If you follow our take on the financial markets through this column, our website, or our Sunday morning emails, you know that for a variety of reasons we have been a little cautious. However, we believe that the last four months of this sideways moving market have eliminated most of the downside risk, are slowly coming to an end, and investors should gradually position themselves for a continuation of the bull market.
For those trying to make sense of this bullish bias, keep in mind that the direction of the stock market is often not a reflection of the economy but rather a reflection of investors’ emotional reaction to current events. irrelevant or relevant current events, but with a short tail.
Successful investors have the opportunity to remove emotion from the process, separate news from noise, and focus on long-term predictability in financial markets rather than short-term volatility. Focus on the climate rather than the weather.
What are some of the bricks that have been laid to build this wall of worry that the bulls will climb on?
Inflation. Retail prices as measured by the Consumer Price Index (CPI) rose 0.4% in September and 5.4% year-on-year, while wholesale prices, the price index to production (PPI), rose 0.5% last month. and 8.6% year-on-year.
We believe the supply chain disruption as a result of COVID has made manufacturing (production), shipping (logistics) and selling to consumers (labor) more expensive. However, at present, our basic outlook is that rising labor costs are the only element in the supply chain that has a lasting impact on economic growth. Industries that will be negatively affected will include those that cannot pass price increases on to the consumer.
Technological advancements, including the long transition (measured by decades) from fossil fuels as an energy source to a more environmentally friendly choice, will become increasingly disruptive, transformational, and will have tentacles that extend from further and further into our economy and our society as a whole. These advances, while sometimes unappreciated by many, will limit the recent upward momentum of inflation in some sectors, but may cause imbalances between supply and demand and possibly inflation in others. the magnitude of which remains, frankly, to be determined. .
At this time, we are currently unable to determine the net impact of the above on the way we do business, consume, care for our young and old, vacations, seeking entertainment, etc. However, it is important to recognize that technology, as well as the progression of the COVID virus and our fight against it, will play a vital role.
We recognize what we believe to be a more than transient “power” shift from employer to employee and we are turning rocks to find industries that will thrive as well as those that may lose out.
Despite the recent upturn in economic activity, we continue to prioritize growth over value and also remain optimistic about companies engaged in sectors in times of secular growth. Due to the recent upturn in economic activity, we favor the domestic market over the international and equities over bonds.
We would be remiss if we did not address our long-term concerns about the US budget deficit and the amount of excessive stimulus that is pouring into the economy. However, in the short and medium term, this infusion and the record amount of savings accumulated by the Americans outweigh this concern, represent the asset and constitute a major factor of our optimism.
Please note that all data is for general information purposes only and does not constitute specific recommendations. The opinions of the authors do not constitute a recommendation to buy or sell the stocks, the bond market or any security contained therein. Securities involve risk and fluctuations in principal will occur. Please research any investment thoroughly before committing any money or consult your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell securities for themselves which they also recommend to clients. Consult your financial advisor before making any changes to your portfolio. To contact Fagan Associates, please call (518) 279-1044.