Great Opportunity to Optimize The Portfolio

It’s been another exciting week in the markets! Last Friday, every major sector was down. More importantly, this down move was on an increase in volume!

When we analyze the market, we don’t only look at the surface level of the price; we also consider the volume behind the move. Sometimes, you have moves on lower volume, which indicates that there was not a lot of participation or conviction behind that move.

When something unusual happens, like on Friday, AND it happens at an increased volume, you should start paying attention. 

The move started because a Fed Head discussed the possibility of no rate cuts as inflation is accelerating. In the last two weeks, roughly two interest rate cuts have been removed from the market expectations set by Fed Funds Futures.

As you know, we have been signaling and preparing for this reacceleration in inflation for quite some time now!

Inflation
"Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars worth of groceries. Today, a five-year-old can do it." 
Henry Youngman

 In its mid-November conference call, Walmart predicted food deflation. This was a welcome prospect for customers. However, as predicted, growth and inflation are reaccelerating, causing Walmart to change its food deflation prediction back to inflation.

While consumers have known very well their grocery bill is up 37% since the pandemic, the Fed is starting to catch up.

Earlier this week, Fed Chairman Jerome Powell said:

“Given the strength of the labor market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us.”

Housing plays a significant role in inflation, not only because it’s a large part of our budget. Housing costs also move a lot slower than groceries or clothes, which can keep inflation feeling for a while even when things level out.

This stickiness is partly due to limited housing options and the rising construction cost. When building new homes is expensive, more are needed, pushing existing rents and prices even higher. This can affect the whole economy as people spend more on housing and have less left over for other things. 

Just look at the chart below, which clearly shows the decline in the supply of US housing.

The Portfolio
It’s always a great time on the markets! Either you are making a lot of money with the markets screaming higher, or you have the chance to reposition and optimize your portfolio, which I’m grateful we can do today!

Mixed growth signals and a consistent increase in inflation will characterize 2024. Energy goes up along with inflation regardless of growth. It’s the only true all-weather inflation sector out there. For this reason, we will replace the Technology Sector with the Energy Sector, as the Tech Sector will not be happy with the higher-for-longer dynamic in terms of rates.

Another optimization we execute today is changing our exposure to the Netherlands with exposure to the German economy. I love the Netherlands and am bullish on most European countries. However, if I had the choice like we do today, I would rather have Germany in the portfolio as it’s considered the engine of the European economy.

It is not in the portfolio yet, but on the watchlist are inflationary plays like Copper, Silver, and the US Dollar. I’m still waiting for a better move to buy these.

Let’s get into the positions!

The S&P 500 is up 5% while The Minimalist Portfolio is up 11.67%!

EXIT Technology Sector (XLK) +3.24% YTD
ENTER Energy Sector (XLE) NEW Entry Price: 95.26
As described above, this sector goes up along with inflation regardless of growth. It’s the only true all-weather inflation sector out there. For this reason, we will replace the Technology Sector with the Energy Sector as the Tech Sector will not be happy with the higher for longer dynamic in terms of rates.

US Insurance (IAK) +10.9% YTD
Investing in the insurance sector provides exposure to a stable industry that can withstand a decline in growth while delivering an excellent inflation hedge.

 Healthcare (XLV) +1.9% YTD
This defensive sector is less dependent on economic growth and has proven resilient during market fluctuations. Factors such as aging populations and escalating healthcare requirements worldwide contribute to the sector's promising long-term growth potential. 

WTI OIL +8.28% Since Entry Fri 23 Feb 2024
While the U.S. Government keeps declaring victory on inflation, we’re going to keep buying inflation. The Global Industrial & Manufacturing Cycle bottomed in December of 2023 what remains Bullish for oil. 

Japan (NIKKEI225) +10.8% YTD
Japan has been releasing great economic data and has an accommodative policy. Compared to other developed markets, the Nikkei 225 historically trades at lower valuations, making it appear more attractive to value investors seeking bargains with good expectations for the future.

India (INDA) +5.7% YTD
The difference in real growth between India and the median G20 economy is set to reaccelerate in 2Q24, while India is already the global growth leader through 2024.

Gold +16% YTD
Gold has been solid historically in the given macro environment, especially relative to the S&P500. It’s a true classic for holding up as a haven asset in higher-volatility environments.

Netherlands (EWN) +5.8% YTD EXIT
Germany (DAX) Entry Price: 17744.82
As we are bullish on Europe it’s great to have exposure to what is considered the engine of the continent Germany.

China (SSE) +1.22% Since Entry Fri 8th of March 2024
China has strongly accelerating Cyclical Data. Including China to the portfolio increases upside while also making sure we include global diversification.

Bitcoin (BTC) +52.82% YTD
Bitcoin is always a momentum play that is clearly starting. I’m not a crypto expert nor am I a long-term holder but the when the excitement about another bull market starts it makes more noise and draws more amateur investors in than anything else. This makes it a self-fulfilling prophecy and something we want to participate in.

I hope you enjoyed this edition of The Minimalist Portfolio. I’m grateful you’re here from the start, and I’m looking forward to outperforming you together! 

All the best,
Philippe.