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.
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