2022 Q3 Portfolio Update, Part 1
The S&P 500 has declined approximately 2%, as I write this, since June 30th. That does not nearly tell the whole story of Q3 2022. During the quarter, there was a ~17.5% (bear market) rally before the current pullback we are in the midst of. Because of that, it sure feels like Q3 has been a hell of a lot worse than a 2% decline.
Heading into Q3 the portfolio was unhedged. That was until early August, near the peak of the intra-quarter rally, when it seemed like a right time to redeploy a short bet against the Nasdaq.
The third leg of these short bets culminated just a couple of days after the Fed’s latest meeting. The put options saw a 700% increase on Fed meeting day.1 This goes to show the ferocity of the market movement stemming from U.S. Federal Reserve chair Jerome Powell’s latest comments and actions.
Coinciding with this ferocious negative price action, it feels like there is a real shift in sentiment. People are angry. Specifically, people are angry at chair Powell.
The Fed chair is something of a referee for the U.S. economy. Just like in sports, when you know the name of a referee, chances are that referee has unfortunately become part of the game.
Without putting it on one person, over the past decade and a half, the Federal Reserve has undoubtedly become a major part of the “game” of investing.
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This past week, after seeing the anger boil over, I started thinking about this market in the context of the Kubler-Ross model a.k.a. the five stages of grief.
If I were to apply this model to the average market participant today, I’d say we are likely in stage 2. More precisely, it looks something like this overlayed on a 2022 S&P 500 chart:
Investor sentiment is an actual real data point. The following table shows the reported sentiment of individual investors on the given date:
| Date | Bearish | Neutral | Bullish | Stage |
| 9/21 | 60.9% | 21.4% | 17.7% | Anger – a new low for 2022 investor sentiment2 |
| 8/10 | 36.7% | 31.2% | 32.2% | Denial – marking the end of a bear market rally |
| 6/15 | 58.3% | 22.2% | 19.4% | Shock – coinciding with the June bottom |
Using this model,3 it seems investors were in denial throughout July and August as we all wondered if the bottom was in.
Now the million dollar question is, during the next phase, does the market breakdown through the prior June 2022 low?4 Or is this next phase going to see more sideways-type price action? While there is no way to know for sure, either way, it seems clear that we are still multiple quarters away from stage 3 and acceptance.5
In addition to the real data above, the anecdotal evidence that we have entered the “anger phase” is abundant.
On September 23rd, Wharton professor Jeremy Siegel was on CNBC. Tell ’em why you mad, Jeremy.
I am very upset. It’s like a pendulum. They were way too easy through 2020 and 2021, and now [impersonating the Fed] ‘we’re going to be real tough guys until we crush the economy.’ I mean, that is just to me absolutely, poor monetary policy would be an understatement.
The prominent Wharton professor, as you can see, was very animated in articulating this point on live television. He came across as legitimately angry.
But the anger is broad-based. For example, if you prefer to count the angry Jerome Powell memes on Twitter, I trust you will come to the same conclusion.
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Looking ahead — keeping an eye on currencies is one piece of the puzzle. Why? The U.S. dollar has risen nearly 20% this year.6
The dollar’s strength may be a key part of the next catalyst lower — (a) the upcoming large U.S. companies’ quarterly earnings reports could suffer due to shrinking profit margins on international sales,7 (b) entities/countries with debt denominated in dollars may find it harder to meet their repayment obligations.8
To put it in a very simple manner; things typically have to get scary for a market to bottom. For me, the March and May bottoms never felt like the actual final 2022 bottom. In June, it finally felt like this could be the one. But here we are testing that bottom.
Seeing a well known Wharton professor getting angry on national television is just the kind of thing that we want to see in seeking that bottom. But these headwinds, as we enter what is the historically treacherous month of October, mean we are likely still on that long road to acceptance.9 If the Kubler-Ross model is to be a good corollary, it has to get worse before it gets better.
Editor’s Note: In part 2 we will do the more typical quarterly review of the top individual stock holdings of the portfolio.