If you're anything like me, you spent your time between 2:30 and 3:30 p.m. on the stationary bike Wednesday listing to the Fed Chair's press conference after the quarter-percentage point hike announcement. Some things I thought were interesting in the event included the guy from CNBC asking (telling?) Chairman Jerome Powell that his "understanding of the inflation dynamic may be wrong."
Also, there was Powell stating that overshooting the optimum rate target and dialing back is preferable to missing the target altogether, and the Fed chair stating that, "This is not a standard business cycle."
The phrase "this time is different" is mostly used by investors and traders who are going through their first business cycle. The comment in turn usually elicits a raised eyebrow, a smirk, and a quietly uttered, "Sure it is" from seasoned veterans.
Still, Powell's lead-up to that statement is somewhat justified, as he is right in that we can't "look back at the last 10 times there was a global pandemic, and we shut the economy down. ..." So, given the Fed's view that inflation is going to be stubbornly persistent (a statement for which history provides some support) and the market's near insistence that inflation will cool much more rapidly than anticipated, what kind of positioning should investors be thinking about?
Extended January Rally?
January saw a number of product groups come off life support. Crypto, fintech, and even the most buzzwordy buzzword of the past few years, "Innovation Investing." In fact, looking through a list of the top 50 non-levered year-to-date performing exchange-traded funds, there are a lot of names that just a month ago were raised up as examples of an industry run amuck. The Roundhill MEME ETF (MEME) , SoFi Web3 ETF (TWEB) , The Meet Kevin Pricing Power ETF (PP) , Proshares Metaverse ETF (VERS) , and not one, but three of Ark Invest's lineup, with all of these funds gaining over 20% in January alone. In fact, it's not until you get to fund No. 91, the Renaissance IPO ETF (IPO) that you start seeing sub 20% returns.
The point here is that considering that you have a Fed that has come out and said that they essentially don't have any issue with causing a recession, because it has "the tools that would work on that," I would think that investors would be gearing up for the kind of pain Powell promised last fall. Still, making hay while the sun shines is how you get more hay, so I guess I can't blame folks for piling on.
Wrap it Up
If you feel that these types of strategies are going to continue to defy gravity, let alone reason, then by all means, get on board. The only thing I ask is that you backstop your position by either setting up a standing stop loss order or buying some puts in the funds. I recommend the puts if only because that stop-loss order only sets the price at which your trade hits the books. If a name is truly in free fall, your trade might get executed at some price far away from what you want. You could use a stop-limit order, but again if that knife is falling fast it might break through your limit before your order has a chance to execute and you're stuck with a position with more embedded losses than you care for. Hedging a position with puts means you don't have to worry about what gets executed when. Further, if the name does head-fake and bounce back up, the hedged position still keeps you in the game.
For those who are saying, yeah, but what if I don't get to exercise my put and I end up wasting the money I spent on it? I will ask you what I've asked rooms full of folks for years, which is, "who here is angry that their life insurance policies haven't yet paid them back for all the premiums they've paid over the years?"
