Inflation is tracking well above 8% and is unlikely to recede for several months as the Russian oil shock works its way through the year-over-year comparisons. So why did stocks surge on what would ordinarily be bad news?
That’s just the kind of mood Wall Street is in these days. Bad news is better than complete uncertainty . . . every data point we get helps to draw a line around the worst that can realistically happen, versus the worst scenarios we can imagine.
Wall Street has gotten used to imagining apocalyptic scenarios. The pandemic fractured a lot of risk tolerances, leaving investors exposed to the gnawing dread that it only takes one more shock to destroy the global economy as we know it.
Normally the end of the world is not a possibility we need to price into what we’ll pay for various assets. From that point of view, our sense of risk is relative (a shifting mix of good and bad) and not absolute.
It takes time to recover that realistic and mature view of the investment future being somewhere in between perfection and paranoia, Goldilocks and gloom.
If you’re already there, congratulations. You know the Wall Street glass is never 100% empty or 100% full, but somewhere on the continuum.
A lot of investors are not in that place. Good mental habits have eroded and the market needs to rebuild its sense of how much risk is survivable.
That’s why we see a surge of relief when the news is bad. In one respect, it’s valuable to be able to quantify how bad the current economic environment is.
The inflation numbers could have been worse. In a market trained to dread any inflation data release, the worst threat is not knowing how bad the numbers were going to be.
Now that we know, we can price 8% inflation into our overall investment landscape. It could have been 10% or something even scarier, but 8% is at least a known quantity now.
And the world hasn’t ended even with prices up 8% from last year. Inflation is a trailing indicator, looking backward.
We know now that we can survive a year of 8% inflation because we’ve all done it. It wasn’t fun, but it wasn’t the end of the world either.
Corporate leadership continues to ride the wave. Profit margins aren’t collapsing. Neither are sales.
That means shareholders are in little danger. Consumers are the ones feeling the pain . . . but owning stock is a way to blunt the blow at least a little.
Of course if earnings disappoint, shareholders will feel the pain as well. However, today tells me that unless the quarterly numbers are apocalyptic, Wall Street will probably breathe at least a little easier.
One way or another, we’re going to find out what every publicly traded company thinks about the present economic environment and the future. Question marks will be resolved.
Not every answer will make Goldilocks investors happy. But at least the rest of us will have answers. We’ll know which companies are doing well and which ones are struggling.
It’s no secret what to do with that knowledge. Underweight weakness. Buy and hold strength.
And these are relative terms as well. Every company is feeling at least a little inflationary drag. Very, very few are loving this environment.
But some are doing better than others. Those are the ones we buy. It’s that simple.