f you are following our take on the financial markets either through this column, our website or our Sunday morning emails, you will know that for various reasons we have been somewhat cautious. However, we believe that the past four months of this sideways moving market has wrung out the majority of the downside risk, is slowly coming to an end and that 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 quite often is not a reflection of the economy but rather a reflection of investors emotional reaction to current irrelevant news events or relevant news events, but ones with a short tail.
Successful investors have the ability to strip out the emotion from the process, separate the news from the noise and focus on the longer-term predictability of the financial markets rather than the 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 over which bulls will climb?
Inflation. Prices at the retail level as measured by the Consumer Price Index (CPI) rose 0.4% during September and by 5.4% y/y, this as prices at the wholesale level, the Producer Price Index (PPI), climbed 0.5% this past month and by 8.6% y/y.
We believe that the disruption in the supply chain as a result of COVID has made it more expensive to manufacture (production), ship (logistics) and sell to consumers (labor). However, at this time our baseline outlook is that the increase in the cost of labor is the only component to the supply chain with a lasting impact on economic growth. The industries that will be negatively impacted will include those that cannot pass price increases to the consumer.
Technological advances, including the long (measured by decades) transition from fossil fuels as a source of energy to a more environmentally sound choice, will become more and more disruptive, transformational and will have tentacles that reach down further and further into our economy and society on the whole. These advances, although sometimes not welcome by many, will cap the upward momentum to the recent spike in inflation for some sectors, but may cause supply/demand imbalances and perhaps inflation in others, the extent of which is, candidly, yet to be determined.
As of yet, we are currently incapable of ascertaining the net impact of the above on the way we do business, consume, care for our young and old, vacation, seek entertainment, etcetera. However, it is important to recognize that technology along with the progression of the COVID virus and our battle against it will play a vital role.
We recognize what we believe is a more than transitory shift in “power” from the employer to the employee and are turning over rocks to find industries that will flourish as well as those that may find themselves on the losing end.
Despite the recent pick-up in economic activity, we continue to favor growth over value and also remain bullish on companies engaged in industries that are in a period of secular growth. Because of the recent pick-up in economic activity, we favor domestic over international and stocks over bonds.
We would be remiss in not addressing our long-term concern regarding the U.S. Budget Deficit and the amount of excess stimulus flowing into the economy. However, over the short- to intermediate-term, this infusion as well as the record amount of savings Americans have accumulated outweighs this concern, represents the trump card and is a major factor in our bullishness.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call (518) 279-1044.