The Outlook Is Better Than One Year Ago; October 2022 Investing Letter
Negative Sentiment and Lower Prices Meet a Positive Signal
October 5, 2022
No Comments
Negative Sentiment and Lower Prices Meet a Positive Signal
Friday’s stock swoon argues investors have more work to do to understand the scope and duration of higher interest rates. Run away? We discuss how we’re investing in this climate.
In our opinion, some of the conditions for the market to bottom are in place. We discuss the signal we think is important and has yet to be triggered in our July letter.
Our contrarian suggestion is that demand destruction is already well underway, which should be expected to contribute to lower inflationary pressures and ultimately be positive for stocks.
The market fears recession is imminent, should you sell now?
Analysts and economists are convinced that Fed rate hikes are sending us into a recession. Meanwhile, every retailer and restaurant company we know is hiring as fast as possible. Who is going to be wrong?
Soaring inflation is eating into consumer spending. The Fed is about to tighten the screws on the economy and growth. And now Putin is trying to put the Soviet Union back together.
Tech stocks (the Nasdaq) dropped 5% in the first week of 2022, and nearly 40% are more than 50% below their recent highs. The bloodshed has torched the portfolios of investors who focus on high-growth “idea” stocks that promise revolution but have yet to demonstrate more mundane abilities, like turning a profit. It’s worth asking: Are we at a peak?
Will valuations, rising interest rates, fewer stimulus payments, labor shortages, & inflation stop the consumer and wreck returns in 2022? We discuss what we believe the worriers are missing and why we’re bullish even with Charlie Munger saying that valuations are “crazy”. Stock idea discussed: Upwork, Inc. (UPWK).
Inflation is supposed to be very scary for investors, but we believe there’s a way to position to benefit from it. What characterizes stocks that are attractive to own now, based on what we know about wages and prices? Ideally, a business that has pricing power for its goods or services (customers will pay up, rather than substituting an inferior good or just putting off the purchase altogether) AND is not as exposed to structural labor cost increases.