Happy September!
Sadly, summer finished with a bit of a whimper for me. Smoke forced us out of Kelowna earlier than we had planned, and by mid-August, my work schedule was packed, and soccer was back in full swing.
It’s lovely to see clients face to face again; nice to be back on the pitch coaching and playing soccer again, but it is a bit of a shock to my system to see my calendar so full, and it has been a struggle with finding my rhythm to interacting with live people. I’ve already forgotten to print out portfolio summaries, bring my reading glasses to meetings (because I can’t read printed statements anymore!) and remember to fill my car up with gas. This leaving the house thing is hard! Just read a report that the ideal amount of free time you should have daily is somewhere between 3-5 hours to optimize life satisfaction. Too little free time fuels stress and burnout; too much undermines purpose and progress. Going to be a bit of a balancing act for everyone this fall as we balance getting back to normal with fighting to keep a few of the benefits that came from a remote work life!
Markets have been largely positive, with most major indices flirting with all-time highs. While valuations are high, ratios like price to earnings, price to growth, and other metrics have contracted a bit over this last quarter. In other words, stocks are high because earnings have been strong. They certainly aren’t cheap right now, but on a relative basis, I wouldn’t categorize them as expensive either. The real question going forward is whether expectations have gotten too far ahead of themselves? From a macro perspective, the rise of the delta variant has been a counterweight on global economic activity. Add in continued supply chain bottlenecks, China’s regulatory crackdown, and the high cost of durable goods, and economists are scrambling to revise this year’s GDP numbers downward from earlier estimates. This has caused investors to “derisk” portfolios, shifting away from more speculative sectors and companies into higher quality, more proven stocks with solid balance sheets and reliable cash flow streams.
Growth is still expected to be healthy, just not as robust as initially forecast. It will be interesting to watch how markets handle disappointing numbers. One of the constants over the last year has been that, despite the global pandemic and economic shutdown, data flow has persistently come in better than expected. We’ve had an extremely trying year, but after the crash and the shock to markets between February and April of 2020, the economic news was not as dire as forecast, and subsequent financial numbers consistently outperformed forecasts.
We’re likely heading for a quarter or two of misses on targets. Market sentiment and confidence play a big part in short-term market movement. Psychology can come into play as behavioral finance tells us that people feel the pain from bad news more acutely than the pleasure from good news.
Loss aversion is the tendency to avoid losses over achieving equivalent gains. It is comparable to needing 5 or 6 compliments to offset every criticism we get to maintain healthy self-esteem in our everyday lives. If the economic narrative turns more negative than positive, I think we will be testing the market’s resiliency over this next quarter!
It is always challenging to predict the market’s short-term direction, especially right now, given the uncertainty around COVID, the upcoming election, and headline risk. The good news is that no matter what happens in the next few months, I firmly believe we are only midway through the expansionary phase of this economic cycle.
Generous fiscal and monetary policy remains in place, supply-side constraints will get worked out eventually, and there is a ton of pent-up consumer demand looking for ways to spend some of the money they have put aside this last year. Pullbacks in clean energy, healthcare, and emerging markets offer more attractive entry points to areas I like a lot. Any broad-based correction would also be welcome as a chance to add to or consolidate positions in companies we want to partner with for the long term. I have no idea when, and I am not sure we will conquer it, but I am convinced that the world will adapt to COVID and move forward. A balanced portfolio built with that in mind will be the key to meeting long-term goals!
I am going to leave you with some good news. My daughter just got engaged! I am a bit conflicted about it, to be honest. On the one hand, having Maddie move out of the house will be one of the best financial transactions that I could possibly do. Getting her off my balance sheet is going to be ridding me of a massive financial liability!
On the other hand, the emotion that goes with knowing someone else is going to be responsible for your baby girl is somewhat overwhelming! Despite displaying somewhat questionable financial acumen in his willingness to take Maddie on, we love her fiancée, Joel. We are going to be very happy to welcome him into our family next year! The news is probably not the catalyst needed to move markets, but it is a big deal in the Low household!
Stay safe, stay positive and stay disciplined!
Jeremy
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