Weekly Commentary,5/19/2023, Capital Markets, Economy
VenkataRaghu K.
Registered Investment Advisor|Financial Planner|Financial Analyst|CPM?
This week, it got delayed than usual in publishing this update. I wanted to make correlation tables and do an association analysis combining the fund data and weekly economic factors. That took longer than anticipated and might further delay the update. So I want to go with the material already on hand and update the article when the analysis is ready. Also, this month's detailed study compared to the last few months' data and performance is in the works, and I will share it with some additional proprietary analysis.
Most large retailers like Walmart and Target have released their 1st quarter results. The running theme is low customer sentiment, and many people have tightened their spending. People are spending money on essential items (nondiscretionary) but holding off on purchasing big-ticket items.
We are near the end of May, and a consensus has yet to be reached on the Debt ceiling. The negotiations have taken a predictable route of the diametric blame game, with neither side budging so far in their positions. Meanwhile, the cottage industry of punditry has been on a constant barrage of doomsday predictions on a financial Armageddon that is looming around the corner. Their business model is ad revenue or speaking fees. The more eyeballs for their predictions, the more their income. Nothing attracts more quickly than an emotional doomsday scenario. I am in a glass house, publishing my articles here and elsewhere.
I am not in denial about the blood bath regarding the market turmoil. There is a higher chance for correction in the real estate market, at least in areas where 30-50% growth happened within 2 to 3 years. Investors, or speculators, need to remember history and rational financial analysis when bubbles are being grown. It does not even need sophisticated analysis. Do the interest rates and people's incomes support such a valuation? That is the question that needs to be asked before investing in a frenzy. The same thing holds for stock valuation also. Will the long-term arc of the company, growth, profits, and operating margins support the valuation? But something to remember here is John Maynard Keyes's expression," The stock market can remain irrational longer than you, and I can remain solvent."
Long-term thinking seems like a fool's errand for a speculator as the constant noise of the daily, weekly wins and losses stimulates one into an irrational lull regarding the capital market's provable long-term compounding and liquidity benefits. Sound principles, separating noise from the signal, and contrarian thinking are all requirements for long-term wealth building. Fads come and go, but the reality is that a sustainable, replicable method shall be there for us to create our pensions from the myriad of tax-deferred and taxable accounts available.
Economy:
The weekly economic indicator data are mixed. There is a decrease in consumer confidence, electricity output, and fuel sales. There is a reduction in unemployment insurance claims, which is good for the economy's overall health. Retail sales, railroad traffic, and steel production have seen an increase. The short-term data sends mixed signals regarding a possible slowdown in economy.
Capital Markets:
There were no widespread losses that exceeded -3%. S&P 500 index picked up 1.5%. However, some sectors did exceptionally well. The energy sector rose nearly 5% because of the never-ending Ukraine war crisis. Regardless of which camp we are on, that war's human toll and misery are unmissable and a looming lesson on power plays and lurking Thycidides trap in the great power rivalry brewing.
The bond market developments have no significant changes in direction for the week ended. The bonds' duration indicates their volatile nature, and as such long-term bonds have been nearly as volatile as stocks in the recent past. That volatility is one reason for Silicon Valley Banks' asset evaporation in a jiffy.
Insights:
Opportunities are being presented due to the uncertainty and negative sentiment prevalent in the market. Sectors that remain stable in a slowdown and bonds that could provide coupon interest that is a net positive adjusted for volatility and price fluctuations are areas to look into for long-term investors that plan for a longer time horizon. These are exciting times for those who can do dollar cost averaging in their accounts, as most people/investors are not 100% sure about the economy's or markets' direction in the next six months. For those waiting for an ideal time to get into the markets, nearly every sector has been recovering for the past six months. While predicting the next market move is complex, the 5-year and 10-year returns in the markets should be an eye-opener despite wars and slowdowns.
Another favorite pastime of nihilists is pessimism in our economy and the growth of India and China. It shall never be a zero-sum game as there is enormous growth potential in several sectors despite the competition we face from other economies. In the near term, our growing debt is concerning and will drag on the economy's growth. Just based on the size of the economy, corrective actions are possible to do a course reversal. Disciplinary actions could include tax rate changes and economic stimulus due to a good labor and capital allocation policy. All of this requires some consensus within both parties, as any drastic measure will be anathema to extremists in each party. We will likely agree on any meaningful direction change once we are on the brink of economic disaster. Until then, we will keep dragging on while opportunities are always created due to policy or the sheer efficiency of some companies or sectors.
Contact:
Raghu Kumar Komari, CPM?, Candidate for CFP? Certification
www.iriswealthadvisory.com
Disclosures/Disclaimers:
The commentary is provided for educational purposes only. It shall not be considered Investment Advise, Financial Planning Advise, or a recommendation of specific funds. Fees and taxes are not included in any hypothetical model or fund analysis. Please do your due diligence.