The Market Candy Bag
As we approach the weekend of costumes and candy, I can’t help but think markets are drawing some interesting parallels to a trick-or-treat type of setting.
We’ve blown through new all-time highs after a bumpy September and early October (quickly proving my prediction from two weeks ago wrong — I’ll thank the market for getting that over with so swiftly), and we’re in the midst of an earnings season that was expected to be mixed, but has come in quite solid thus far.
The bag of candy is sweet and full of the “good stuff” — people are being generous with their spending and handing out primo treats. Parents are happy because the market is up. Kids are happy because the candy is flowing.
Just Don’t Eat It All at Once
This is a time when we need to pace ourselves and not let our blood sugar rise too high too fast. Investors can take solace in the idea that consumer spending has been strong and demand continues to be healthy as people start spending again.
Consumption makes up 71% of real US GDP, and the fact that Purchasing Managers’ Index (PMI) levels for both goods and services remain comfortably above 50 (indicating expansion) is a good indicator of healthy demand.
Positive data doesn’t come without warnings though — GDP growth rates are naturally slowing after a strong rebound. That’s not necessarily cause for concern, as rebound rates are different from recovery rates, recovery being the time when things are still positive but past the big bounceback.
Over the next few quarters as inflation likely remains above Fed target levels, we need durability in growth to offset the price increases that are affecting businesses and, in turn, consumers. The candy bag looks tasty, but we should still measure our intake as we gather more information about our health.
Now and Later
One of my favorite candies is Now and Laters, and I’d always save them for last if I got them in my trick-or-treat bag. This year, I think they actually offer some investing advice — what’s working now vs. what might work later. My sense is that markets will not treat assets equally in the next phase and we will need to choose spots that can withstand a grind higher in rates, can maintain pricing strength in the face of more persistent inflation, and companies that can find workers (likely via higher wages) to maintain operations and meet demand. In the “now,” that bodes well for cyclical companies with strong competitive positions and small-cap companies that benefit from economic strength.
As for the “later” or the long term, companies can lower their need for workers and lower their costs by investing in technology…which in turn benefits growthier names and sectors that stand to become exponentially more efficient than they are today with the help of technology, namely health care.
Pick your time horizon, then pick your spots.
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