As an investor I feel like I am on a plane that is about to hit some significant turbulence. I can almost hear the pilot coming over the intercom. "Ladies and Gentlemen. Please take your seats and buckle up. We are about to hit some rough air." It seems every day we get another sign that the economy is careening downward.
Yesterday, the Atlanta Fed's GDPNow reduced their projection of third quarter GDP growth to just .5% from 1.4% last week. Their forecast was calling for 2.6% growth to begin this month. The 30-year mortgage rate is also back up to 6% in many regions again as well, hitting an already roughed up housing market.
All of this is happening in front of another at least 75 bps base hike from the Federal Reserve next week. Not that the central bank has much of a choice given the latest CPI rating. We are all paying the price for Chairman Powell not starting to apply the brakes in the second half of last year, believing inflation was 'temporary' and 'transitionary'. Nor is he getting any help from the administration which continues to push through huge new spending packages as prices are surging at levels not seen since the Carter years. The ironically named Inflation Reduction Act and student loan forgiveness just being the latest two examples.
At this point, it is hard to see any scenario other than the Federal Reserve hiking rates until the economy is an economic contraction that not even Karine Jean-Pierre can spin.
After today's option expiration, approximately 25% of my portfolio will be in cash and almost all the rest is held within covered call positions. I am also starting to selectively short individual stocks in the market. If the Fed slams the economy into a recession, I can see another 10% to 20% down leg in equities depending on how deep the contraction will be.
I am doing this by buying just out of money puts on equites I think are significantly overvalued in a recession scenario. That way I contain my downside but still will make plenty of profit should the economic picture I am painting in my head turns out to be correct. Yesterday, I added Apple (AAPL) to that list. The stock sells for just over $150 a share. I bought the January $140 puts for $5.90.
It was recently noted that Apple was the most heavily shorted stock in the market. But that is just because its market cap is so massive and the options market against this equity is very liquid. In reality, a very small percentage of the outstanding float is held short. Maybe more should be.
The stock is selling at 25 times forward earnings even as revenue growth is only expected to be around 7% this fiscal year. Those estimates will come down if Europe and the United States go into recession. The stock also could be hurt by further escalation between China and Taiwan. If equities do selloff over the next few months, I can easily see myself closing out a profitable short trade when the shares get to the $120 level.
And that is how I am playing the current bout of economic and market uncertainty.