The S&P 500 pushed higher by 0.6% in trading on Thursday, and with that move the index is now officially up more than 20% from its lows on Oct. 12. But this is one of the strangest bull markets I can remember. Nothing seems to stop this rally despite mounting concerns on myriad fronts, including quickly increasing delinquency rates in commercial real estate mortgages. The deteriorating environment for this sector is starting to gain increasing attention from the media, including big stories in The Atlantic and New York Post this week. I expect this trend to become a major negative theme for the markets in the second half of this year
Famed billionaire and money manager Stanley Druckenmiller was also out this week saying he could see profits dropping 20% to 30% on a year-over-year basis on the S&P 500. Morgan Stanley "only" sees a 16% drop in S&P profits now, but expects a big rebound in 2024.
Equities have managed to ignore what I believe is an increasingly dismal backdrop to this point, albeit breadth has been weak through most of 2023. However, it is my continued belief that the music eventually will stop and markets are likely to have a significant hiccup over the summer. This is why I am in process of adding more of what I call stabilizers to my portfolio. I do this by executing bear market put spreads four to six months out on stocks I think are overvalued and would be vulnerable should the overall market have a decent pull back.
I like to place the top of those put spreads roughly 10% below the current trading levels of the stock and the floor 20% to 25% below. I set these trades up to provide a 400% to 700% return should a tumble in the underlying equity occurred. I call these trades stabilizers as they will help offset losses from my other portfolio holdings should this scenario play out. These are small trades so they will not hurt my portfolio much should the markets continue to defy gravity as my other holdings will benefit in that environment. I look at it as cheap portfolio insurance.
On Thursday I initiated this strategy on both Airbnb Inc. (ABNB) and RH (RH) . If an economic contraction is on the horizon, consumers will grow increasingly cautious about their spending. Guidance from Macy's (M) , Best Buy (BBY) and other retailers this earnings seasons already show this is happening.
Travel and high-end furniture are two items that look more than vulnerable to be cut from the family budget as worries about job losses increase in the second half of this year. The likely reinstatement of student loan payments in the near future also will be a headwind. The average student loan payment, which has been suspended for over three years now, is just under $400 a month.
Both stocks seem stretched on a valuation basis, especially if my scenario plays out. Airbnb is priced at more than 35x forward earnings on projected mid-single-digit revenue growth and RH fetches nearly 30x forward earnings even though revenues are expected to fall in the mid-teens on a percentage basis this fiscal year. Both stocks have seen downward profit estimates in recent weeks and in the case of Airbnb large insider sales in the month of May, which have bled into early June.
