and asset allocators have seen the inflationary sectors outperforming dramatically since last 2021. But now they are laser focused on the bond market to confirm that the US economy is indeed slipping into recession as it prices in the lagging effects of the Fed’s 11 rate hikes. If history repeats, we should see bonds find a bottom here and provide some much-needed portfolio ballast against your value, dividend, and high free cash flow stock portfolio (right?). Bonds are still a trade, but this would be the logical place and time for bonds to rise in price and to see interest rates fall to some degree. Our allocations to bonds are small and temporary but they do deserve a place at the table now.
When I look across the landscape of stocks as potential investments, I see a bifurcated market. I see a few overbought and overvalued sectors like technology bubbling around the highs but struggling to move higher now. I don’t really find anything attractive about any of the broad market indices like the S&P 500, but we’ll still hang on for easy market exposure while the trend is our friend. Frankly, the vast majority of stocks in the markets today have been in a steep and destructive bear market since late 2021. As we know, 7 stocks called the Magnificent 7, have held things together in select indices in 2023 but really masked the on-going bear market occurring in the other 493 stocks (in the S&P 500).
But looky here!
The 40% off rack is now filling up! 40% off is a huge discount for anything really. At the same time, one could argue that anything on the 40% rack is undesirable, broken, or odd in some way. But today, I looked through the 40% (or more) market rack to see what I could find. Junk is junk but I was looking for sectors, individual companies, countries, and asset classes that have been good to investors over the decades. I was looking for long term quality in the bargain bin right next to my good American socks! Here’s what I found that is now priced 40% or more below the highs in 2021.
- Telecom companies like Verizon, 8.48% and AT&T , 7.34% – dividends anyone?
- Dows stocks like 3M (MMM), Boeing (BA) and Disney (DIS)
- Mega theme sectors like clean energy (ICLN, TAN) and Biotech (XBI)
- Oversold banks (KRE, KBE, BAC and C)
- Mortgage and equity REITS paying 8-11% dividends
- The retail sector (XRT)
- China and Chinese Technology (MCHI and KWEB)
- Silver Miners (SIL, SLVP)
- Long term US Treasury bonds
I know, I know this doesn’t feel like the stuff you want to bring home now but of course, these are the very things that deserve our attention, especially when they turn higher! This is some off-season shopping, like buying a pair of skis in August. Regardless, this is not investment advice and please do NOT run out and buy these today. I am simply pointing to the hard facts that there are more and more attractive opportunities showing up on the 40% off rack. This is not a leadership group by any means but when something is on the 40% rack, we know a few things.
First, we know that most, if not all, knowable risks in these sectors, countries, stocks, have already been priced in to a large degree. Do you remember the movie, “The World According to Garp” with Robin Williams? Williams is meeting with a realtor to look at a house to buy and a small plane crashes into the home at that very moment. He gets up off the ground and says, “I’ll take it. This house will never be hit by a plane again!”
Second, we know that good companies like Disney, Boeing, even 3M are staples in our economy. They are not going away, and they generate $Billions in annual earnings and revenue every year. This is the domain of Buffett who tends to buy big established cash cows selling at deeply depressed prices. In fact, I think I will encourage my kids to consider these names and others for their Roth IRAs now with their 30-year goggles firmly in place.
Finally, on this rack, I see a lot of passive income that is higher than inflation (telecom and REITS) and I see quite a few sectors that are non-correlated to US stocks or bonds. These are things like clean energy, Silver, China and biotech. Remember, during periods like this, we want to force ourselves to look for opportunities outside of your basic US stock and bond index ETF options.
Young Investors Get Ready
Bear markets are deceptive and serve one purpose. That purpose is to create long-term value by eventually forcing as many investors as possible to sell out at the lows in fear and capitulation. Personally, I have been through two of the most devasting bear markets in history outside of the Great Depression. They are rough to say it plainly. What we have seen since 2018 are a series of three mini bear markets in stocks (20-26%) and a very significant full and complete bear market in long term US Treasury bonds (now down 50% from the high in 2020). What we did not see at the most recent lows in October of 2022 was the type of indiscriminate selling and capitulation that typically accompanies the end of a bear market. Consequently, the potential for a wash out below 3500 on the S&P 500 is still very real to complete this bear market cycle and set the stage for a new multi-year bull market. But young investors should look at this market as an incredible gift. How lucky are you to potentially buy stocks, or even the stock market as a whole at 40-50% off? Anyone in their thirty’s or younger has been living in a world where opportunities have been squandered by older generations who vote entitlements, make laws and set policies favoring the old and wealthy. We collectively have handed our younger generation a land of unaffordability, in housing, food, transportation, education, energy, travel and leisure. If history repeats, young investors will have some incredible opportunities to buy long term investments at deeply discounted prices. I’m starting to see those opportunities develop now thankfully. Is it too much to ask to offer them a viable future?
Find opportunity in fear and buy Darn Tough America (socks) at 40% off.
Have a great week.
Sam Jones
