Market Commentary for the week of February 19, 2024

You made it this far….

As investors muddled through another calamitous week in the stock market, brought about by a perceived “postponement” in Federal Reserve interest rate easing, might I suggest that we need to lower the temperature just a bit when it comes to reacting each and every minute to what one hears on the news.  The post-Covid era presents relentless challenges to stake holders, that we would agree.  That moment when we realized that the world had inexorably changed began a new timeline of portfolio potential.  Education, Technology, Consumerism, Healthcare, and many other headline topics embarked upon new expectations, and opportunities, forever transformed.  The language we use, as well as the sciences and technologies to measure them, might seem unrecognizable right now but portend, nonetheless, an evolution that is generational.  For many companies, their market share is likely to change…sometimes for the worse.  And yet, facts not yet revealed will determine the winners and losers of the future to adapt for decades and beyond.  Every business must necessarily reinvent their model to find a way of conforming with the world’s new paradigms.

Investors in the public arena should be looking to deploy assets differently, as well.  Allocations which reflect changing dynamics in the overall economy have to correlate for sustainability and moral compass.

Creating meaningful portfolio appreciation is more than just following contemporary trends but rather seeking out opportunity from amongst a vast array of social and business imperatives that might not be identified with today’s vocabulary.  In many cases traditional assumptions don’t apply.  The belief that “old” technology, for example, seamlessly morphs into the future is laden with myth and pitfalls. Instead, faster, better, less expensive  is how you capture the fancy of today’s CEO.  Lucky for us, as portfolio managers, that our focus and discipline remains consistent: earnings, secular pricing trends, and stochastic relevance are the omnipresent methods that have created wealth throughout the decades for our clients irrespective of market interruptions.

….now where do you go?

Innovation is always the main driver of profit-making.  Large cap or mid-cap, unique shifts in biotech, telecommunications, technology, and alternative energy have opened new geographies and compelling new opportunities for capital gains.  These sectors are ripe for massive acceleration in earnings and significant overweighting in our portfolios. As mentioned earlier, the laggards sometimes become the leaders of tomorrow.

In fact, the most efficient way to uncover future success is to apply earnings growth to implied 12-month price projections.  In those industries where volume and sustainability are magnifying, we constantly review possible price inflection points of entry along their trendline. The kind of manufacturing capacity required to sustain profits for decades can only be achieved with capital investment in and from the private and public markets.  Having the vision to expand beyond today’s limits defines the “new” landscape for portfolio alpha.  Companies that positively impact upon the lives of our planet’s inhabitants will always have a leg up on the competition.

The bottom line from our perspective, and our response to last week’s market anxieties, is that fundamental and technical market indices haven’t changed significantly in the last half-decade...pandemic was an aberration, not a new normal.  Those sectors that were in ascension (healthcare/biotech, consumer non-cyclical, infrastructure, technology, alternative energy) before Covid continue to build secular momentum.  Recently, many other sectors are breaking out above support.  Our equity investment percentages have increased  in the past few months by over six percent.  There is no “magic” to what is occurring in the stock market…years of fiscal and monetary interposition are finally paying off.  We acknowledge, and will participate in, the uptrend.  For the moment, we are comfortable with the interest rate and cash positions of our accounts which seek a balance between short-term risk (bonds) and longer term capital appreciation potential (equities). 

The pandemic and geopolitical disruptions have created a new dialogue about how to meet the needs and aspirations of a changing domain.  Being attuned, more engaged, more clear-headed, more patient, and more sustainable in the face of adversity  is the new mandate for our businesses, government, and spiritual institutions.           

Market Commentary for the week of February 5, 2024

Bizarro Jerry

This past week’s hyperbolic market activity surprised no one who thinks that we have entered into a “bizarre” phase…..that “down is up” or “left is right”.  The market and its observers are truly in denial about what they are really seeing.  In fact, for nearly three years most detractors have been predicting permanently entrenched inflation, excessive consumer spending, and indefatigable bullish uptrends in the global stock markets.  Its time to set the critics right.

It is our view that the notion of intractable inflation has been misinterpreted because of the Covid pandemic.  One cannot mistake a robust spending spree brought about by being cooped up in one’s home with a secular, definitional inflation.  The negativists are a bit too enthusiastic in their interpretation of alternative facts.

While a modest rebound in inflation did occur, most of that trend was simply a collective outpouring of spending wrought by a stifling inertia that emanated from a legitimate threat to our mortality….one that killed millions of our friends and neighbors…….and extraordinarily gutted supply chains.  In fact, the true center of gravity of this economy is a remarkably low unemployment rate, giving us ample room to digest the changing landscape without inflicting too much damage.  The most significant statistic emerging from the pandemic is that there are enough jobs to go around for those willing to find them.  Additionally, the personal savings rates created by higher interest rates are serving as an added buffer against the economy falling into a hard landing.

When central banks took immediate action to quell the post-pandemic “revenge” spending spree by raising rates they indicated that temporary, not permanent, remedies were required.  However, we are mindful that the onerous effect of these actions has sent some confidence measures in the wrong direction.  As a result, the markets are gyrating based upon “up is down” philosophies.  When it goes up too much, people start to worry; when rates rise over a two month period, the economy is “failing”; etc.  Underpinning the economy is a set of data hard won before  the pandemic ever existed and which remain solid and stable.

To be sure, earnings have been negatively affected by the tumult in economic statistics.  But the secular shift towards growth and expansion is still strong in a majority of sectors.  We believe that P/E multiples will propel the equity markets higher during this year.  The reason: an increasing percentage of that expansion will come from emerging markets; new industries domestically and abroad (biotech, healthcare, energy, agriculture, and infrastructure); and significant capital reserves that will be plowed back into stocks when rates recede.

Bad-bye?

The primary catalyst for earnings acceleration will be the desire to keep inflation low.  Managing borrowing costs and finding a happy medium in which rates are sufficiently “stimulative” are the keys to building public/private confidence in the investment process and creating entrepreneurial innovation.  The government doesn’t need to be the engine of first resort when aggressive R&D combines with sufficient capital reserves.

Moreover, the seeds of today’s economic growth were planted as far back as the last recession in 2008.  The prolific amounts of capital required to bail out the marketplace then are actually paying off now with greater productivity, modernization of plants, and a new manufacturing spirit.  The painful interruption that was Covid only heightened the passion not to screw up what had been carefully orchestrated a decade earlier.

Without question, there will be turns and bumps in any economic cycle…but not one that should lead optimists towards pessimism nor pessimists to rejoice.  Quantitative science tells us that cycles…ebbs and flows…are normal.  The most important statistic is angle of ascent.  Though shallower and less aggressive than many would like, it remains in a trajectory from “bottom left to top right”.  And right now that gives us enough to work with to create portfolio valuation increases for the foreseeable future.