Mike Lipper’s Monday Morning Musings
Week Divided: Believers vs Investors
Editors:
Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
You Are What You Read
Early last week US stock market indices rose gently. The
pundits’ view inflation as having peaked globally, with “factory gate and commodity
prices, shipping rates and inflation expectations have begun to subside”. The
Federal Reserve is expected to reduce the acceleration of interest rates
shortly.
Meanwhile, Washington was simultaneously trying to avoid a
national rail strike by imposing additional costs on the railroads. These costs
would be imposed on all using freight delivered by rail and would encourage
others to raise labor demands, which if successful would lead to higher prices.
If there is going to be a recession, believers think it will
be short-lived and shallow.
What causes Inflation?
Inflation is created by demand exceeding available supply. Rarely
it is caused by free markets working on their own.
Our current inflation started with the last two Presidents who
for political reasons flooded the economy with grants. These grants were beyond
the immediate need of the unfortunate who required help. This approach is
hardly new, it was implemented in ancient Greece and Rome and is still
practiced in numerous countries today. These grants avoid the laws prohibiting bribery
but encourage dependence on elected officials or parties.
On day one the current administration went even further by
restricting supply. They first killed the pipelines then implemented regulations
forcing providers to raise prices to cover government mandated expenses.
To avoid taking responsibility for inflation the Government
turned to the Fed, utilizing it as a hammer to beat down the rate of inflation.
The Fed was like a person given only a hammer to build a home, they only had the
ability to use interest rates to curtail demand.
Business leaders eventually recognized that curtailed demand
would likely lead to lower revenues and consequently started to cut back on
their current and future labor force.
One example of this is the broker/dealer community. While an
index of publicly traded broker/dealers
is close to its all-time high, leading firms are laying people off. Evidenced of
this can be seen in a recent statement by the CEO of Morgan Stanley. (Stock is
held in our financial services fund)
This message is being read and acted upon. ADP in their
latest survey indicated that private sector employment is at the lowest it has seen
in two years. (Also held in our financial services private fund)
What Does the Data Say?
While both concurrent and lagging indicators are slowly
rising, the leading indicator is dropping.
IBES, via Refinitiv, is predicting S&P 500 net income
will show a -3.6% decline in the fourth quarter. The first three quarters in 2023
will be +0.7%, -0.9%, and +3.5%, respectively.
Bank of America’s reminds us that December will most likely
be an up month. Nevertheless, they predict a global recession, the reopening of
China, and re-shoring in Europe and the US in 2023.
Two Other Views
Market indices are being influenced by their leading
components. The Dow Jones Industrial Average (DJIA) is the best performing index.
It is both closest to its former high and has the biggest gain from its most
recent low. The DJIA performance has been driven by its goods producing and
selling companies, which are not normally its best investments.
The Standard & Poor’s composite index is market
capitalization weighted. Something that is most useful to investment
institutions managing large single portfolios, deemed to be high quality
companies.
The NASDAQ Composite is now made up of companies that for
one reason or another don’t list on the “big board”. In terms of the number of
shares traded it is the largest stock exchange in the world, followed by the
London Stock Exchange. The New York Stock Exchange (NYSE) is third on the list,
but probably has more capital listed than others.
Nevertheless, the NASDAQ often leads the US and many other exchanges in
terms of performance. Perhaps it is due to the fact that it has younger and faster
growing companies. (We also own its shares in our financial services fund.)
I pay particular attention to NASDAQ performance compared to
the NYSE. I noted with some concern that the NYSE had 89 stocks achieving a new
high and 44 a new low on Friday. The NASDAQ had 97 new highs and 128 new lows.
Since the NASDAQ has more listed companies, I am not disturbed by the number of
new highs. Unless this is an aberration, the sharp difference in the number
of new lows relative to the number of new highs could be a warning. I will
follow carefully
One of the most thoughtful large mutual fund management companies is the Capital Group in Los Angeles. It has been investing beyond US borders for many years and summed up why in the five points listed below:
- International investing is about companies not countries.
- A strong US dollar won’t last forever. (Dropping recently)
- Dividend opportunities are greater outside the US
- New economy depends on old industries
- Not all of the best stocks are in the US
This is why I believe it is prudent to have some money invested beyond US borders.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: This Was The Week That Wasn’t - Weekly Blog # 761
Mike
Lipper's Blog: Trends: Deflation, Stagflation, or Asian? - Weekly Blog # 760
Mike Lipper's Blog: An
Informative Week with Many Questions - Weekly Blog # 759
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