Happy February! Bit of a rough start to the year as January continues to build on its reputation of being the most depressing month of the year! Days are short, the weather is poor, and it is a hectic month for me as RRSP and tax time hit. Heavy family news and markets off to a rough start didn’t help either.
I thought getting away to Whistler for a weekend away last week would help break things up. We ordered the newest Bond movie the first night up there, thinking it would be a light bit of entertainment to start the weekend.
Sorry for the spoiler. I honestly feel I am doing a service for all those who haven’t seen it yet, but they kill off James Bond in the movie! How on earth do you kill off Bond after 50 years and 25 movies?!!! It made me so mad I spent 20 minutes yelling at the TV and couldn’t sleep! Day two of our getaway had my credit card frozen as the kids were ordering Skip the Dishes back home while we were spending at Whistler, so Visa helpfully put a fraud hold on it. Have you tried calling your credit card company lately? It almost takes as much time to get through to them as it does to order an appliance these days. It took me two days of trying to connect with the bank, and when I finally did get through, they informed me my “whiskey of the month” order had hit and been declined over the time the hold was in place. Some months are just harder than others!
Markets redlined in January, with Nasdaq and the Russell 2000 indices leading the decliners with a 10% drop. Most of the Nasdaq is off at least 30% from their high points last year. Inflation numbers came in at 5% for the end of 2021, the highest inflation we’ve seen in 30 years. I’m not sure why that was so surprising in that 5% actually feels a bit light to me. I can’t think of too many things I buy that have only gone up 5% in the last year! Nevertheless, governments have reacted with a much more hawkish take on the economy, with tapering and interest rate hikes coming into effect sooner than was generally expected. Add in the tensions surrounding Russia and Ukraine and the continued deteriorating trade relations between China and the US, and there is a lot of bad news for markets to digest right now.
Markets reacting negatively to a change in the policy environment and the attendant uncertainty on what exactly that shift means is a normal reaction. There is a legitimate reason for the anxiety too. If you were to canvass a pool of money managers and ask them, “what keeps you up at night?”, governments messing up monetary policy would be right at the top of the list. It is a delicate balancing act to calibrate monetary policy so that it eases inflationary pressures without tightening financial conditions so much that the cure becomes worse than the disease. Unfortunately, delicacy is not something the central banks are known for!
Investors have continued bailing on more growth-oriented stocks with more rate hikes on the horizon. As painful as it is, I am delighted to buy right now and reiterate what I wrote last month. There is no discernment being employed in differentiating between what is a good company with a moat around its business and what is a company that hopped on a short-term trend and is going to get squeezed by higher interest rates and a lower growth environment. Take a company like Peloton. It was perfectly positioned when COVID first hit with their bikes and instructor community already set up. When gyms closed, their bikes were rolling off the shelves, and they had a three month back log of orders. They extrapolated a long-term growth rate from 1 years’ worth of data and bought a manufacturing plant to help meet future growth demands. By year 2, other competitors had entered the picture, and now they had competition from Nordic Track, Lululemon, Nike, etc. By year 3, not only did they have competition, but gyms reopened, and demand for home fitness equipment had slowed back to pre-COVID levels. The stock was rightfully hammered, albeit probably more than it deserved.
Now contrast that to Amazon. Amazon had a record year in profits last year. It just didn’t grow as fast as the year before. It spent 2021 expanding its warehouse space by 125 million square feet and buying a fleet of 120,000 EV vehicles, all in its bid to improve its vertical integration so it can reduce its delivery window from days down to hours. I’m not going to say that Amazon’s e-commerce position is unassailable, but they are so far in front of everyone else right now that it isn’t really close. That is a durable, scalable business with a moat around it, and when it goes on sale, we should pay attention. Putting the two companies in the same category would be like comparing me to Messi because we both play soccer. Maybe the same sport, but we are playing different games! Peloton actually popped up a bit this week on rumors that Amazon may buy them from the pocket change that Bezos found in an old pair of his jeans.
Renewable energy is another high-growth sector that has been killed over the past few months. Last year, a pretty smart guy wrote (read my Feb 2021 commentary!) that the clean energy sector was definitely in a bubble. With clean energy being down 50% in the last couple of quarters, the very valid question said smart guy has been getting is, “why did we stay in the sector if we knew it is in a bubble?”.
I do have an answer to that! Valuations of the individual companies don’t make sense. Still, there is so much political willpower, conviction, and money invested into clean energy that I am willing to live with the sector’s growing pains until clear leaders emerge. It reminds me of the tech bubble of the early 2000s, where you could simultaneously see the potential of eCommerce and that many of the dot-com companies that were early adaptors were destined to fail. The bubble did burst, but out of the rubble emerged Amazon and Google, and tech investors who stuck through the volatility were rewarded for their patience.
I don’t think there is much doubt that Vancouver real estate is in a bubble, but I wouldn’t counsel selling your home in hopes that it crashes soon so you can buy back in at a discount. I would have told you the same thing two years ago, and would you have been mad now if you weren’t still in the housing market!
Eventually, markets will revert to the mean. Still, I have no idea when and since I am a long-term believer in homeownership, I would always advocate buying when you are ready rather than guessing at market bottoms. Someone out there will be smart enough to correctly predict the exact moments needed to both exit and reenter the market. Still, there will be way more investors that will either miss out or get burned in trying to be right twice in the timing of their investment. I would rather stay patient with an asset class or idea I have long-term conviction in and add to the positions when the headwinds hit.
When you invest for the long term, it allows us to look through the short-term headlines and elevated volatility in periods of uncertainty. I’m more concerned with balancing a portfolio and identifying durable businesses that benefit from long-term material consumer habits rather than timing temporary trends.
I believe that when the dust settles, and the outlook becomes more transparent, the economy can absorb modestly higher rates.
The strength in consumer finances and the broader reopening of the economy along with positive macroeconomic fundamentals should keep the party going, albeit at a more modest growth rate.
Australian retail sales surged by record numbers in the December quarter as the end of coronavirus lockdowns unleashed a wave of pent-up spending, delivering a significant boost to economic growth for the country. I expect similar results as the rest of the developed world reopens. Supply chain constraints will improve as the year goes on and should help ease some inflationary concerns. Even with rate hikes and tapering, global rates are still near historical lows and monetary policies highly accommodative.
I don’t want to play the “what if” game of running through the myriad of possible things that could go wrong. I’d instead focus on the long-term outlook, which is pretty easy as it is always positive (unless you are James Bond!) as the world’s economies continue to grow from the inevitable continued increase in population and technological advancements. For the short term, we want to adopt a “let’s see” attitude, making sure we remain flexible enough in our approach to take advantage of market inefficiencies when they present themselves and fit into our long-term objectives. Realistic optimism is a necessary trait of a good investor!
I can grumble about what went wrong on our Whistler weekend getaway, or I can appreciate the beautiful drive up the Sea to Sky highway to one of my favourite spots on earth and the quality time I got to spend with my amazing wife. So important to keep the big picture in mind, in investing and in life!
Stay safe, stay positive, stay disciplined!
Jeremy
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