Comments on the Market
A mentor of mine once told me that stocks go up far more often than they go down, but they go down faster than they go up. It’s the velocity of the price movements that often shake investors. Our brains are hardwired to fear loss more than we are excited about gain. It is for this reason that investors often make mistakes during a market sell-off. Fear can be highly effective in clouding normally practical minds. By mid-week it was clear that we were indeed in the midst of a good old-fashioned stock selloff; the kind grandpa and grandma would be proud of. “Back when I was your age the Dow dropped 680 points in a day.” Down 680 points will get more headlines than simply saying the market declined by 2%. Markets bounced back on Thursday and Friday, as investors said, “Too low, too fast.” Let me share what I believe was the reason for the selloff during the first half of the week.
There is no “I” in stocks, or stonks, as the kids say these days, but there is an “I” in inflation. Remember inflation? “Back when I was your age the purchasing power of my dollar would erode by 3% per year.” It’s back grandpa. If you listened to our podcast on NFT’s released on Wednesday, you heard me say that I was up late the previous Friday trying to figure out why stock prices were falling when the overwhelming majority of companies who reported earnings beat expectations. It can be explained in one word: inflation. The stock market is a forward-looking mechanism. When inflation rises, the revenue streams created by publicly traded companies will not be worth as much in the future. As a result, stock prices can go down in the short term. Growth stocks are often affected the most because interest rate increases are often used to slow down inflation.
Are we looking to sell out of our growth stocks? Absolutely not. Remember, if we own stocks as a part of our investment strategy, it means that we have a multi-year time horizon. Additionally, some of the publicly traded companies we invest in just had their best quarter in history. We are net buyers of quality stocks as they will provide significant means of appreciation into the future. But what about now?
Remember a professional contractor does not go to the Jobsite with just his or her favorite hammer. They carry their entire toolbox because they never know what problem may arise. Our current problem is inflation, likely (in my opinion) caused by the artificial increase in money supply through stimulus, supply chain problems related to COVID shutdowns, and the lack of willing employees for businesses. This week we saw McDonald's and Amazon boost their minimum wage and even offer signing bonuses for candidates who were willing to come to work. Cost of production will get passed onto the consumer in the form of good old-fashioned inflation. The silent thief. So what’s the plan?
Last week I mentioned that we had added commodities to most of our portfolios. Commodities are things that you purchase, like food, lumber, oil and gold. If we own a commodity index, we can benefit from the rising price of goods. Real estate tends to also do well in times of rising inflation. Real estate is part of all of our models right now and has been for years. Equities (stocks) over the long-term are still the best way to outpace inflation, though it may cause some headwinds in the near term. We currently favor financials. Eventually, interest rates will rise, and when they do, we believe financials should continue to benefit. Shippers of freight can be an indirect means to benefit from inflation. Freight is built into the rising cost of goods. If technology stocks continue to face headwinds, we may get a tremendous buying opportunity, so while we look for current opportunities, we must be careful not to lose track of the strategy that got us here: buy outstanding investments and hold them over a long period of time.
The market changes, we react. For more information about inflation, you can check out the next Dynamic Growth podcast that will be released Wednesday. Derek and I take a deep dive into inflation, its causes, threats, and benefits. It's going to be a great weekend. Get out in your gardens! I appreciate your trust.
Nate Crosby, CRPC