Thematic Investing During a Market Correction
At its worst on Monday the S&P was off almost 4% for the session and nearly 12% lower than a fresh all-time high hit earlier this month. The dramatic drop, amidst mounting concerns that the Fed is behind the ball on inflation and will need to dramatically expedite its rate hike schedule, plunged the index into correction territory–a 10%+ drop from a recent peak.
Turn on CNBC or open the WSJ and there was no shortage of scapegoats or anecdotes for the market's excess.
We've had JPEGs of mutant apes selling for $3.4M, nascent cryptocurrencies (without any application) rallying several thousand percent after being hyped in a Discord channel, and every possible proxy for a market bubble in between.
The stock market has certainly not been spared. The much maligned "Cathie Wood names", a catch-all for the hyper-growth stocks that came to fame during the early days of the pandemic, have become the poster child for areas to avoid.
And with good reason.
The flagship ARK innovation fund (ARKK) is off 25% this year and 56% from its Feb '21 top, reached during the height of the meme-stock frenzy.
Yet the distinction needs to be made:
Thematic ≠ high growth.
Thematic ≠ high multiple.
Thematic ≠ overvalued.
Sure, a thematic portfolio or fund can reflect a basket of high growth stocks that outperforms in a low rate, easy money environment. But that doesn't have to be the case.
A "thematic portfolio" is simply an expression of a thesis built on concepts and keywords that reflect natural language, a more dynamic and real world way of slicing the market into different buckets.
Defensive. Inflation-protected. Diverse supply chain. Housing products. Department stores.
While they might not fit into traditional sector classifications, each of the above reflects a theme that can be expressed through a custom portfolio.
On Monday, news that Kohl's (KSS) had attracted multiple takeover bids sent the stock surging (+33% on the day) and lifted names across retail, notably other department stores like Macy's (M) and sporting goods retailer Dick's (DKS).
Meanwhile, the recent flight from risk assets has brought inflows into consumer staples stocks, typically a safe-haven in times of turbulence. General Mills (GIS) and the Coca-Cola Company (KO) are each up 1% on the year and have been a refuge in a brutal tape.
Household products, food suppliers —> inelastic demand, inflation hedge–a thematic, cross-asset portfolio can be tailored to virtually any potential market environment.
Thematic does not mean that your portfolio is destined to underperform in a shaky market.
The massive proliferation of thematic funds (especially ETFs) has provided investors with a bevy of solutions and trendy products to get exposure to the market in novel ways. Some ambiguous themes like "innovation" require a knowledge graph and interface that allow a user to better drill down into its core inputs–whether that's cloud computing, new gene therapies, or vertical farming.
Noonum helps you evaluate and understand the investment funds at your disposal or find individual stocks to help you craft your own view of the world.
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Disclaimer: any opinions expressed in this article are not intended as financial advice.