On Monday we published our quarterly update to SWS Growth Equity, our in-house actively managed equity strategy designed to exploit market inefficiencies over multi-year periods. For investors with higher risk tolerances and longer time horizons, Growth Equity takes a more concentrated approach with its 36 portfolio positions, in contrast to our asset allocation strategies that utilize diversified passively managed ETFs. We provide an excerpt of the analysis below, which also includes our latest diagnosis of the current market backdrop. The full analysis is also available via pdf or audio stream.
Any attempt to make sense of equity market dislocations invariably entails a careful study of historical precedent. Through its lens we attempt to diagnose our plot point and whether that falls on the slope of recovery or decline. The next natural step is an attempt to isolate factors that make our predicament “different this time,” a task even the Fed admits is difficult to pinpoint (hence its “meeting by meeting” approach to rate hikes and the data ingest process that informs their decisions).
For public equity investors, determining the market’s capacity to bear risk is an interplay of art and science; some may also say overlaid with a sixth sense. Here our goal is to diagnose the scenarios embedded into current public equity market price levels. Once you can reasonably conclude that humanity isn’t facing mass extinction, the question quickly becomes, “How forward-looking is the stock market?” Dislocations ultimately transform into opportunities, particularly in the public markets where the fungibility of capital seeks out the highest-returning opportunities. This also happens well before the gears of economic value creation become dislodged; often just the state of conditions getting “less bad” can be a capitulation point.
As we roll up our sleeves to study the latest data that inform our answer to the “how forward-looking” question today, there’s a familiarity with the data-parsing exercise. It’s very reminiscent of the adjustments we had to make while managing long-only capital at the pension during the global financial crisis (“GFC”).
Back then, to make a reasonable stab at determining how cheap “blue chip” stocks could get, any semi-accurate bottom-up analysis had to exclude the crater-sized hole delivered by the entirety of the financial services sector. This near-fatal wound severely hampered the equity markets for a good 24 months via earnings impairments…
Fast forward to today, and we don’t have to nix the earnings contributions of a systemically critical sector in order to determine whether fertile ground exists amidst the scorched earth surrounding us…
Download our entire SWS Growth Equity quarterly update here:
Investment advisory services are offered through SWS Partners, LLC (“SWS”). SWS is an investment adviser registered with the Securities & Exchange Commission. Registration as an investment adviser does not imply any particular level of skill or training. All opinions and views mentioned in this report constitute our judgments of the date of writing and our opinions are subject to change at any time. We will not advise you as to any changes in figures or views found in this report in the future. Investing involves risk of loss and the investment return and principal value of portfolios under our management will fluctuate as the stock and bond markets fluctuate. Past performance is not indicative of future results.