Author: Thomas A. Martin, CFA, Senior Portfolio Manager
Earnings reporting, the inflation cycle, and the Fed cycle. Let’s not forget housing, employment, and the broad economy. Or the stock and bond markets. Oh, and goodness, banking. The middle is challenging because there are seemingly solid markers on either side, but it is unclear as to which side you are headed back to. Longer-term portfolio positioning is difficult in this environment, and in preview, we remain conservatively optimistic and slightly overweight quality U.S. equities.
Tired of hearing that inflation is “sticky?” It definitely doesn’t have the reassuring ring of “transitory” or “peak.” It’s a bit more hopeful than “embedded,” but it smacks of potentially trivializing a real problem like it’s just a little jelly left on your fingers after making a big sandwich that you can simply wash off. “Inflation” is the most important thing among a host of really important things. It’s paramount to keep this in mind, as losing sight of it can result in big mistakes as history has shown. The Fed has been very clear on this point, and they are doing their best to do their part, but inflation is complicated and not monolithic. Its proper treatment can have unwanted consequences throughout the economy. The good news is that it does appear to have peaked, but it is still near the higher side than the lower side, and where it ultimately ends up and how long that will take remains to be seen. The early stages of disinflation indeed.
Looking for consistent themes from 1Q23 earnings reports? Some parts of the economy are doing better than others. Capital goods, industrials, and capital expenditures related are showing signs of slowing, as is shipping, transportation, and distributors. Advertising spending remains subdued, cloud spending is relatively anemic, and computer, IT equipment and semiconductor growth is not in recovery mode yet. But consumer staples, restaurants and travel continue to show resiliency, with some companies getting large price increases and still managing relatively robust unit volume growth. Housing traffic is way down, but prices haven’t budged much, and inventories remain tight.
I don’t usually think about banking, but when I do… Banks are the new Most Interesting Man in the World. When is the last time we sport-watched bank runs (or walks), deposit flight, rates and “beta,” money-market rates, the two-year Treasury, loan growth and bank profitability and solvency and how much it will cost to save the financial system if (when?) it comes to that? If you want to know where we are on this journey, it’s not too far from the departure dock.
The Fed as our Champion. Our knight in shining armor for keeping the world economy on track. It is out in the wild world every day facing a three-headed dragon—inflation, unemployment, and financial system stability. Unfortunately, instead of being equipped with a mighty sword, all it has is a stubby little golf pencil that you can only swing a couple of inches at a time. And there’s no eraser on that thing, so if you don’t like your score on the last hole, you’ll have to make it up on the next hole. The May 3rd FOMC meeting is right around the corner. The markets want to know, what do you all think you’re going to get on the next par 5? What hole are you even on?
What to do. We remain generally positive on the economy and that the peak is in view on the rate cycle. We do, however, note that the volatility of potential outcomes for the future remains very wide and is based on unsettled, fundamental factors. We are maintaining our conservatively positive positioning as we work our way through this.
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