Why you shouldn’t worry about ‘what comes next’
Lately, I’ve seen a number of media reports pondering if world economies – and equity markets – are headed for a soft, hard or no landing. To me, this kind of talk is a bit of a distraction. Because, as a long-term investor, the objective is still the same: to buy quality companies at good prices.
For some time now, economists and commentators have predicted a recession in the U.S. and Australia. But so far, strong jobs and rising company profit margins have combined to help both countries avoid one.
It may yet be the case that inflation persists for so long central bankers will, in an effort to avoid inflation expectations becoming entrenched, be forced to raise rates wildly beyond current estimates and ultimately drive their respective economies into recession. But we aren’t there yet.
At the moment, we have inflation still high but falling, and economies growing. That’s a ‘disinflationary boom’, and in the past fifty years, disinflationary booms have fuelled good returns for innovative growth companies – precisely the companies many experts suggest are currently overpriced.
I remain convinced, however, that investors should not now be looking at aggregates nor become distracted by broad statements about whether ‘the market’ is expensive or not. We have just exited a period of heightened or ‘wild’ volatility and have now entered a period of ‘normal’ volatility, which will be accompanied by a return to fundamentals and value driving returns.
Companies that beat expectations will do well, and companies that disappoint will see selling impact their share prices. This is normal. Good news is good news, and bad news is bad news.
Richcession
A new phrase doing the rounds is Richcession, coined by Wall Street Journal journo Justin Lahart.
It could just be a fad. A typical recession hits the wallets of the poor and the middle class. The wealthy are merely ‘inconvenienced’. The current period of economic uncertainty however is characterised by the wealthy reacting most adversely or being the most adversely affected. It’s a period when the rich change their spending habits the most, and it’s being observed in the U.S.
Lower-income earners benefitted during the pandemic from government stimulus and personal cheques. Wage increases have also been won by lower-income workers thanks to a tight labour market.
But many wealthier IT workers (the average salary at Google is US$133,000) are losing their jobs thanks to massive layoffs. Elsewhere, salaries for the wealthy are flat, while falling property and equity prices are having a direct negative wealth effect.
By way of anecdotal evidence, Bentonville, Arkansas–based retailer Walmart recently reported its quarterly results and said it’s gaining market share through higher-income consumers trading down.
CEO Doug McMillon told analysts that more than half of the market share gains Walmart saw in the U.S. last quarter were from high-income shoppers and that its Sam’s Club stores captured a greater share of spending for both mid- and high-income shoppers.
“We’re gaining share across income cohorts, including at the higher end, which made up nearly half of the gains we saw in the U.S. again this quarter, and we’re also capturing a greater share of wallet at Sam’s Club in the U.S. with both mid- and higher-income shoppers.”
Net sales for Walmart U.S. came in 8.0 per cent higher year-over-year, or $113.7 billion for Q4 fiscal year 2023. The company saw “continued strong market share gains in grocery, including high-income households.”
December 2022 saw the largest sales volume in the retailer’s history. Compared to two years ago, same-store sales increased 13.9 per cent.
Another phrase: No landing
There’s buzz around another new phrase, and this time it’s the “no landing” scenario. It sounds like an updated version of the Goldilocks economy, describing economic conditions that are ‘just right’.
The chatter is that the U.S. avoids a recession, at least in 2023, and continues to grow, albeit anaemically thanks in no small part to a resilient labour market.
According to Bloomberg: “As U.S. inflation receded over the past few months, some economists warned that the situation might get sticky – the kind where inflation seems to retreat only to gum up the works again. Last week, that scenario seemed to arrive. While new data showed overall inflation still falling, if only slightly, for January, consumer prices rose again, potentially a sign of a feared persistence that could push the Fed to raise rates for longer. Still, the overall economy remains robust, with more blowout job numbers and resilient spending (and skyrocketing credit card debt). Though the Fed’s timeline for snuffing out high prices is hard to predict, one thing may seem a bit clearer: Corporate profits appear to have peaked after a two-year bonanza, with some businesses retrenching. And while market observers continue to debate whether the U.S. economy will manage a soft landing, enter a full downturn or maybe experience a series of “little recessions,” there may be a fourth option: the so-called “no landing” scenario. This pattern includes a strong economy, a muscular labor market—and inflation that won’t go away.”
So, thanks to considerably stronger-than-expected U.S. economic data, instead of a choice between a soft landing or a hard landing, an additional ‘no landing’ scenario has been thrown into the mix.
The outcomes for investors however haven’t really changed. First, if modest economic growth continues and inflation subsides, we’ll have a great environment for innovative growth stocks, which equals Goldilocks or ‘no landing’. If, however, growth continues and is accompanied by persistent or sticky inflation and employment remains robust, interest rate expectations will be recalibrated – by investors and central banks – and they will have to rise faster and higher than currently anticipated. In such a scenario, we should reasonably expect a bumpier road ahead, and the plane will have to land.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
