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.
After a strong 1Q, April brought back volatility that was reminiscent of the volatility that dominated much of 2022. However, the volatility was not evenly distributed with significant dispersion across individual names and sectors, especially as earnings seasons gets under way. While many names performed poorly, the S&P500 was up. There appears to be flight to mega caps as uncertainty continues to dominate. This is a bit unfortunate since the Paper Portfolio has low exposure to mega caps, a headwind that continues to drag and limit our ability to close the gap with the index.
For the month of April, the Paper Portfolio performed poorly as it reversed some of the gains experienced in 1Q. The Paper Portfolio returned -10.4% vs +1.6% for the SPY. This brings YTD performance to +13.3% vs +9.1%, respectively.
Capital Flywheels was hoping for a relatively benign April ahead of a much more unpredictable May / June / July period.
This upcoming week will see the May Fed decision. Capital Flywheels is fairly confident that there will be a 25bps hike and then guidance for pause in hikes, though there is presumably some risk that the Fed could continue to ignore percolating risks in the economy (e.g. bank runs, asset devaluations, etc) against inflation that remains visibly too high. An end to rate hakes would finally limit the key headwind that has capped long duration assets of all kinds – bonds, equities, property, etc.
Beyond the Fed decision, though, these next few weeks / months brings a lot more uncertainty around the US debt ceiling amidst continued elevated uncertainty in geopolitics. While the debt ceiling is very likely to be eventually raised, the politics around the debt ceiling is neither rational nor economic. For whatever reason, the US political realm seems determined to go down a path that is very likely both unenjoyable and unproductive. Currently, the US government seems determined to breach the debt ceiling if even for just a day because enough politicians think that by holding the government finances hostage, they can drive a hard bargain for changes elsewhere.
These last 12 months have shown us how much asset values can change when interest rates go from 0% to 5%. These last 12 months have shown us how much asset values can change when the price of money changes.
However, breaching the debt ceiling is a wholly different consideration – Rather than having to consider changes in the price of money, now people will have to consider whether they will be getting their money back.
There will be moments in the next few weeks and months where Treasury holders will start to wonder if they will get their money back.
Right now it’s probably more of a question of when they will get their money back.
But, still…seems like a reasonable question the US government should be working hard to avoid.
I don’t have high conviction about how markets will evolve over the next few months, but hopefully the US government does the sane thing. Beyond that, hopefully data continues to support a gradual glide path for inflation, while the economy slowly taps mild recession.
Turning to the Paper Portfolio, the bulk of the portfolio performed poorly as high valuation / long duration stocks sagged. A number of names also unfortunately missed earnings expectations.
Some highlights:
On the positive side…
Schrödinger increased 12.1% in April. Schrödinger recently hosted investors / analysts for a Platform deep dive that continues to illustrate the power and potential of the platform. In addition, Schrödinger investee, Morphic, recently announced positive clinical trial data, which helped support a strong run for Morphic stock (+26% in April). The drug in question was developed using Schrodinger’s platform, and Schrödinger currently owns ~2% stake in Morphic (~$2 billion market cap).
On the negative side (unfortunately many)…
Cloudflare declined 23.7% in April with the bulk of that decline coming within the last day of the month after missing earnings. The company had to lower full year revenue guidance from +37% to +31% after seeing a significant slowdown in deal timelines after SVB bank run. This is very unlikely to be a permanent issue, but it may take a few months / quarters to work through the banking disruptions that are gripping certain parts of tech / California.
Pinterest declined 15.7% after reporting results. Interestingly, Pinterest didn’t really miss expectations but did not provide much upside to expectations either. The results were quite encouraging with users now solidly returning to growth (+MSD%), while the company continues to deliver solid revenue growth of +MSD%. That may not sound like a lot, but it puts Pinterest at the top amongst peers with Google and Meta growing only ~3% and Snap delivering -MSD%. The company also struck a potentially very promising partnership with Amazon Ads with more potential advertising partners to come.
Snap declined 22.3% after reporting disappointing results. While other advertising platforms appear to be recovering, Snap continues to struggle as they face the double impact of a weak operating environment (ATT changes, macro deterioration) as well as some self-inflicted damage they try to evolve their advertising tech.
As we enter into May and ahead of a likely bruising debt ceiling battle, I think it makes sense to take a more conservative stance.
Let’s see what May brings.
Disclosures: Of the stocks mentioned, I own shares in NET, PINS, SE, KIND, MRNA, U, UBER, OKTA, SDGR, SNAP. I have no intention to transact in any shares mentioned in the next 48 hours.