Thanks, Jerry
Interest rate reality slammed the
financial markets (and personal pocketbooks) with full force in the past few
weeks prompting one to ask whether the coveted “rally” that carried investors
through the Summer was an aberration or, perhaps even worse, just a placeholder
before the next drop off?
In either case the message is clear
that the cost of fighting excessive demand and profligate spending with higher
interest rates is serious business.
Unfortunately, the stock markets took
the latter view and inflicted selling pressure not seen in several months. We believe there is likely to be more
volatility in the weeks following as earnings and jobs data for the quarter are
released. The early-year momentum has,
at least temporarily, been abated while global central banks remain apace to
quell inflation.
Given that there now appears a lull,
if not downward, bias in stocks we remain satisfied with our portfolio preparations
“on the way up” for the inevitable capitulations that the financial markets are
experiencing: using cash to purchase short-term time deposits to supplement our
account’s yield potential, and readying for any pivots that might support
buying equities on dips. Liquidity is,
and has been, our key to navigating the post-Covid economy.
As long as pent-up demand keeps
moving goods and services…the after effect of a two year economic hibernation
…markets will remain active and volatile, despite a waning level of consumer
confidence. To be sure, the past 5 months
have seen us go from speculative fervor to awkward sell-offs. Most notably, there is a marked exaggeration
in the gaps (and experiences) between the wealthy and the poor, particularly in
managing food and energy expenses.
Our lower risk approach to investing should
more consistently assuage the precipitous up and down cycles and hopefully
outperform benchmarks without excessive volatility. Adherence to a strict discipline of earnings,
secular asset allocation, and patience has always proven to be our signature. Nevertheless, a potent confluence of high
inflation, rising interest rates, post-pandemic economics, and a lethal
conflict in Ukraine has hindered portfolio performance and dampened
expectations about the near-term for many of us.
Moreover, as negative attitudes
proliferate one must accept that trends take time to develop and to reverse
course. Right now, fear is accelerating
the decline in stocks as much as, if not more than, any changes in
fundamentals. These are indeed unique
times as we emerge from a pandemic but all of us have seen crises before and
come out stronger as a result. Reversals
do not surprise us as much as the mania surrounding them does. In fact, we see secular investment opportunity
in tangible assets (commodities), energy, ecology, and utilities while the drumbeat
of inflation data imposes temporary pain on other sectors losing earnings
power.
Challenge the risk
The markets will require much more
than immediate monetary intervention.
Political leadership (fiscal stimulus) must address structural economic inequities
which exacerbate poverty, climate change, national security, crime, healthcare,
education, hunger, and infrastructure in order to complement efforts by the
Federal Reserve. It is unfortunate that
election season looms large in the debate about when/if things get done but we
have optimism that the latter part of the year will be better.
The next few weeks cannot accurately
be “predicted” but if history is any guide it is likely that negative influences
will persist for the near term.
Remember, though, that it is during periods of excessive vulnerability
that bases are built and entry opportunity reappears. Prudent strategic thinking demands that we
lower the harmful rhetoric and search for answers while we have the time.
(Post script: generational monsoons
in Pakistan and flooding in Mississippi remind us to be grateful for the
“privilege” of turning on the tap and having clean water to drink).
