Rates,
rates, and more rates
Question: Where do you think global stock markets would
be if interest rates weren't low?
Fortunately, we haven't had to answer
that question in recent years. However,
with interest rates modestly spiking upwards in recent weeks investors were
confronted with exactly such a dilemma, and the turbulence which ensued. The distraction caused by having to ponder
higher borrowing costs, higher inflation in goods and services, and the
possibility of an equity market in free-fall set investor's comfort level back
by a considerable margin. One is only
left to wonder what, when, and how a post-pandemic hyper-inflationary global
economy might look.
Obviously, no one can accurately
predict the future nor the answers to those questions above. But we can discern certain trends, certain
probabilities, which are becoming clearer as the viral scourge recedes. For one, any
rise in interest rates becomes an indicator that expectations for global growth
are expanding. Bear in mind that
this is the first sign in at least 15 months that economic forecasters are
bullish. In a climate devoid of much
good news over the past year even the prospect of inflationary pressure becomes
an important nugget. Buying stocks in the
past year had become a default option for many investors. Now it appears to be a harbinger of some
underlying breadth in the fundamentals.
We are not abandoning caution,
however. Safely deploying capital always
requires a prudent assessment of risk...by asset class and by process. For obvious reasons, betting it all on black ensures
nothing but a 50-50 proposition of winning or losing, outsized losses versus
outsized gains. Any manipulation of the
markets based upon interest rate projections alone is shortsighted and
speculative. Adding additional risk to
portfolio management based upon one indicator is not part of our vocabulary.
Instead, we think it appropriate to
consider the impact of a nascent expansion in the economy as an opportunity to
fine tune asset allocation and to redistribute assets into sectors with
emerging and/or consistent staying power.
Currently, we think that rotation away from aggressive speculation, and
back into defensive equities, is the most durable way to segue way back into
the markets here at the top. Those
modest interest rate hikes in past weeks are not statistically significant to
derail the recovery or to change risk correlations. Quite the contrary, they are precursors of a
next-generation expansion. There simply
is not enough of an inflation risk at present to abandon long-term macro
expectations for appreciation in the coincidental and laggard portion of the
marketplace. Examples of where we would
put our money include basic materials, utility shares, consumer
non-discretionary, and industrials.
Gratitude
One other critical component to that
process, particularly in the (almost) wake of the Covid pandemic, is a healthy
dose of gratitude. From amongst all the critical factors we
review daily, including earnings, yields, trend analysis, stochastic relative
strength integers, and price patterns, we believe that creating an environment
of soulfulness, understanding how lucky we all really are, is critical to
building long-term macro success in the portfolio management process.
We must consider how capital can and
should be used; to reach out to the less fortunate; to give something back;
create kindness and offer constructive opportunity to our fellow planetary
travelers. Gratitude might take the form
of a friendly utterance to a stranger, a kind word at work. But it might also represent a full-bore
commitment to our air, water, food, natural resources, and other things that
can improve the quality of life...as well as building profits from so many
disparate sources.
As noted, no one can precisely
foretell the future. But there is finally
enough of a cycle shift taking place that we consider the exogenous noise of
headlines and newsworthy commentary simply to be a part of a larger tapestry
whose direction is more clearly taking shape.
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