My daughter and I largely share the same sense of humor. We often find comedy in things which many people wouldn’t. For instance, there is a certain type of joke called an anti-joke which you either love or hate. There isn’t a lot of middle ground. Annie and I both love them. My wife? Not so much. The reason why is because an anti-joke is one where you are expecting a punchline and you get something simple or dark instead.
For instance, what do you call a joke that isn’t funny? A sentence. Can I get a ha? How about this one: what do a laser beam and a goldfish have in common? Neither can whistle. How about an LOL? Then there is the old: what is worse than finding a worm in your apple? While the usual punchline for this joke is “half a worm,” an anti-joke response might be “getting robbed.” That sort of thing.
So, with this in mind, again, what is worse than finding a worm in your apple? The current stock market. That really isn’t funny is it?
In the three decades I have been in the investment industry, the recent downturn in the market is probably the most frustrating I have experienced. Don’t get me wrong, 2008 wasn’t any fun, but the world’s financial system was collapsing. I got it. The bursting of the tech bubble from 2000-2002 also wasn’t a lot of fun, but there were some places to hide. The collapse in the Spring of 2020 was both dreadful and understandable.
In short, I can explain away most of the swan dives I have had the misfortune of living and working through. This current angst? Well, that the market has fallen some after 3 years of outsized returns isn’t terribly surprising. However, the magnitude and the, shall I call it, fear have been. But why?
What I would give for a clear ‘this is the one reason’ answer. However, it seems there is no shortage of them, am I right? Inflation? Check. War in Eastern Europe? Check. Persistent domestic strife? Check. Loss of confidence in our public institutions? Check. Shoot, loss of confidence in our private institutions? Check. Baby formula shortage? What a weird one that is, and check. China’s lockdowns and general bellicosity? Check. Higher mortgage rates slowing the housing market. Check.
The list of worries seems never-ending, and that is the problem. Although bad news sells, a steady drumbeat of nothing but bad news can be debilitating. Unfortunately for all of us, the current news cycle is about as depressing as any I can remember. It doesn’t show any sign of slowing, and is drowning out the good news there is. That’s right, there actually good news out there.
How about these items? Over the last 30 days, roughly 70% of the companies reporting earnings either met or exceeded analysts’ estimates. The official Unemployment Rate is a miserly 3.6%. Virtually all purchasing managers’ reports suggest the economy is in expansion, with both ISM Reports on Business suggesting growth around 3%. The US dollar is at least at a 10-year high. While flatter than it was, the yield curve is still positively sloped, which has always been an inducement to extend credit. To that end, banks remain flush with cash and are still anxious to make loans. Inflation, while still too high, is starting to show signs of cooling down, and will continue to do so over the upcoming months. There’s more.
The Federal Reserve has pretty much telegraphed it doesn’t plan on crushing the economy the way Paul Volcker did, and that is good news. Outside of wheat and crude oil, most commodities are showing signs of cooling down. There is still a lot of liquidity in the markets, a lot, and it will all have to go somewhere at some time. Stock market valuations are at their 10-year average, as defined by the P/E ratio on the S&P 500. Finally, the Baltimore Orioles aren’t the worst team in baseball, and that might be the most impressive thing is this paragraph.
In essence, yeah, there are a lot of negative headlines floating around. However, there is also a lot of good news if you want to peel back a layer of onion or two. This leads me to the proverbial meat of the matter.
The current unpleasantness in the markets, stock and bond, isn’t permanent. Persistent red ink is not the ‘new normal.’ The economy IS slowing down from last year’s feverish pace, but it isn’t in any danger of collapsing like it did in 2008. Yes, the Federal Reserve is making money more expensive in the economy, but it is still cheap in both absolute and relative terms. Housing is slowing down, no argument, and it could be a real slugfest for homebuilders over the next several quarters; however, again, a repeat of 2008 doesn’t seem likely. That is, after all, what scares a lot of folks: a repeat of 2008.
No matter where I look, things aren’t as bad as most believe. In fact, it reminds me of a line in a Billy Joel song called ‘Keeping the Faith.’ Here it is: “because the good old days weren’t all so good, and tomorrow ain’t as bad as it seems.” Yes, I have used that line here in the past, and I will undoubtedly use it again in the future. It is a good one.
Unfortunately, no one can predict with crystal clarity when the current market psyche will change. Even so, our investment committee believes we are much closer to the end of this sell-off than we are to the start of it. So much so, we are all working on trade ideas to add a little firepower to our strategies. Specifically, selling a portion of the non-cyclical investments we made at the start of the year, and looking for opportunities in some of the cyclical names which the markets have unduly clobbered.
In other words, and in no uncertain terms, it is almost time to start making some money again. So much so, when, at the end of the year, I give you that anti-joke “what is worse than finding a worm in your apple? The current stock market,” you won’t find it funny then either…largely because it won’t be true.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows not only on this day but on every day, and may the conflict and bloodshed in Ukraine end quickly.
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.