Hello Candor Family!
I hope you are well-stocked on candy for trick-or-treaters. This Fall has blessed us with beautiful weather in Louisiana and Arkansas. The leaves are holding fast to their stems, displaying their rustic chroma, and awaiting their windy and winding descent to terra firma. The air is pleasant, and the sunsets are plentiful. I remember being a ten-year-old. We spent these evenings, as much as Mom would allow, “running with the dogs.” (Literally, we would just run around the yard with our dogs.) The cool night air seemed to rejuvenate us, making us inexhaustible super-heroes of the neighborhood.
Halloween night was the apex of the season. Our costumes were usually nothing but scraps of cloth or a repurposed blanket-cape, and some cheap stinky-grease makeup from a dollar store. But we didn’t care. Like sugar-crazed demons we tore through the alleys of our neighborhood, pranking and pillaging as we went. We were good kids, but something about donning a mask and a cape and running willy-nilly through the night just made us all a little more terrifying. This certainly disturbed the peace, and we reveled in it--until we were caught. More often than not, an officer would accost us, and much like the falling leaves, we were quickly grounded. The next day was the usual…back to school…back to normal… back to reality.
As adults, many of us feel the markets behave this way in October. Clients often inquire about this, pointing to that same October in 1987 (which included Black Monday) as their favorite reference point. While there’s no doubt the tenth month is notoriously more volatile, the truth is the average of all October returns since 1945 has actually been positive. What’s that you say? It is an election year? Oh yes, and mid-term election years do bring a higher level of uncertainty, for obvious reasons. The ratio of positive to negative returns during past mid-term years have been mixed almost evenly. But the following 12 months after mid-term elections have all been positive since 1950. Not so scary when you take a step back and look at the big picture. Read more about that here for a quick fact check or visit LPLResearch.com.
But what about inflation? Well, that does seem scary at first. But when you consider what inflation actually is, and how the Fed fights it by raising rates, some potential opportunities become clear. First let me illustrate what inflation is. Imagine a dollar bill and a candy bar in a drag race. (Trust me on this.) Sitting at the starting line, they are the same value. The light turns green, and at first the dollar pulls ahead slightly, but just when you think the dollar is winning (stronger than the candy bar) the candy blasts ahead like someone hit the nitrous-boost, taking the lead away from the dollar. While the dollar was stronger, it could purchase the candy bar. But when the candy became stronger, the dollar is no longer of enough value to purchase it. That’s not good because we either have to spend more of our dollars (which makes the candy even faster) OR we have to buy less candy (which hurts the stock market.) So who hit the boost button? We did. Consumers from other countries did too. When consumers spend abundant dollars on limited goods, prices will rise. Due to overheating of prices, it is now necessary to slow the economy down. To do this, the Fed will usually raise rates (and more recently increase the supply of bonds in the market) to make money more expensive thus slowing down spending and borrowing and letting the dollar “catch up.” This takes time, but a patient investor can often enjoy the fruits of this reset sooner than you think.
Even bonds, after they have ripened on the vine a bit, are one such benefit. Rising rates mean falling prices for bonds, so you get more juice for your squeeze. Stock can also benefit from inflation, just not immediately, and not always directly. Inflation can hamper returns of some sectors like consumer discretionary (think RV’s and motorcycles), industrials and materials. But many sectors can thrive during inflation. Financials, for one, tend to benefit from rising rates initially. Energy and commodities can often enjoy a boost as we have seen over the last 18 months. Health care and consumer staples also hold up very well, since they are goods and services that people will continue to pay for even when their accounts are low. Among these sectors, value stocks (those with higher cash reserves and cash flow) have historically held up best to inflation and bounced back quickest. Plus you can usually get a higher dividend than growth stocks while you wait.
I would like to remind you of a quote from Warren Buffet. “Uncertainty is actually the friend of the buyer of long-term values.” He really has a way with words. And these words are telling us that uncertainty is the very thing that investors need to bring investments back down to an affordable level. Americans are no strangers to uncertain times, and we can all attest that they are temporary. The bear markets of uncertain times have always led to the bull markets of prosperous ones. Based on recent CPI figures from the Department of Labor, we are not out of the woods yet. There may even be tougher days ahead. But buying and holding quality investments and staying diversified are the cardinal rules.
As kids we made the adults nervous with our sugar-induced behavior on Halloween. But we eventually succumbed to the maturity that birthdays bring. We ate our vegetables, did our homework and turned out fine… in the long run. Behind those masks we were just good kids acting crazy. Fortunately, someone saw good in us… invested in us… and patiently kept us around to watch us grow. They took the time to see us for who we really were and didn’t judge us too harshly for our misbehavior. I encourage you to do the same with the investments that have historically outgrown and outpaced inflation and provided the best long-term returns while doing so.
Always with candor,
Ivan
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
*The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.