Things are clear as mud
This is the strangest market and economic environment of my career. Michelangelo would not be able to paint a clear picture of all this. You should always be wary of people who have strong opinions about the future, but perhaps never more so than right now.
Here is my best attempt to explain where we came from and where we are today.
This year has been devoted to inflation and interest rates. Rising inflation killed stocks and rising interest rates killed bonds.
Consumer prices began to take off in the spring of last year as the economy was taken off life support and began to run sprints. There has been much debate over whether or not the increases were transitional. It wasn’t, and we saw nothing but further acceleration, with the most recent reading hitting 9.1%, the highest figure in over forty years.
To help ease price pressure by cooling demand, the Fed has raised rates four times this year with the intention of continuing to rise until prices fall.
Rising prices destroyed consumer confidence and falling stock prices destroyed investor confidence. Homebuilders are in dire straits, with sentiment falling the most in July in 37 years, excluding April 2020.
The stock market is generally forward-looking, but let’s be honest, it doesn’t always get it right. He hasn’t done a great job of sniffing out inflation, for example. * The CPI first crossed 5% in May, and the S&P 500 did not peak until January. With stocks well past their lows, I wonder if they are pricing in less bad earnings or a spike in inflation. Orrrr, maybe it’s just a dead cat bounce, and I’m trying to find meaning where there is none.
Banks kicked off earnings season by telling investors that business and consumer credit was doing well, never better in some cases. But nearly all told investors they were bracing for a downturn. Then we heard AT&T drop its forecast and retailers like Walmart did the same. Snap fired advice, and we braced for the impact to hear what Google and Facebook would tell us about the state of the ad industry.
Stocks stopped falling in June and really started to climb last week after we got strong numbers from companies that shared their second quarter results. Google posted 13% revenue growth, the slowest since 2015. Not great, but not as bad as investors had expected, with the stock down more than 30% from its highs. Apple, arguably the largest company in the world, reported record numbers for its June quarter. And travel companies have told investors they see no signs of slowing down.
So who are we listening to? Maybe the banks are conservative. Maybe retailers blame inflation when they mismanage their inventory. Maybe Snap just can’t monetize its users, and advertising, one of the most cyclical areas of the economy, is actually okay. Google’s 11% revenue growth in this segment seems to indicate that this is the case.
It may seem absurd to the point of obviousness, but the simplest way to describe what is happening now is that some companies are being hit harder by macroeconomic conditions than others.
Based on what we’ve heard income calls and based on what we’ve seen in the labor market, it’s hard for me to say the economy was in a recession in the first half of the year, even with a fall in GDP for two consecutive years. quarters.
The big questions now are: has inflation peaked, will we enter a recession, can the Fed pull off a soft landing, and what has the stock market already priced in?
Let’s take this one at a time.
We have started to see signs of lower inflation, although the numbers have not budged yet. The goods arrive everywhere; Lumber is down 60% from March and national average gasoline prices are down 16% since mid-June. That’s all well and good, but on the other hand, housing prices are still high and nominal wage growth has not slowed down at all.
On the word r, it is the Rorschach of all Rorshachs. I happen to think that, again, looking at labor markets and listening to income calls, it’s hard to say that we were in recession during the first half of the year. At the same time, one could argue that a recession is coming. And with the Fed actively trying to dampen demand, it’s probably best not to think too much about this one. ***
Can the Fed pull off a soft landing? Three months ago, I would have said no. Now I think there is a chance. There is a debate about what the Fed said last week versus how the market interpreted its words. The S&P 500 has climbed 5.4% in three days since the Fed spoke, leading Neel Kashkari to say:
“I’m surprised by the markets’ interpretation,” Kashkari said in an interview. “The committee is united in our determination to bring inflation down to 2%, and I think we will continue to do what we need to do until we are satisfied that inflation is indeed coming back down to 2% – and we are far from it.
In the 164 days between the January 4 high and the June 16 low, the market has priced in a lot of bad news. The S&P 500 fell 23%, the Nasdaq-100 33%, high-flying stocks lost 90% of their value, new quotes dried up, crypto surged and investor enthusiasm plunged.
Over the past two weeks, the news has continued to worsen****, but stocks have stopped falling.
It’s been 209 days since the S&P 500 peaked and 46 days since it bottomed. The question now is, was it the down, or just a bottom?
Some of the best performing stocks over the past two weeks are those that have been hit the hardest over the past two years, as you can see in the chart below. And some of the worst performing stocks over the past few weeks are the ones that have performed the best over the past year.
People might say this could be a sign of a junky rally. I haven’t seen any evidence that market dips have to adhere to a certain set of principles, but in any event, this rally has been pretty widespread.
To sum up, I’m confused. The best thing to do now is to stick to your overall investment philosophy, whatever it is. And if you don’t have one, find one quickly.
Markets aren’t always right, as mentioned earlier, but they’re certainly better at price risk than your stomach. Don’t let your big decisions be driven by fear and greed. Look, I’m human, I’m more optimistic now than I was in June, but you wouldn’t know that by looking at my wallet. I already know what I will do if the market goes up or down. In other words, try not to get distracted by the stock market.
I have no confidence in my ability to predict the future, but if you forced me to give an opinion, a guess, it would be this one; investors are getting too optimistic after being too pessimistic. A few weeks ago, Amazon erased four years of earnings. After dropping 45% from its peak, the stock was where it was in 2018! Now Amazon and others like it are bouncing back on retrospective earnings numbers, indicating that previous forward-looking estimates by investors were too pessimistic. A decent income turns out to be enough.
The future is never clear, but some moments are hazier than others. Now is one of those times. Luckily for you and me, seeing the future isn’t a prerequisite for being a successful investor. Focus on what you can control; the rest will eventually take care of itself.
* I guess you can point to the High Thieves culminating in February 2021 as a sign they did, but again inflation was above 5% for eight months before the broader indexes peaked.
***I can go 2,000 words into this one, but this post is already scorching
**** I can spend another 2,000 words on this one. Some businesses are doing well, some are struggling, some are dying. Some think inflation has peaked, others don’t. Some think the Fed is preparing to pivot, others think it is still hawkish.