Shifting sands
Buffeted by expectations about a year
end tumble in stock prices, the market settled into a pattern of fits and
starts last week, forewarning a rocky close to the third quarter. Although the data about inflation is abating
somewhat, the severity of the response to consumer anxieties is what might
derail the markets in the next few months.
Even as the markets were expanding
during the Summer there was always an uneasiness about whether or not the
fundamentals were “for real”.
Nevertheless, investors buckled in and went along for the ride. As the saying goes, “you can’t win it if
you’re not in it!” The real questions about durability and
sustainability are, for now, held in abeyance.
It is obvious, however, that there is
a real struggle between the expectations of profit growth versus the economic
impact of inflation upon spending and profitability. The most modest interpretation would have you
believe that a soft landing is inevitable, that the Fed knows what it is doing,
and that profitability is “rotating” by sector.
Even as deficits expand, demand wanes, and GDP decelerates, the Dow
Jones averages expand. Our research
indicates that these successes are restricted to a very small universe of
companies….and participating investors.
The rest of the world is consumed by politics, population migration,
hunger and poverty, and security issues.
In other words, talk of a “rally” in the markets affects only a handful
(on a relative basis) of extraordinarily wealthy…..and a few speculators
looking to become so. This might not be
the “rally of all rallies”, but instead a ghoulish game being played only in
monied circles.
We would feel more comfortable calling
this a global recovery if everyone were the beneficiaries of an expanding pool of
assets.
Location, location…..
Interestingly, the Western economies
still stand as a bastion of technological innovation and hope for the rest of
the world, even though their influence is sometimes in dispute by the
East. A far greater percentage of the
world’s wealth resides in the West where demand, consumption, and currency
drive momentum in business. One must
note, though, that traditional investments are seeking cheaper alternatives in communications
satellites, pharmaceutical research, and alternative energy resources that are
found in the developing nations.
Globalization and integration of business function is still the calling
card of a sustainable recovery and rebound.
We have also written in the past that
a period of lower interest rates made stocks the “default” investment of
choice. As rates have risen during the
last two years short term fixed income instruments have gained in
popularity…and security….for many investors.
Having played its hand, the Federal Reserve unleashed a new wave of
savings and investing that has benefitted those who were frightened by the
volatility of the equities markets.
Thus, the mania and concern that might manifest during the fourth
quarter might be dulled somewhat by the fact that the universe of participants
in stocks is at significantly lower levels than a year ago.
For our part, we are using the
month-end inflection point as an opportunity to rebalance and refocus upon our
macro analyses. It is better to be
prepared for the long-term than to obsess about the news headlines each
day. We do not, in fact, see a
diminution in the enthusiasm for stocks, but rather a reallocation into those
sectors that have a more enduring story to tell. While the post-pandemic rallies were about
pent-up mania, the rest of this term looks more to be about projecting winners
and losers in the global marketplace.
This might temper the appetite for “trading” in the market, but it might
also quell many anxieties about the volatility (and loss of principal) that
attends as a result.
Nothing says sustainability like
strong earnings. In this climate of
uncertainty, pricing power and strong consumer demand should be your guide as
to where to invest your money. Whether
that means defensiveness or aggression, the goal is to move portfolio
valuations from point A to point B with as little disruption as possible.
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