This is Part 1 of 4 in a mini-series that begins to lay out and explain the structure of how I’m building my portfolio in 2022. In case you missed the Introduction to this series, I’ve linked out the original post below - give it a glance if you haven’t already.
Let’s take a step back and begin to talk through what we do (and do not) know about the stock market and the underlying economy that steers it higher or lower.
This has been an especially hot topic year-to-date, as the newest Consumer Price Index (CPI) data alludes to a +6.8% increase in prices .. the highest year-over-year increase in 39 years.
Central banks pursue an expansionary policy to stimulate an economic in a recession - something we experienced in 2020. By expanding the money supply faster than usual, the Federal Reserve was able to kick-start the COVID-stricken US economy. This led to a sharp jump in employment - and an inevitable explosion of inflation.
Continued stimulation of an economy with “easy money” once a recession is over can lead to out-of-control inflation, monetary policy-driven asset price bubbles, and a generally overheated economy.
It’s essential and destined that the Federal Reserve will halt their stimulation, and instead begin the “tapering” process - likely to cause sharp drops in equity markets and notable rises in government bond yields.
Record Job Openings:
Over 11 million - that’s the current number of job openings in the US. This figure continues to significantly outpace the number of available workers, with a crippling five million more open positions than people seeking to work. With individuals quitting their jobs at a record pace and more positions becoming available by the week, there’s essentially two unemployed workers per three job openings.
“That’s the lowest ratio of unemployed people to job openings we’ve ever seen and that is contributing to unprecedented tightness in the labor market,” noted Julia Pollak, chief economist for ZipRecruiter.
US companies are “open for business” across the board at a historic rate, yet the number of unemployed people still sits at nearly 7 million.
In October, the number of total separations was nearly 6 million individuals. While there’s plenty of ways to spin this data to show the changes in industry compositions or note that some individuals changed jobs multiple times in one year, there’s one thing that’s certain - this slows the flow of the American economy and inevitably is accompanied by months-long growing pains.
‘Total separations’ includes quits, layoffs & discharges, and other separations. Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs.
Currently, the world seems to be filled with significant unrest and uncertainty. We continue to hit road bumps as the inevitable subsequent COVID variants fill news story. Most currencies throughout the world are experiencing significant inflationary pressures. Russia might invade Ukraine. China might invade Taiwan. There is a full-blown humanitarian crisis in Taliban-run Afghanistan. The U.A.E might pull out of a $23 billion aircraft deal with the US over Chinese espionage requirements. Both North Korea and China have been testing hypersonic missiles and are expanding their arsenals to become the most powerful in the world. The list goes on and on.
My point here is not fear - there’s always horrible stuff going on the world. My point is that, as investors, we cannot afford to ignore foreign affairs and the general unrest of the world…especially during fragile times in the market.
Introducing the Mega-Caps:
With all of this in mind, I plan to have ~50% of my portfolio invested among about a dozen companies that have multi-decade long track records of delivering value to their shareholders. I’ve listed them below, along with my rationale and their respective weightings.