A big debate is raging about the type of inflationary cycle the world is experiencing. How much higher? For how long? Have we peaked? Is the Fed right? Will the purchasing power of retirement savings collapse?
In general, markets prefer clarity to uncertainty and confusion. Markets look for leadership, trends, and for something predictable. Investors are looking for anything to help see through the confusion. In periods of confusion, market participants can quickly get excited about, and just as quickly get disinterested in, data and anecdotal evidence — grasping at straws, trying to locate the most relevant and important data points to help them in their positioning for the future.
So while the debate rages about how to invest, the 60/40 static investing approach, stocks, bonds, commodities, etc., the truly significant underlying force is trillions of newly minted dollars, yen, euros, pounds, yuan, etc. causing price fluctuations and creating opportunities and imbalances. One thing all market participants should agree on is that when money costs nothing, discipline disappears.
We recognize that all markets have a heavy hand of governmental stimulus and manipulation acting upon them. This distorts the normal price-discovery mechanism that used to drive markets. So while easy money and government handouts can indeed lift economic demand and asset prices, the heavy-handed policies add to market confusion, as history shows that some unpleasant, unforeseen, and unintended consequences probably lurk in the future.
Investment implications: Maintain discipline. Gather as many differing opinions and data points as possible. Approach the environment with a disciplined approach to evaluating reward and risk. Look for growth at a reasonable price. When investing for income, look for income that comes from a growing expanding enterprise and good management. Avoid the areas that look to have asymmetric reward-risk characteristics where the potential returns are capped and the potential downside seems greater, such as long-duration bonds. Also, while the markets dance around in a push/pull tug of war, curtail speculative trading; momentum can be fleeting, so instead, use dips to buy and spikes to trim. This is how we are choosing to use this period of confusion to our clients’ advantage.
