Due to the many distortions stemming from pandemic related developments, it is often difficult to “properly” decipher economic data. Changes in the economic environment are often subject to very rapid changes. We could soon be entering a period where changes might accelerate, leading to surprising outcomes. Investors should keep an open mind and maintain a “flexible” mindset.
For the time being we are maintaining our basic investment approach as expressed in last week’s commentary. We continue to prefer high quality stocks that offer good balance sheets, as well as relatively stable cash flows and profit margins. We prefer a global diversified portfolio for long term investors. We continue to stress that stock selectivity in this current environment is of paramount importance. We forecast continued financial markets volatility.
We continue to remain concerned that there could be more disruptions stemming from issues relating to smaller regional banks. Hopefully we will develop a clearer picture of credit availability as regional banks report their earnings, reserve allowances and their proclivity to lend. We found it striking that uncertainties surrounding consumers’ year ahead expectations appear to sometimes mirror fixed income volatility even while their longer term expectations remain well anchored generally.
We expect the Fed to hike the federal funds rate by 25 bps at its next meeting and then “pause” for quite “some time.”
The cracks in the high inflation, tight labor market and relatively robust economy narrative have begun to accelerate seemingly. In this context, we were reminded of Linkin Park’s song “Castle of Glass.”
The banking crisis depicted in our last two commentaries commanded mostly the attention of Congress and various government officials this week as they tried to discern who the “bad guy” was – or who the bad guys were – who helped precipitate this crisis. In her song “bad guy”, Billie Eilish made it easy as she identified herself as the “bad guy.” We thought that one phrase in particular captured the essence of her persona in the song: “I do what I want when I’m wanting to.” We surmise that this might have been the attitude of many people who were involved in laying the foundation that could turn into the crisis that transpired.
Late Thursday morning, we thought that it was highly likely that U.S. equities traded at a level that could be at least a short-term peak. We thought that the risk-reward no longer justified full positions in many stocks. We also detected what we would characterize as much complacency in regard to economic trends, which many investors and analysts viewed as perhaps predictable and evolving slowly. We suppose that future economic and inflation trends could evolve in a sudden and non-linear pattern.
The Fed will have a difficult task in balancing the risks of tighter monetary policy to rein in inflation against the risk of financial instability. To what extent are these objectives compatible? To what extent will the Fed become a chameleon? To what extent will this change the Fed’s “karma?”
Throughout 2022, the equity markets challenged even the most seasoned investor’s definition of “risk.” As one of the Partners here at NewEdge Wealth recently put it, when volatility spikes and asset prices fall in value, investors often realize that their risk tolerance is different than their risk capacity.
We continue to stress that stock selectivity in this current financial market environment is of paramount importance. We are looking for that special “Desert Rose.” We remain wary that we are not imagining what we want to see, but instead keep an open mind so that we can better see the “reality” of a company’s fundamentals. Only then would we be able to properly assess the risk-reward of owning a particular investment. Another important consideration would be how a specific investment might fit into a diversified portfolio.
We continue to stress that stock selectivity in this current financial environment is of paramount importance. We will reassess our investment posture after we have analyzed the next set of monthly economic data. We maintain our strategy of buying equities only on downturns. We will continue to scrutinize investments on a risk-reward basis.