By Portfolio Manager, Randall Coleman
I’ve made analogies between investing and bicycling before. Even though it takes fortitude, endurance and stamina to invest through market cycles, particularly nasty periods occur when a rider (investor) is heading straight into ferocious winds (bad news). Every pedal stroke is a struggle and reaching the goal feels impossible. As I rode to the office Friday morning into 35 mph headwinds, it occurred to me that as investors, we’re facing a similar environment. Bad news abounds and market reactions are savage. This week, several major retailers announced compressed margins and earnings misses, and their stocks got hammered anywhere between 11% and 25%. A motorcycle manufacturer announced a halt in production and its stock got clobbered. The tech-heavy NASDAQ index made a new 52-week low on Friday amid earnings misses, continuing supply chain snafus and inflationary pressures. Gasoline topped $4.00 nationwide and it’s not uncommon to see it over $6.50 in my neighborhood. Food prices are spiraling up. The Fed is raising interest rates to combat inflation. Consumer support from cash stimulus payments is a thing of the past. Global consumer confidence surveys are plummeting and the S&P 500 Index is flirting with an official bear market. And now Monkeypox enters the equation. Is there no end in sight?
The first point to make is that we’re going through an unprecedented rebalancing. The Covid-shock to the global system has caused enormous upheaval in every corner of the world, every corner of the global economy. Unwinding from this trauma can’t happen overnight and certainly won’t happen in a linear fashion. The great rebalancing we’re going through is the search for a “new normal.” The new normal takes on many faces: how and where we will work?, how much travel will we do?, will my kids go to school? daycare?, will I shop in stores again?, etc., etc. As we collectively decide what the new normal will be, uncertainty and change prevail. In March, I attended my first in-person conference in more than two years. The response from more than 300 attendees was unanimous: we are so glad to be back. Zoom calls were a great stop-gap measure, but there is no substitute for meeting with company management in person. There will definitely be a return to travel, but how much is the question. The new normal won’t be uniform. It is taking shape differently in various geographies. In addition to my recent conference in the UK, I had a meeting in San Francisco a week ago with a German financial services company. I worked in San Francisco for many years and my experience there a week ago was eerie. It was like walking around a ghost town at 2pm. My Sacramento office, on the other hand, is very busy and getting busier. Because it’s a shared-work space, I get a first-hand view of what companies are moving into the area and it is booming. San Francisco’s new normal will be different from Sacramento’s. Sacramento’s will be different from Chicago’s. Chicago’s will be different from Atlanta’s. Adjustment to the new normal will be bumpy and will take the critical ingredient of time.
The second point relates directly to time. Market headwinds are nothing new. Market downturns and market recoveries are nothing new. More than a dozen market downturns since 1929 have shown a wide variation in recovery time. It took more than 10 years for the market to climb to new highs after the Great Depression. It took over four years to climb to new highs after the dot-com blow up of 2000-2002. The downturns are uncomfortable and nobody likes them. However, as my colleague David Ruff likes to say, “Nobody rings a bell at the bottom.”
Market Downturns in months and Recoveries in months
Like the intrepid cyclist, we view companies as players who can face the headwinds, adapt to the new normal. As that “new normal” takes shape, it’s hard to see when the headwinds will change into tailwinds, but they will. They always do.
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