Sometimes the market gets a little too far ahead of reality or sets up a narrative and then reality twists. You zig, the world zags and then you need to skate harder to where the puck is going.
That’s what happened last week (we talked about it HERE) and that’s what always happens on Wall Street in the long haul. American stocks have always made money except in very short shocks that quickly get resolved again. You can’t avoid the shocks. It’s just life. They come and go, you get up and get back to work.
But the shocks hurt and some people get nervous. When you try to avoid the shocks in life or the market, you get in a habit of taking every rumor of bad news ahead too seriously. You retreat to the sidelines the first whiff of trouble.
And most rumors just don’t turn into facts. Especially rumors of the end of the world because the world has not ended yet. Someone who sells every rumor would save themselves all the pain of being in the market. They would make no money.
Go back and someone who sold the first rumor of taxes going up would have lost the chance to make 30% in the market since then. And taxes haven’t gone up yet. When we hear the new brackets, you can think about whether it makes sense to sell your stocks.
Someone who sold the first whiff of inflation lost the chance to make a lot of money. Someone who sold the first sign of the pandemic overseas gained liquidity early on but they needed to come back to put that money to work.
Someone who sold because China is having fresh trouble lost the chance to make a little money in the last few weeks. Debt ceiling, the Fed, bond yields. When the market corrects, you want to have a buffer in place to make the math less painful.
And it does get less painful. Once you’ve been in the market long enough to rack up 10% in paper profit, a 10% correction leaves you roughly where you started. No real gain but no real pain either. You’re in the market for gain, not to avoid pain.
When stocks are soaring, they’ll probably correct hard when life gets in their way. Miss the soar and buy the slump and you’ll feel the pain. Buy the soar and the slump will sting but you’ll still have something to show for the experience.
What do you gain on the sidelines? Someone who sold September because it’s so awful lost about 1-2% on the month. If you bought any other time but at the peak you’ve still made money. Maybe a lot, maybe a little but that 1-2% isn’t horrible. You went in with $100 and if you quit now you come out with $99, $98.
And who says you want to quit now? Still great American companies. Earnings are right where we thought they’d be, maybe a little better in spots. Interest rates are manageable. Taxes are manageable. We don’t like the drag but paying for infrastructure would feel amazing. Other things? That’s up to you.
We beat every pandemic the world has thrown at us. And here’s the thing, managing higher taxes and inflation can be a profit center. CEOs aren’t clueless. They know fixing supply chains is in their best interest. They’ll figure it out. When they do, the world will be leaner and more efficient than ever.
Profit margins are already tracking around 13% . . . record territory. Room in there for a little adjustment without disaster. Otherwise, if you bought stocks at any point in history except for September 2, you’ve made money. What happened on September 3? Just rumors.
Inflation: The Devil You Know
Inflation, on the other hand, is real. If you’re selling for any reason, this would be the one.
But the thing about inflation is that money can work faster. Inflationary periods feed innovation (necessity mother of invention). We figure out how to get it done, use different materials, new processes.
People start getting paid more. Already see it happening in Social Security announcement +5.9% in the coming year for fixed income retirees. Incredible. When they have a little more in pocket, companies can justify raising prices to avoid gouging grandma.
Companies have already raised prices one way or another. Delivery fees. Takeout menus. Construction shortages.
Stay ahead of inflation when you can in stocks. But if you’re terrified, may we suggest gold?
Innovation & Boom
Been down so long that even recovery feels like a boom. Gas prices feel like they’re soaring ($4 premium) but they’re only back where they were in 2014. We lived through that.
High gas prices create new Teslas. Simple as that. Crisis creates disruptive competitors, new markets, new wealth.
Housing still tight. Building as fast as they can when they can but next year should be hot as well. Developers are learning that they’ve gone through the perfect credit scores and now need to build for the rest of us. Also cutting corners due to material supply issues . . . smaller houses, fewer mcmansions.
COMP is a great stock to watch here, the UBER of real estate.
And how about our friend AFRM? AFTPY will join it as part of SQ, still time to get SQ shares on the cheap. Back door.