As always, this is not investment advice! Please do your own due diligence and take your own financial situation into account. Everyone has a different financial situation, which means different tolerances for risk and ability to take risk. What is appropriate for me may not be appropriate for you.
October was a relatively stable month for the Paper Portfolio. The Paper Portfolio returned 1.74%. However, this pales in comparison to the SPY, which returned 8.13% in October. The YTD performance for the Paper Portfolio remains dismal at -53.35% vs -17.75% for the SPY.
The strength in the SPY in October is particularly interesting since many of the largest components of the index had a fairly challenging month. This includes -9.3% for Amazon, -31.3% for Meta, and -1.6% for Google. However, the single largest component of the index, Apple, performed remarkably well at +11.0%. Until very recently, the largest components in the index held up quite well even though many smaller market cap businesses shrank in excess of 50%. Now many of the largest components are also facing significant weakness as fundamentals deteriorate, except Apple. Apple remains remarkably resilient for now.
October was an eventful month, especially geopolitically. China’s Party Congress confirmed (what many had already suspected) Xi’s significant control over the Chinese government. And it is becoming increasingly clear that national security is the central driving force in Chinese policy. At the same time, the US revealed strict new measures to contain China’s semiconductor advancement. These new measures are a significant escalation as it bars US persons from assisting China in achieving self-sufficiency in advanced semiconductors. Now, restrictions span equipment, hardware, software, finished semiconductors, and people. On the other side of the world, the situation in Europe remains tense as Russia ramps up the brutality of their attacks even as winter begins to set in. Domestically, US midterm elections are also underway, which increases uncertainty around US policies.
It may not be possible to know where the world’s geopolitical roads lead to, but the general direction is not favorable.
Nonetheless, even against this backdrop, there is likely a compelling long-term opportunity for stocks. Similar to the May / June period, many stocks are back to very compelling levels. We cannot know ahead of time when the market will turn, but current prices seem to suggest at least spending a moment to savor that temptation.
In terms of individual stock performance, a couple of highlights:
1/ NVDA returned 11.2% with particular strength following Meta’s earnings. Meta is investing heavily in AI, which means more demand for Nvidia datacenter products.
2/ MRNA returned 27.1%. Moderna benefited from reports that Pfizer is considering commercial pricing of >$100 for Covid-19 vaccines (vs current “special” pricing of ~$20 for the government). If prices for Covid vaccines expand, it would go a long way to offset concerns of declining volumes in 2023 and beyond. In addition, Merck exercised its option to jointly develop and commercialize Moderna’s personalized cancer vaccine. Merck is exercising this option ahead of data readout, which likely signals Merck’s confidence in the personalized cancer vaccine.
3/ ASML returned 13.7%. ASML reported very strong earnings, despite pressures on the semiconductor industry. Despite a number of customers announcing capex reductions, ASML continues to see record business and demand.
4/ SE returned -11.4%. Sea has likely been negatively impacted by recent poor performance in Chinese capital markets. Sea has shown high correlation with Chinese markets in recent quarters. In addition, certain data points suggest the gaming and e-commerce business continue to face pressure.
5/ TSM returned -10.2%. TSM is negatively impacted by weakness in certain semiconductor end markets such as consumer electronics. Geopolitics is also likely having a negative impact given the rising risks looming over Taiwan.
6/ PINS and SNAP both offered interesting windows into the advertising space. SNAP was the first to report, and the stock cratered almost 30% as revenue growth weakened into the single digits. However, SNAP recovered almost all of the post-result losses by the end of the month as it became clear that peers were also struggling. For example, Google search grew about as fast as Snap, while Youtube shrank. Meta was also similarly challenged. PINS reported surprisingly good results compared to peers. This environment has been nothing short of unpredictable, and the advertising space seems to have turned upside down with unexpected outcomes across the board.
Almost done with 2022.
Disclosures: Of the stocks mentioned, I own shares in NET, PINS, SE, KIND, MRNA, UBER, SNAP, U, SDGR, OKTA, AYX. I may transact in shares mentioned in the next 48 hours.