Recalibrate redux
After this most recent round of
earnings reports, the market’s short-term algorithms took on a decidedly
riskier tone. Downgrades and pivotal
price shifts in stocks moved the averages lower, breaking a string of momentum
that had been developing all Summer.
Thus, it will take time to reestablish price supports and upside trend
vectors. No doubt, recent earnings have
disappointed….something we predicted in earlier missives.
And still, inflation concerns
permeate households and executive boardrooms.
A surge in borrowing during the last few years, spurred on by lower
interest rates, is finally coming home to roost. There is simply not enough appetite for more
borrowing while rates reside at their high point. Meanwhile, the average cost for goods and
services has increased by multiples of 10.
A tapped out consumer is no good to anyone and obviously presents the
biggest obstacle to corporate earnings increases. The ripple effects of these constraints is
something we are monitoring closely in all asset classes.
Higher inflation also means more rate
hike proposals from the Federal Reserve.
While net family incomes are declining the problem spills over into the
economy writ large. Too many people have
mistakenly thought that the economy grows in a straight line, whereas most of
my clients understand that we occupy a parabolic universe, not linear. One needs to know on which side of the
parabola their investments reside and do all that is possible to mitigate
drawdown and volatility caused by a downward slide. Managing risk is the ultimate task of any
money manager.
Preserving one’s mental security is
equally as important as preserving portfolio sanctuary.
Not withstanding the risks detailed
above, we remain confident about our long-term projections about sustainable,
socially responsible investment solutions.
A global migrant crisis involves innovation in housing, security, and
food distribution; climate catastrophes necessitate strategic energy
alternatives and disaster/shelter relief; poverty and food insecurity requires
agricultural and educational policies to meet structural disequilibrium. Here is where the venture capitalists can
ride in like white knights to solve problems that are societally beneficial.
Acknowledging how best to address
geopolitical tensions is what our government is for. Where, when, and how to pivot is the
over-arching demand of our leaders. As
asset managers, we respond to, and try to predict, the vectors and contrasts
that we can measure in order to protect our clients from volatility and
exogenous noise that can influence both their short and long-term goals. But, clearly, ours is a reactive profession
in a world where we are asked constantly to make predictions about the future.
With yields having risen in each of
the last two years many are asking whether the increases are permanent or just
a temporary measure to fight inflation.
Interestingly, even during the last decades of accommodative monetary
policy, there wasn’t the kind of positive economic response that we’ve seen
with higher rates. No doubt that some of
the GDP increases are in direct response to the Covid lockdowns and pent-up
demand. More specifically though, higher
rates have, in our opinion, created a favorable alternative investment scenario
for investors that enables them to buy stocks and short term saving
certificates, both, which enhances their savings and speculative opportunities
combined. A modest rebound in inflation
has proven to be the proper stimulus to a moribund economy that previously had
relied upon the equities market for capital appreciation and portfolio growth.
If inflation remains “moderate”
through the end of this year we believe there is ample capital in reserve to
support a productive cycle of investment with competitive rates of return.
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