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.
During August, the Paper Portfolio returned -12.39% vs -1.63% for the SPY. This brings YTD returns to 31.28% vs 18.66%, respectively.
Although the index ended only slightly lower than where it started, the final numbers mask meaningful intra-month volatility with stocks selling off throughout most of August before staging a late rebound. The final numbers also mask meaningful divergence between the mega caps (especially, Nvidia) vs everything else.
In contrast to first half of 2023 where markets were carried by the twin narratives of “soft landing” and AI, August saw these themes come under question. Recent inflation data came in more mixed, while growth continues to surprise to the upside. These factors alongside rebound in commodities such as oil and gas likely raise questions about the viability of a soft landing. If inflation refuses to be tamed (because we are all spending too much with limited sensitivity!), then perhaps rates have yet to peak. A casual observation of the US Treasury market seems to suggest this might be the case with treasury yields making new highs in recent weeks.
On the AI front, Nvidia’s recent blowout results continue to prove that AI momentum is alive and strong…despite rapidly rising expectations, perhaps we are still only in the early innings of this AI revolution? But, interestingly enough, judging from Nvidia’s somewhat muted stock reaction relative to the enormous business momentum they are seeing, investors seem to be either having AI fatigue or questioning the sustainability of the unbelievable numbers that are coming through. And, of course, beyond Nvidia, many companies claim to be beneficiaries or drivers of AI…but the list of companies that have real numbers to show for it is truly thin.
Against this backdrop, foreign markets also saw dramas of their own. The one that matters the most is likely the drama going on in the Chinese economy. Although China’s economy is still expected to grow somewhere around 4-5% this year, it has clearly lost momentum in recent months. Early momentum from pandemic reopening has been overwhelmed by property sector malaise, weakening business and consumer confidence, and lack of meaningful stimulus. Some of these things may be starting to improve judging by recent government measures, but confidence is not an easy thing to influence or control, especially when long-term issues like demographics and significant debt whisper from the back of the mind. People may discover that sometimes official slogans and public pronouncements may still not ring as loud as the whispers we desperately try to avoid.
All of this made August a challenging and volatile month. Is the fear warranted? Perhaps, though I continue to believe in a more optimistic path than what the market now fears.
Near-term, the inflation prints will likely continue to be tricky. Inflation is and will likely continue to rise in the near-term on year-over-year basis. However, this mostly seems to be due to base effects given how inflation trended a year ago. The month-over-month data looks much less problematic. I will be watching the September CPI closely. Something tells me investors may scream and shout when CPI comes in somewhere closer to 3.8% (vs recent low of 3.0%). Even if the month-over-month data seems fine, the narrative / noise seems to be a story that will write itself. But what will the Fed do at their September meeting?
Aside from macro / big picture, the micro dynamics are also interesting. August was a major month for earnings, but most of the moves were quite asymmetric. Many stocks that beat expectations saw fairly muted reactions, whereas stocks that missed were completely destroyed. Sadly, the Paper Portfolio had more than a few of those. Some of these moves probably don’t make sense…but whether we are right or wrong in the long run does not make the current moment any less challenging (and that is assuming we are even right in the long run, which is never a given).
Turning to the portfolio itself, most of the portfolio performed quite poorly. There were only a few names that did well.
On the positive front, the key callouts are Okta (+8.7%), Nvidia (+5.6%), Texas Pacific Land (+25.1%), and Mercadolibre (+10.9%). Okta just reported results that came in better than expected. The business appears to be stabilizing with good initial moment from new product launches such as Identity Governance. Nvidia reported another quarter of stunning results, with datacenter segment growing triple digits. Texas Pacific Land likely benefited from recent recovery in oil and gas prices and saw strong demand for their related services. Mercadolibre reported very strong results as they continue to pull away from local e-commerce peers.
The negative side is long…A couple that are worth calling out include Nextdoor (-30.2%), Sea (-43.4%), and Adyen (-53.8%). In some way, all three of these names faced the same dynamic, missing expectations leading to complete collapse of their stock. Nextdoor’s business continues to face headwinds from a challenging macro situation. This was further exacerbated by very strong results coming out of advertising juggernauts like Facebook and Google. I cannot blame investors losing interest in a small name like Nextdoor when they can get much better results in blue chip names like Facebook and Google. Nextdoor should eventually regain their footing, though. Sea fell after reporting mixed 2Q results and guided for pivoting back to growth (and sacrificing margins in the near-term). Pivoting back towards growth is probably the right long-term decision, but investors appear to have lost confidence in the strategy with rising fear of competitive disruption from TikTok and Pinduoduo / Temu. Likewise, Adyen completely collapsed after reporting slower than expected growth in the face of irrational competition. In addition, Adyen continues to invest heavily into new emerging opportunities, which is negatively impacting margins in the near-term. Similar to Sea, investing for growth is likely the right thing to do, but that is not what works in the market today.
Overall, August was a challenging month. Let’s see what September brings.
Onward.
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Disclosures: Of the stocks mentioned, I own shares in KIND, NET, PINS, SE, MRNA, U, OKTA, SDGR, SNAP, ENVX, ZI. I have no intention to transact in any shares mentioned in the next 48 hours.