| Markets have been acting poorly since the start of summer. After a strong bounce to begin 2023, stocks have stalled out with pessimism building. A confluence of events is to be blamed as stocks grapple with considerably higher interest rates than a year ago, while inflation has cooled but remains far from the Fed’s 2% target. Throw in a dash of consumer fatigue, a UAW labor strike, sprinkle in a US debt downgrade, multiple bank downgrades and what seems to be an ever-increasing border control concern and you have the makings of a classic summer sell off.
In the midst of the dark clouds, it’s always difficult to even begin to imagine how things can improve. You’d probably be considered a little out of whack if you didn’t feel the negativity building as we ponder the future of our country.
The irony is that we seem to go through this same situation every few years. In the last decade alone markets have faced considerable headwinds such as a European debt default led by Greece, North Korean missile threats, a war between Russia and Ukraine and let us not forget the Coronavirus which shut down manufacturing and businesses entirely for many months. In each environment, capitalists prevailed, and businesses rebounded. Markets found their footing and stocks traded higher. Despite what has looked like the brink of disaster on countless occasions, we’ve always managed to back away from the ledge and right the proverbial ship.
While I was managing money through the dotcom collapse as well as the great financial crisis, bear markets worthy of testing anyone’s patience, I can’t even begin to imagine what it was like during WW2 or the great depression. I’m guessing there were many who felt that the US was done, and markets were certainly never going to trade higher again.
Today I field questions on everything from the value of the US Dollar, my views on the debt, cryptocurrencies, politics, corporate earnings, and everything in between. While the future is uncertain, my answers, which are built on the bedrock of this great nation, always remain the same. We have the smartest businesspeople in the world running the largest corporations on the planet. They are doing business all over the world and in fact, more often than not, the US represents a small piece of their overall business model. When stocks fall on uncertainty and at times investors lose their focus and panic, I am at the ready to gladly buy what they fearfully sell.
While you may think my opinion is rooted in fantasy, allow me to share a few facts that are worth keeping in mind.
The US Dollar remains upwards of 60% of the entire world’s reserve currency. Second to the Euro and the Yen, two countries with zero desire to supplant King Dollar. The idea that the US Dollar will be replaced by anything else in the near future is more fantasy than reality.
While the US grapples with its spending problem and debt levels, corporate balance sheets remain incredibly flush with cash. In fact, 13 firms within the S&P 500 currently hold over $1 Trillion in cash, while the entire group of companies have roughly the same amount of cash as they had to end 2020 as companies hunkered down from the pandemic. While it is concerning to me to see the Joneses loaded up on Visa and Mastercard debt, as an investor, I’m much more concerned about the financial health of the companies I’m investing in. I’ll never be buying shares in the Joneses, that’s for sure.
A counter argument to the recent Fed’s action is the incredible amount of fire power they’ve been able to build up, which many suspect may be put back to use sooner rather than later. The unprecedented rate at which the Fed has raised overnight rates and embarked on shoring up their balance sheet also means that when the economy stalls, which looks to be happening, the amount of liquidity at the ready for the Fed is enough, in my opinion, to restart the fiscal flames.
This last item is rather bittersweet and as an investor has me incredibly optimistic, however as a citizen gravely concerned. Whether it be the UPS wage increase, UAW strike or simply a lack of readily available employees, technology is rapidly being used to supplant employee headcount at a feverish pace.
Consider something as small as the self-checkout lane at your local grocery store, which has eliminated several cashier jobs or something as large as robotic warehouse sorting, packaging, and shipping. I believe we’re experiencing a front row seat to the great employment technology replacement revolution or ETRR (which I just made up but sounds right)
One of the great attributes of entrepreneurs is their ability to adapt and overcome. When you challenge an entrepreneur with a shortage of workers or an ever-increasing employment cost, they will cut overhead and implement less costly solutions. The result will be higher profits, and unfortunately higher unemployment.
I could write about several other items that keep me long term bullish, but I will conclude by reminding us all that as an investor we’re focused on corporations and their value with regards to how much money they are making and have the opportunity to make in the future. When stock prices drop based on fear or an emotional response to the unknown, there has traditionally been a great opportunity.
As we enter the 4th quarter and conclude 2023, I continue to be more optimistic on stocks than I have been in a very long time. I believe the genuine mood of the public, while appropriate for the challenges we face as a nation, are not indicative of the future of the markets. Furthermore, I believe 2024, the political backdrop will make the powers that be very motivated to do everything in their power to improve the economy and the stock market. |
