Market Commentary for the week of May 1, 2023

Knit one, pearl two

Too often, experts synthesize data into a complex tapestry of do’s and don’ts, rights and wrongs.  This is true in politics, education, spirituality, golf (!!)…you name it, it can probably be overanalyzed and or misapplied.  The financial markets have this problem, too, certainly lending their share of aphorisms about the proper “rules” investors must follow.

Everyone is experiencing an overwhelming sense of anticipation about what the next few weeks might offer but, in reality, that anxiety can be offset with fundamental discipline: those that do things well and who meet expectations consistently will be rewarded in the end.  In this case, it is a particularly good time to be stacking those odds in your favor regarding earnings, price acceleration, sales growth, and relative industry strength.  We’re talking about building a profit driven portfolio.  While there are certainly no guarantees that your objectives might be met, the goal is to mitigate against unnecessary risks.

As you look at the “news” be careful not to elicit too much emotion about a 24 hour cycle of exogenous noise.  We prefer, instead, to create opportunity in our accounts from a broader, macro perspective.  If bank stocks are in decline, for example, then we won’t fight the tape or bottom fish.  Duration/time/amplitude are your best allies, and help to avoid volatility driven by fear or hyperbole.  The economy has done the hard lifting while emerging from pandemic shutdowns, now it is just a function of these longer term cyclic dimensions to continue to support the base that’s been established. Patience is the key.

As the market rebounds towards seasonal highs we believe that our oft-spoken about themes (agriculture, technology, healthcare, energy) will obviate the negative effects of post-Covid supply chain and inflation concerns.  In fact, our models are heavily skewed towards growth industries of the future and higher equity prices all around.  We believe these generational (secular) themes are geopolitically agnostic….what heals the planet and the ills of mankind heals the economy, as well.

Of course, we all have a role to play in holding our representatives accountable for developing policy initiatives, but our belief is that the hopes and aspirations for local/regional/global prosperity and fairness will result in a positive outcome for the capital markets.  Everything operates on a cyclic rhythm.  When expectations exceed the reality on the ground….or when equity prices linearly speed out of control….there is a reversion back to the mean that inevitably occurs.  These are mathematically prudent, common, and need to be embraced.

Living in Relativity

There are compelling reasons to support our confidence.  Though we might be witnessing a diminution in global purchasing activity caused by restrictive and de-stimulative monetary policies, there are no specific suggestions that we are in, or approaching, a recession.  In fact, tight money policies have revised some earnings downwards more in line with true considerations and lessened the pain that had artificially been suppressed by lower interest rates in those sectors that were insulated, such as housing and consumer cyclicals.  Savings rates and household employment data are surprisingly benign leading us to believe that GDP for 2023 might be better than last year.

The fact that monetary policies might already have modulated inflation could give the markets some positive incentives for the balance of this year.  To be fair, nothing is bulletproof or immune from capitulation.  But profit margins are the most obvious net factor upon which we rely, and even with price pressure and modest inflation there is sufficient leverage built into the market to indicate bottom line growth opportunities.

Thus, our optimism about our existing asset allocation is a reminder that “cash is king” and the bulwark principle of our discipline that mandates sector diversification  and earnings acceleration.  It seems to me that we need fewer experts opining about “rules” and more capitalists originating efforts to replace “me” with “us”.  Somehow, lost in a bid for personal gain, we have forgotten that in the end, we are all circling the sun on the same planet.  Why not advocate for common solutions?