Market Commentary for the week of May 23, 2022

Pushing back against aggressive inflation data from the past few weeks, the US Federal Reserve upped its rate-hike pace by raising the policy rate by 50 basis points, thereby sending equities…and consumer expectations…into another tailspin.  This notion that interest rates, alone, might quell anxieties about and solve supply chain and production issues, the war in Ukraine, domestic violence and crime, and political disfunction in Washington D.C. is specious at best.  In fact, the perception that economic panacea resides with one individual, one stroke of the pen, or one institution is the reason, we believe, that the economy is so forlorn.

The extraordinary volatility in the financial markets during the past few months has lifted the veil off of a poorly kept secret: business is all about making money.  The infinite contortions that corporations are willing to make regarding hiring and pricing indicates just how resourceful they must become to deliver the ultimate “positive” outcome for their shareholders and to demonstrate supremacy within their sphere.

And make no mistake…no industry is immune from those gyrations.  Large or small, energy companies or baby formula manufacturers, utilities or computer tech...all of them jostle for consumer share.  Regardless of capitalization or geography, if they aren’t profitable they won’t last very long.

The only question is for how long are investors in these companies willing to forsake their own role in the downsizing/upsizing of the economy and the unavoidable loss of moral compass in the process? 

Please note that we are not suggesting anything is wrong with pure capitalism.  We believe most strongly that capitalism itself is part of a long term solution if it provides for the common good of consumers and the general community in which these companies reside.  However, anything meant for a means-to-an-end philosophy is far-fetched in academia and the social sciences.  Consider how we address the global food crisis…

Question: is it unethical or immoral to hoard food, discard leftovers, or “manage” the output of our farms in a world that has millions of starving inhabitants?  We suggest that the answer derives from one’s age, location, occupation, social status, or conscience.  Children of the Great Depression (1929) are loathe to discard table scraps; today’s millennials can’t wait to leave the table to pick up their cellphones.  (Obviously, those examples are generalizations and literary exaggerations about individual facts.)  But the point is this: one’s circumstance markedly defines a whole host of beliefs and attitudes about the state of the world and one’s place in it.

So, we ask again….is eating immoral or unethical in today’s world?

Let’s answer with this thought: eating is intrinsically selfish (!)  We eat to keep ourselves alive.  We support ourselves by being healthy and well-nourished.  Given this, how, then, do we treat countries and citizens that are “poorer” than we are?  Don’t they have the same rights; do they not have the same survival impulses?

Food is different from computers or cars.  Feast or famine  does not mean the same thing to a retail sales executive, for example, as it might to someone for whom the phrase is literally life or death.  Food is a topic about which capitalists cannot only argue about the bottom line, but also the human element and any emotional context.  Why is there anyone on this bountiful planet that must go to bed hungry, or migrate across continents to avoid starvation?

To be fair, your kitchen does not  come at the expense of another.  You made yourself successful, we agree.  Your bounty is not a sign of gluttony or inconsideration.  But we know that as the global wealth and natural resources gap widens what is “ordinary” for some is “extraordinary” for others.  The more the extremes are increased, the more we should expect economic and global volatility.

One cannot choose their country of origin.  But we can use our integrity to help understand what maximizes reward and profitability and who benefits/loses in the process.  Besides the laws of physics and economics, ethical indifference is why the markets are in such a funk.

Market Commentary for the week of May 2, 2022

Is this  the New Paradigm?

How can investors distinguish between “traditional” elements of consumerism versus a shift towards a new macroenvironment consisting of rising costs, diminishing natural resources, and a widening gap between the rich and poor?  The role of specialized thematic investing…such as alternative energy, agriculture, environmental studies….is increasingly becoming more vital…and profitable.  As these transitions magnify in intensity there develops more emphasis upon how to quantify these silos in a changing landscape.

But is the evolution momentary or permanent?  After the last decade of low interest rates and consumerism at any (all) costs we must look at the drivers of a new secular tailwind.  Cars are more expensive, but leading to an electric alternative to fossil fuel consumption.  Energy and other natural resources are becoming more scarce, but now the progenitors of new science and innovation in their respective spheres.  Global hunger and poverty are ubiquitous, providing the motivation for a new generation of socially responsible bankers, scientists, thinkers, and moralists.  Efficiencies are being uncovered in technology, healthcare, and industry.  Investing in these nascent capital markets can potentially lead to a better planet as well as portfolio sustainability and growth.

Depending upon one’s point of view and station in life they might think these shifts are tectonic…or negligible.  But the primary engine of portfolio profitability has always been the entrepreneurship of innovators and moral thinkers.  Inflation will ebb and flow, markets will surge upwards then capitulate.  Margins must expand in order to help businesses survive.  Thus, our optimism about the new paradigm outweighs any fixation upon yesterday’s business headlines.

Method or madness?

Before we even begin discussing how to benefit from these secular economic transitions, however, we must address the elephant in the room: people’s panic about seeing their portfolio valuations decline by 5 to 10 percent, or more.

They must remind themselves that they are in the “game” for the long haul; that there is no such thing as a zenith  or nadir  when talking about portfolio net worth…only trajectory, which oftentimes is uneven and overflowing with highs and lows.  Unrealized capital gains and losses are not worth talking about except in the context of sector allocations and prudent portfolio weightings.  In other words, even the most successful portfolios traverse a bottom-left to top-right configuration, along with a plentitude of cyclical deviations from the mean that are uncomfortable and frequently volatile.

Additionally, coping with one’s anxieties can be mitigated by employing asset allocation, diversification, and risk management strategies.  Worrying about a “total wipeout” of one’s worth is not even a possibility in a scenario in which only 30% (for example) of assets are in the equity market.  For example, if all those dollars were to become worthless overnight (unlikely), there still remains 70 percent of your capital invested elsewhere.  While this example might be discomfiting to some, consider again that its likelihood of happening is quite remote.  Besides, if that “crisis outcome” leaves you uncomfortable, then by all means limit the amount of capital invested in risk strategies to only that which you can afford to lose.  A discussion between you and your advisor is recommended at the outset to discuss these extreme consequences.

Realistically, even a well balanced portfolio will experience fluctuation.  Managing these parameters is the role of your advisor. Suffice it to say that we are in a volatile moment right now….inflation, Covid, world events, economics, social injustices.  The nimble investor uses these periods to transition his wealth to take advantage of the ever-changing environment.  We see the current market leadership/rotation telling us that safety, yield, and growth are paramount to an effective process.  The contraction in discretionary consumer spending is likely to continue for the foreseeable future. Equally as likely, though, is the ever-growing disparity of lifestyle between the well-off and those just struggling to get by.