What Is Happening In The Market?

Before I start, I just want to put this picture here. So that I can remember this day as one of my heaviest holding went up 60% in a day! 

Digital Turbine Share Price Gain on 11/11/2022

Nevertheless, this also highlights the current situation in the market. The market is very volatile due to the macro environment. On a day that CPI increase lower than expected, along with a better than expected result, allow Digital Turbine to increase over 50% today.

But a drop of 20% could also happen if companies did not performed better than expected and if the CPI data comes in worse than expected.

This brings me to today's topic - What is really happening in my opinion?

1. Fed Repo Rate, which I deem as Risk Free Rate, is over 4%. Everyone expects Fed to continue to increase interest rate, which will continue to push up the Risk Free Rate. Companies, banks and institutions probably deem that the Risk Premium of holding onto equity might be too risky. Valuation of companies also tends to drop if risk free rate increases. Thus, many institutions and banks are staying on the sideline. 

Fed Repo Rate as of 8 Nov 2022

2. Staying on the sidelines does not meant these funds cannot earn any yield. Institutions and banks can place these funds in the Fed Overnight Reverse Repurchase Agreement to earn that 4%. The below picture show that the amount is over US$2.2 trillion on the sideline. What happens if these funds are allocated to the market?

Fed Overnight Reverse Repurchase Agreements as of 8 Nov 2022

3. During this period, recession talks also pollute the market and liquidity continue to exit the market. This continue to place downward pressure on the share price of various companies. 

4. In the meantime, Funds started their merry-go-round again (remember they went from selling to buying growth to meme companies to NFT since the pandemic) - heavily investing in Value plays, especially defensive stocks. For example,  Coca-Cola, Pepsi, P&G and Kimberly Clark is more expensive than Apple, Microsoft, Google and Meta from a PE perspective currently.

Big Tech and Defensive Companies Ratios as of 11 Nov 2022 (Per Seeking Alpha)

5. At the end of the day, Market continues to over-react to the downside and also the upside. 

So what am I thinking?

Firstly, I do not think we should switch to the defensive plays or value plays. If you start to follow the Funds in the merry-go-round, you will constantly make subpar returns. This is because you will always be later than the funds in entering the "new party".

Secondly, we should continue to DCA into our personal convicted companies cautiously, at least over the next 2 years. Eventually, these good companies will be notice and their depressed share price will rise significantly. However, recession is always a possibility. Thus, our heavy conviction companies must be able to endure through a potential recession. 

Thirdly, I believe we should still have a bit of speculative plays within our portfolio. Many of these companies have been beaten down significantly, and if you choose one with a disruptive business model and improving fundamentals, you may have a chance to obtain excessive gains from these companies in the long run.

Finally, I do believe once you understand the situation, then there is a chance to make "Generational Wealth" during this period.

Summary of Factors affecting the current environment

On a side note, I had a chit chat session with a fellow investor, Boon Tee on 8 Nov 2022 and we also discussed about the above situation on his YouTube Video (You can click on the link to watch the chit chat session).

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