Lessons From the Tightrope Act

| May 03, 2022

Sarasota loves the circus and my favorite part of it is a perfectly executed tightrope act. That’s probably because I’m one of the first to get knocked out of a limbo competition, but I marvel at anyone who can balance a spinning plate on their nose when walking a thin wire three or four stories above hard ground. Talk about a pass/fail exam.

As thrilling and dangerous as the tightrope act is, we still take our kids to the circus because we know—or at least fervently hope—the walkers will always make it to the other side. They may teeter in the middle or drop a hoop, but that’s just part of the show. What’s the point of watching a walker make it look easy?

If we close our newspapers, turn off the financial news channels and simply look at a long-term chart, the stock market is simply walking a tightrope. Stock market corrections—declines of 10% to 20%--are routine over a 30 or 40 year history. We always want to see the world as black or white, so we tend to see the market as either “bad” or “good.” It’s not that simple, so I’ll share a few observations about what I’m watching and expecting right now.

Inflation will be tamed, but it won’t be pretty

The federal government handed out too much money, the Federal Reserve kept interest rates too low for too long and we’re still a long way from supply meeting demand, whether we’re talking about PlayStation 5 consoles, gasoline or workers. The supply chain issues will eventually resolve themselves and people will eventually return to work. I don’t believe the high wages will persist. As workers begin to compete for jobs, firms will find ways to cut labor costs.

The Fed will raise interest rates. It’s not certain by how much, but inflation severely impacts retirees and makes businesses more cautious about expanding. Eventually our economic growth will slow as higher interest rates make expensive purchases less appealing. But It’s way too early for us to expect stagnation, a recession or a depression.

Bargains are easier to find

All this uncertainty has the market in a funk and one of my favorite market maxims is to “be fearful when others are greedy and be greedy when others are fearful.” We’re at that stage of a market decline when great stocks are punished for very short term concerns. I’m paying particular attention to industrials and other economically sensitive stocks. Don’t buy cheap shares simply because they’re at a 52 week low; instead, look for great companies that, first, will benefit from an economic recovery and, second, are low priced compared to their earnings power.

We all know how the tightrope act will end  

There are some near term concerns for the economy. We face the drumbeats of war, extreme gas prices and further supply chain shocks.  We are hopeful the Russian invasion of Ukraine doesn’t escalate further, and humanitarian efforts are successful.  For my final thought, I pause for a moment on analyzing how geopolitical events affect our stock market as there is no price one can assign to human life.