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.
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