Market Commentary for the week of February 27, 2023

 

(The following is a hypothetical “love letter” to Federal Reserve Chairman Jerome Powell from an investment client)……….

 

Dear Chairman Powell

I’m not one who usually pens fan letters, but I wanted to write to thank you for your ongoing series of interest rate hikes.  I know there are myriad numbers of complex reasons for the policy, but for me and my family all you need to know is that we finally have reason to invest without fear from stock market volatility exclusively.  You obviously know that the last decade, and more, has a been a period of declining rates of return primarily because you and your fellow board members had become preoccupied with stimulating the economy post-Great Recession (2008) and post-Covid.  In such a low interest rate environment I had been oddly burdened by having to buy stocks as surrogates for income producing bonds.  Yes, there has been the occasional one-off success in the stock market, like tech stocks or biopharmaceuticals, but by and large the stress of managing my expectations with the stock market gyrating constantly has been too overwhelming for me to accept.

I remember years ago when interest rates were quite high…as much as 12 percent on money market funds.  My financial advisor and I are resigned to the fact that those types of returns, without risk, are no longer available to me.  Instead, my children have grown up in a generation of near-linear positive, and quite unrealistic, equity market returns, always having to worry about when or if the plentitude might capitulate.  Sure, we watch the evening business news shows where they talk about things like GDP, unemployment, and inflation.  But for the most part these are not outcomes we think about on a day to day basis.  Thank goodness you and your contemporaries are there to do the heavy lifting on these matters.  So….your recent interest rate hikes have been just the thing we need right now to steady our investment path, generating competitive rates of return on non-equity securities in our portfolio.

The irony of all that data they talk about on television is not lost on me, however.  The pundits tell us that we are a nation “at full employment” and that the economy is “in a rebound”.  Why, then, do I feel insecure about my job and the factories in my city, watching several of my neighbors getting laid off; why am I frustrated by the price of groceries such as eggs, dairy, and meats?  It seems as if the decoupling between what “they” say and what I see is profound, so I trust that you and your partners in government have our best interests in mind before taking any further action.

I mean no disrespect when I observe that things look out of control….war in Ukraine; political discord in Washington and elsewhere; global immigration policies which exclude the indigent; more virulent diseases that interrupt the flow of our life; not to mention fear, loathing, and resentment of those who are perceived as “different”.  Is an improvement in my bank CD rate really sufficient to address all these matters? Should I care?  Do you know?

I suppose that the extent of one’s anxieties over these and other issues is determined by one’s capital reserves and their station in life.  I mean, without having a magic wand to wave over the world, there will always be the haves and have-nots, right?  I was taught a person’s character was the most important thing.  But it sure seems as if the size of their pocketbook also plays a role in determining their fate.

In conclusion, I’m not a sophisticated market guru nor consumed by all the data and information you have at your disposal.  I’m just a client of my investment advisor, with a significant portfolio of assets that I care about preserving and growing modestly.  Lately, I have been concerned about the inordinate amount of risk that I have been forced to take in order to achieve my investment objectives.  Now, thanks to your hefty increases in interest rates, I can safely and efficiently generate a competitive return and add balance to my asset allocations.  For that, I offer my heartfelt thanks.

Sincerely,

Joe Client   

Market Commentary for the week of February 6, 2023

Pivot

Last week’s market activity highlighted the complexity of how to interpret a confluence of incompatible data (e.g., money supply, employment, earnings, prices).  Virtually all these numbers signal a recession, but stocks haven’t gotten the message.  The Federal Reserve continues its biases to quell inflation, but this time the market responded positively because those policies actually appear to be working.  There are still those who predict a recession, but our view is that as long as the good earnings performers remain incentivized, the anticipation  of a recovery will be stronger than the fear  of it not happening.

Fundamentally, better begets better....and so on.  

Interestingly, the magnitude of the selling waves appears to be dissipating.  The upside rebounds have been getting more powerful, while the sell algorithms are losing trigger points.  If this pattern continues, buying volume just might win this time. Those are not guarantees…in either direction….but the probabilities are aligning towards building a base for the next up leg after so many previous attempts had failed.  The market has priced in the central bank’s intention to raise interest rates and is now prepared to look forward, not backwards.

The direction from which expansion and innovation emanates is definitely shifting.  As such, we see nascent capital appreciation influences coming from socially responsible investments (SRI).  The concept of using innovation, private equity, and science to “do good” is also a profit machine for the longer term.  Investors are finally seeing the possibilities of achieving wealth and contributing to the globe responsibly.  Companies that feed the hungry, or which produce clean renewables, can also generate rising portfolio valuations.

Commitment

As with anything in the capital markets, the primary issues are defined by expenses  and profitability.  A new element that we would like to see included in the analysis is conscience and empathy.  We know how  to solve many of the globe’s ills, we just might not have the will to do so.

Whereas these burgeoning industries are in their infancy, the other issue facing the capital markets is whether financial resources…in addition to time and patience…are in supply sufficient for which to allow new technologies to gain traction.  Wealthier nations might have the money; poorer ones certainly do not.

We must also draw a macro distinction between the stock markets and the economy.  Seemingly inextricably linked, they are in fact two distinct vectors and phenomena.  Sometimes they appear graphically congruent, other times not.  In previous missives I have termed this a Parallel Disconnect.  Good stewardship of the planet is not explicitly a “portfolio management methodology”.  However, fair compliance and good governance is the foundation for generating profitability from innovation and high demand.  There is nothing quite as insidious to portfolio success as to equate making money during good times with a consistent process of evaluating the economy.

There is no additional cost or barrier to entry for doing the right thing.  In fact, not  to do so drastically limits portfolio potential, forsakes modernization in science and technology, and dissipates valuation expansion.  Historically, secular trends take time to develop.  Those things which sustain them have more to do with long term demographics than with intraday mania or panic.  The proliferation of 24 hour business news and online access makes the markets, and investors, susceptible to triggers that can only aggravate predisposed anxieties.

One case in point is the media’s obsession with the Federal Reserve’s interest rate policy and their battle against inflation.  One might think there is something newsworthy there but, in reality, the market has absorbed and responded to a secular reversal of a 20 year disinflationary, “easy money” phase.  Whether Main Street “likes it” or not, there is a generational reversal of that disinflationary vector occurring….right now!  Not to accept that, or to panic each day because of market ups and downs, is nothing more than counterproductive behavior.