Market Strategy 3/14/2022

• Stateside and global investors will be focused midweek on the outcome of the Federal Reserve’s FOMC meeting on expectations that it will raise its benchmark rate for the first time in nearly four years.
• A ramp up in the ferocity of the Russian attack on Ukraine has created a negative overhang on equity markets around the world. Commodity prices have risen on risks of further disruptions to the already dysfunctional global supply chain.
• With 497 or 99% of the firms in the S&P 500 index having reported, earnings are up 29.8% in Q4 from a year ago on back of revenue growth of 16.1%. Some 73% of firms beat analyst forecasts.
• Data last week showed inflation rising to 7.9%, a 40-year high, but considering base effects when looked at over two years, the inflation rate in February would stand at 4.7% while the core rate (excluding food and energy) would be at just 3.8%. 

Traders and investors will have plenty to ponder this week with the Russian incursion into Ukraine moving into its third week and showing no signs of letting up while economic re-openings gather momentum around the US and inflation appears stuck for now at 40 year-highs, and with the Fed expected to hike its benchmark interest rate for the first time since 2018 at its FOMC meeting midweek.

With just 17 days left on the calendar to close out the first quarter of 2022 the proverbial jury in our view is a long way from coming to any conclusion as to how the year will unfold from here to year end. There’s a lot of moving parts political, geopolitical, financial, economic and social to work their way “out of the woods” that the world finds itself in.

Near term there’s so much uncertainty facing the global economy and the markets as to the outcome of what’s taking place in Ukraine, how successful (or not) the Federal Reserve and other central banks around the world will be at curbing record high levels of inflation and the open ended issues as to whether COVID-19 and its variants are near done or not—making key in our view for investors to consider the importance of diversification, sturdy portfolio design, along with right-sized expectations and an ability to exercise patience.

In our view it is likely too late to get defensive and instead more important to distinguish the quality of investment holdings and take advantage of the current levels of volatility to pick up babies (quality oversold stocks) that have been thrown out with the proverbial bathwater (less worthy stocks and negative emotions).

While we believe it’s important in portfolios to “keep some powder dry” (cash on the side for a rainy day when an outstanding opportunity might appear) it’s important to consider that with inflation running at near 8% at the CPI level too much cash can be a “wasting asset” for investors with intermediate and longer-term objectives.

We’ve never been known as “back up the truck” investors (“buy with impunity” types) but rather are selective at what we buy and what we sell at times like these. Market history has shown in hindsight that worrisome events have proven too often to be better times to weather the storm rather than to cut bait and run depending on the quality of the assets one holds and what diversification is employed.

In our view the level of uncertainty facing the global economy at this time should be taken less as the focus of concern but rather as a possible window of opportunity should the current challenges be suitably addressed by monetary policy makers and government officials around the world.

From our perch over the decades on the market radar screen it’s not so much the problem as the quality of the response that will count at a future date. Think back to the financial crisis and its resolution. Think back to April 2020 when prospects for vaccines of efficacy seemed unlikely to appear in a timely fashion. Remember how things worked out and to what extent. Avoid utopian impracticality. Keep it real.

We often remind investors and ourselves that there never has been nor do we expect will there be an “all clear signal” sounded over the investment landscape. As a colleague and mentor often reminds us “nothing is easy.” We’d add: “….and even when it might seem that things are easy—the normal ebb and flow of day to day challenges will present catalysts normal and not so normal to remind us that reality rules over the course of history.”

The resilience of the US economy and to some extent the world economy persists in supporting innovation and the adaptation of technology by business and consumers alike feeding we believe prospects for further economic and corporate earnings growth ahead.

In our view, technology today looks from a historical perspective parallel to where the automobile was early in the twentieth century. Henry Ford around that time automated the assembly line, elevated quality standards, and made the automobile accessible and affordable to millions of people. It changed the way business and consumers respectively executed and shopped and the way people lived their lives.

Technology in our view is in a similar place today: rapidly changing the way we do the things we do, creating greater opportunities and efficiencies across all eleven sectors of industry and throughout the world supporting secular (longer term) trends that foster competition and are counter-inflationary over the longer term.

These times appear to us similar to others we’ve weathered across our lives and careers. During times like these we find it key to avoid missing the forest for the trees