Wednesday, May 9, 2018

Outlook for May 2018

One third of 2018 is done and the markets just keep getting more and more interesting by the day. The stock market is rallying hard and billions are added to individual networths (Jeff Bezos) overnight as if the numbers mean nothing. This is the reality that we live in when your cost of capital is zero for a decade. Capital has concentrated to an extremely small segment of the population, who control immense amount of wealth and continues to divide the nation/world more deeply. However, with the yield curve getting close to the 3% mark provides an interesting inflection point as investors watch it closely.
The smarter of the two, bond market, is signaling a coming recession (possibly in 2019), while the equity market keeps shrugging things off. It’s all well and dandy until it isn’t. The central bankers have painted themselves into a corner and will trigger the next economic crisis, as the end of the 30-yr bond bull market nears.

Outlook for May 2018

As I’ve indicated for the last few months on this blog, I am keeping a close eye on the US$. Over the last few months, the US$ has been sliding pretty consistently, although it saw some strength in the last couple of weeks. It is sitting at a crucial point where it might break out to the top of the 200d MA. While the tide may be turning positive for US$, I think this is just a short/medium term move as I expect it to continue its long trend down.

Not surprisingly, the most undervalued asset over the last year — Commodities have done really well YTD. Following chart from Visual Capitalist shows that commodities have blown all other assets out of the water YTD.

Of course, this is great news for me personally as I’ve been overweight commodities in my investment portfolio, especially precious metals. I believe the best is yet to come in the commodities/precious metals sector as the bull market starts ramping up.
My portfolio’s exposure to the Materials sector had crossed the 50% mark earlier this year, and I decided that I had to pull back and start selling some of my positions in order to manage my risk exposure. Even after a few sales over the past 2-3 months, the increased returns keep my portfolio close to 50% mark (see the stock diversification chart below) and I will be looking to taking more profits in coming months, while maintaining an overweight position to the sector.
50% is a line I have drawn in sand that I do not want to cross when it comes to exposure to a single sector of the market. There are still some good finds elsewhere as the market re-prices equities and we go through multiple contraction as the bond yields rise. I will be looking to diversifying my portfolio further in the coming months while maintaining a healthy cash position.

As of Apr-30-2018, our overall portfolio diversification is structured as shown below.

Looking for investment ideas? Check out this Top Investment Picks for 2018, where 35+ bloggers present their top pick and a reason to invest in those securities.
What are your thoughts on the points mentioned above? Do you have any specific thoughts on the markets and looking at anything interesting? Share with a comment below.
Full Disclosure: Our full list of holdings is available here.

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