Originally published on January 16, 2022
In our first blog of 2022, I suggested this could be a tough year. While most predictors tend to predict their wishes, this says more about them than it helps. Perhaps the most useful predictions are expressed in a fan-fold display, with at least three lines from the current origin to some future date. The chart offers at least three possible paths: high, medium and low. My faulty crystal ball is no match for this model. My current outlook is negative. Maybe it’s my military training, when I take on a position of responsibility and look for all possible avenues of attack. Following this process, there are immediate reasons for concern for our investment portfolios. (As I said before, I hope I’m wrong.)
Causes for concern stem from my weekly review of data and news stories. You can interpret any or all of these factors negatively or positively or consider them unimportant. I leave it to our followers to make up their own minds and hopefully share their views. The issues are listed in the order I encountered them, not in order of importance. In parentheses and in italics after each item are my concerns.
- Most commentators focus on the Federal Reserve Board’s expected moves in interest rates and the disposition of their vast portfolio of debt instruments. (I expect the Fed to continue its traditional role of delaying the change in direction, confirming trends already in motion rather than signaling a change in direction. This view stems from the fact that the president appoints governors of the Fed, which in turn are confirmed by the Senate.Last week, three people with no apparent experience of working in a bank, a profitable business enterprise or managing money as a fiduciary were appointed. the Fed is an independent agency, it is highly unlikely to take a viewpoint opposed to the President.Many investors believe that the rapid rise in interest rates is largely due to the Fed’s accommodative policies under the current and previous president. Inflation is the result of many other imbalances in the national and global economy. Under the current circumstances, I am concerned.)
- From last week to Thursday, 11 of the top 25 performing mutual funds were precious metals funds, with 7 of the worst 10 being growth-oriented funds. (The stocks in these portfolios are moving in the direction suggested by high inflation and a short-term stock market.)
- One of the oldest stock market predictive approaches is the Dow Theory. Continuing the current trend requires the Dow Jones Industrial Average and the Dow Jones Transportation Average to move in the same direction, with each index confirming the other’s high. The transportation index has been falling since November, while the industrial average hit a new high. (If professional transport buyers believed that orderly demining of seaports would solve rising inflation, the index would rise.)
- The former Journal Commerce Industrial Price Index continues to rise, gaining 2.7% last week. (Inflation is broader than consumer prices, transportation costs, and excess money supply growth.)
- The Barron’s Confidence Index predicts that bond prices will outperform stock prices over the next six months. (This happens rarely and is a sign of a bearish stock market)
- Robert Lovelace, senior civil servant and portfolio manager of the highly respected Capital Group, pointed out that we are in the 11th year of stock market expansion. The increase in price/earnings ratios largely contributed to its rise. (Corporate earnings generally move more slowly than valuations. Therefore, we can have a bear market with flat or rising earnings when valuations fall.)
- The largest contributor to global trade growth is China. Compared to the United States, China is a controlled economy. Even with all its controls, the results slip. (Without China’s need to import high-quality goods, services and energy, exports from developed countries will decline. This is important for the United States, Germany, Italy, Canada and Australia, among others that supply imports to China.)
- Bondholders faced volatility risks over 5 years of interest payments in January. (If the bond market is risky, it is also dangerous for global equity markets. Most stocks are leveraged by the amount of fixed income securities borrowed. There are many highly leveraged positions in high-end bonds. quality.)
- Ukraine’s unequal position in relation to the 100,000 Russian troops on the border depends on international cooperation for a resolution. (Is Putin betting on the likelihood of the US and others not committing troops? The belief that reducing Russia’s use of the SWIFT currency transfer system will be a deterrent effective does not understand the historical practice of enemies at war. Enemies routinely trade with each other across third countries, as happened in World War II. The way we left Afghanistan and left behind many promises of entry into the United States calls into question the strength of the American voice.)
- The increasing use of Private Equity by public pension funds and retail wealth managers increases the potential risk for investors, who do not have sufficient knowledge of these investments and what can go wrong. (This is just another example of the pursuit of performance rather than anticipation.)
- Barron’s wrote positively of 105 stocks gaining 5.1% on average in 2021, versus the relevant averages which gained 8.4%. They had more success with four bearish recommendations. The picks of the “experts” who participated in their annual round table also underperformed the market. (Choosing investments is a difficult task. It’s easier to pick winners and limit losers by picking portfolios, but they’ll often fail to beat the individually selected stocks that are big winners.)
- The JPMorgan Chase (JPM) earnings call celebrated the released numbers, while discussing each of their major businesses, correctly outlining current issues. Although it is arguably the best big bank in the world, it may have reached a cyclical peak in many businesses, which will not return until there is real and continued growth in many savings. JPM’s 6% drop in price on Friday seems appropriate. (Perhaps JPM is overstepping the bounds, as the United States is doing under Putin’s judgment. Xi can share this view, given his plans to deploy four aircraft carriers against one. for the United States in waters near Taiwan over time.)
None of these concerns need be permanent, but investors are likely facing tough times ahead. The possibility of multiple negative events taking place simultaneously is of great concern. We have a toxic mix of rising inflation, high valuations, rock bottom interest rates, a slowing global economy and a dangerous geopolitical environment. Getting people appointed for purely political reasons is always a concern, but especially at a time like this where hindsight and skill are needed.
Inflation will only be defeated by taking the necessary corrective measures to raise interest rates and slow spending. There will be political pressure to do otherwise. Taking the necessary corrective action is likely to be painful and politically damaging – a reason why it is unlikely to be done to the extent necessary.
Valuations will likely return to normal sooner than expected, although this is cold comfort for most investors. A generation of investors knows only rising markets, which has led to complacency.
What do you think?
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.