We want to give a shout-out to all the clients who joined us at the Fort Wayne Children’s Zoo on Sunday. We were treated to a picnic lunch at the pavilion in the African Journey, then a show by a couple of the Zoo’s keepers, who showed us 3 animals, including this python:
The Zoo is a treasure in this community. It is always changing, always adding new exhibits and beautifying others, and always in an ecologically conscientious manner. We are thankful for their impressive stewardship.
If there was one disappointment, certainly it was when John announced he was about to launch into a slide deck on the markets…then said he was kidding. The crowd’s groan was heavy. But no worries, we will now attempt to make up for that gaffe.
This has obviously been a wild year, given all that investors have had to digest, and the resultant volatility in both the stock and bond markets. That said, not much has changed in the macro picture since our last blog post in March, and George’s newsletter that followed in April. Inflation continues to run rampant. The Fed continues to raise interest rates and rattle sabers about raising them a lot more. Manufacturing supply chains continue to be short on supply. Investors are worried about consumer spending eventually caving under the weight of inflationary pressures, leading to a possible recession in 2023 (some say even earlier). [ed. note: if so, it would be the best-advertised recession ever.]
The newest data points have come in the last 2 weeks from quarterly earnings reports. Most retailers have fiscal-year ends on January 31, and thus their first quarters run through April. Contrasted with the March-end earnings reports of consumer-facing companies a month ago, when companies nearly unanimously agreed that the consumer was accepting all price increases, the tone seems to have changed. Cost pressures (shipping and labor, namely) have eaten into earnings. Consumer demand for goods has plateaued, or at least morphed, faster than expected, particularly among lower-income consumers, whose battle with inflation is much rougher than for consumers with higher disposable income. It’s not a surprise that consumers are spending more on experiences, as opposed to goods, as covid restrictions have eased. But the degree to which the retailers were caught off guard, and now are burdened with higher inventory levels, suggests the pullback has been rather sudden. Other companies with April quarter-ends, like Cisco and Deere, are suggesting that business and farm spending might hit the pause button, although the companies say this is due in large part (or entirely) to supply-related component shortages. Cisco’s orders and backlog continue to grow. New home sales have dipped for similar reasons (shortage of building materials), just as new car sales have (shortage of semiconductors).
Other companies are reporting that little has changed in April and May, and they have kept their growth projections intact for the rest of 2022. Many of these are department stores which skew toward the higher-income consumer, and Home Depot and Lowe’s still sounded relatively upbeat. After the browbeats suffered by Wal-Mart and Target, it was a surprise today that Dollar General kept their projections intact.
It should also be reiterated that while we feel a responsibility to have our finger on the pulse of the economy, it does not single-handedly guide our investment process. We invest for the long-term, and we humbly accept the truth that we cannot predict where stock prices are going in the short-term. We are heartened by how the market tested lows multiple times in the past week, all of which were -20% from the peak for the S&P 500 (a significant technical trading demarcation between a bear market and a correction), and bounced up off the lows every time. Even as the market was hitting those lows, the Volatility Index (VIX) was rising, but to lower highs. Believe it or not, the VIX peaked on an intraday basis in January; this means that panic selling hit its peak then, not when the market was lower in April and May.
The point of looking at these technical factors is that it seems like there’s plenty of investor interest to buy around that -20% level. Of course, the market could hit new lows; it’s always possible. One noteworthy fact is that very, very few investors have even made a single trade during this stock market swoon. Hedge funds have found fertile ground to bet against stocks, and as things went their way, add to their bets. They are largely responsible for the market’s correction.
There is still plenty to be concerned about. Frankly, our greatest concern since the bulge of excess pent-up consumer savings ($2.3 trillion, it is estimated) formed in 2020 and 2021 is that it would all get spent too quickly. This would leave a major hangover on the other side of the spending binge. Thanks to the never-ending covid waves, and now inflation, that binge is not happening. It might get drawn out over multiple years, or it might sit on consumers’ balance sheets. Either would be a positive outcome.
Thanks to this pause in consumer spending on goods, it is also possible that we could now be at a point where inflation news, projections on Fed interest rate hikes, and supply chain shortages are all close to their worst point. The old adage is that there might be light at the end of the tunnel, or…it could be a train.
We have enjoyed the fact that many of the stocks you own are up this year, in a market that is down 17% (S&P 500, through May 25). Yet there are plenty of buying opportunities in stocks that have fallen more than the market. If stocks retreat further, this will represent an even better buying opportunity for the long-term.