After an incredible first 6-7 months of 2023, stocks were at a “historic tide” after surging 19% in the face of stubborn headwinds. In fact, this is how we ended last quarter’s report when the stock market was surging, and many investors were euphoric:
“Either way, a good portion of 2023’s gains have already factored in many of the positives. The third quarter has generally been the worst quarter, and that trend is likely to continue for 2023. As investors get more positive here, it is best to go against the consensus.” July 3, 2023
This proved to be the case for not only stocks but bonds as well, particularly long-term (which we have been especially negative on), as stocks plunged in the 3rd quarter and bonds followed up huge losses in 2022 with significant declines.
Just as important, when valuations were low after a disastrous 2022 in stocks, we saw many good opportunities in select stocks. After a few months of trading range type market, certain stocks did reward investors much quicker than we expected. Here is what we wrote going into 2023 after so many investors lost money in 2022:
“Even with a significant markdown in stock valuations, we still see many challenges, along with only very select opportunities currently, heading into 2023. Investors should expect a challenging environment with many areas that still need to be avoided, likely making passive allocated investing and 60:40 investors still somewhat disappointed.” January 4, 2023
The first few days of the 4th quarter remind us of 2022’s fourth quarter. We were defensive going into the final quarter one year ago, and accumulated bargains into the weakness. The same strategy should be applied with the first few days of the fourth quarter continuing to experience massive selling pressure. It is during these times of extremes when a contrarian view makes sense. As valuations, particularly in many of the favorite tech stocks, were high on the allure of AI in July, select other stocks are approaching accumulation territory into this significant pullback.
Nobody really knows how far down valuations will go, but having cash available to gradually and selectively buy in this environment is important. As the 4th quarter ended last year, we had not expected to buy Tesla under $110 or Uber back in the mid-twenties, but volatility can provide opportunities.
When investors experience such extreme and sudden swings in valuations, sometimes a more contrarian approach provides the best result for the patient investor. We stated last quarter to not chase stocks and get more defensive into the surge in values, today we would be more in selective buying mode as valuations plunge and the average investor bails out.