Hello All-

I’m writing to you with some commentary on the market and macro outlook, and as always during moments of increased volatility like this one, a reiteration of the key fundamentals of investing. You will soon be receiving a more granular/’micro’ review of what trades we’ve made in your accounts, and why, but again, this installment is macro-focused.

First, however, I just wanted to share something personal, which I have mostly kept to myself over the past year+. If you’ve been a client for a while, you likely remember that, especially during the early days of the pandemic, I would typically open up these writings with something quick and light about my life outside of work (which at that time was pretty much just gardening and perhaps the occasional outdoorsy trip!). After all, you, our clients, share so many intimate details about your lives with me/us, so I feel that I too should be sharing a bit more about my ‘humanity’ such as hobbies, causes that are important to me, etc. I’ve found that this sort of ‘mutual intimacy’ has done a lot to strengthen my client relationships over the years, and augment the trust that’s been built. Furthermore, I believe that building and maintaining genuine intimacy and trust sometimes necessitates sharing a vulnerability. So with that said, the main reason why I haven’t spoken much about my personal life over the past 15+ months is because I’ve been going through a divorce. Thankfully it’s been amicable from day 1, but of course still very difficult. In the midst of this I’ve also moved homes, moved my practice, and also had an injury that rendered me immobile for a period. Needless to say there’s been a lot going on. While 2021 was a challenging year, it was also one of tremendous growth, personally and professionally; I’m in a great place now that the dust has settled on both the home and professional fronts, and want to express how grateful I am for your patience with us over this transition period. Furthermore, I’m also deeply grateful to this incredible team for stepping in to help me promptly address the daily stream of questions and time-sensitive action items that often land in my inbox first. We have a sharp and experienced team, so most of the time my input is not needed—and this collaborative effort has really allowed us to improve our response times as well as the level of detail and thoughtfulness in replies. I absolutely love the work I do with you (and the team with whom I do it!) and appreciate your continued trust and confidence. Look forward to sharing much lighter/more mundane personal life updates going forward!

OK, so here we are in a tectonic shift in the world’s geopolitical order, occasioned by Russia’s barbaric war on Ukraine, and the growing realization that China cannot be relied on to be a rational actor. In addition, we find ourselves in the grip of the most severe inflation outbreak in 40 years. And as always, the financial media feeds a ‘negativity narrative’ in an attempt to keep our eyes glued to the headlines.

No one can begin to predict how these situations will resolve themselves…much less when. Nor can anyone begin to imagine how the capital markets will adapt to the resolutions. So we are once again in a perfect Cloud of Unknowing. But it continues to be irrelevant to the investment policy of a long-term, goal-focused, plan-driven investor. And that bears repeating—current events are perfectly irrelevant to the investment policy of the long-term equity investor.

The essence of successful long-term equity investing is the continued practice of rationality under uncertainty. But what does that even mean? To me it means basing our investment policy on our financial plan as distinctly opposed to a view of the economy and the markets. Two years ago, we could not begin to imagine how lethal the pandemic was going to be, nor when (or even if) effective vaccines would become available in sufficient quantity. Today, we can’t anticipate what Putin will do in Ukraine, nor how the back of this inflation will ultimately be broken. But nothing has changed. We’ve just moved on to a different set of unknowables.

Meanwhile the amount of money we need to accumulate to meet our goals, short- and long-term, has gone up with inflation. And the only hope we have for our assets to appreciate meaningfully, net of this inflation, is the premium return that only stocks can deliver long-term. The fact is that owning stocks is the only effective weapon we have against inflation. This is because any alternative to stocks—most especially cash and bonds but even commodities (oil, metals, etc.), which might seem attractive at the moment given the disconnect between supply and demand in the economy, are not likely to perform anywhere close to the stock market in the long-term. And because the markets ebbs and flows cannot be anticipated, and much less timed, we maintain that it would be irrational to make any significant change in course on the basis of current events and assets that might seem ‘hot’ right now. Instead, we have been absorbing the changing environment in real-time, considering further market events that could impact the companies you own, strategically capturing stocks that have gone ‘on sale’, harvesting tax losses, and repositioning portfolios for what we believe could be a prolonged ‘changing of the guard.’ Overall, however, there hasn’t been a ton of movement, as we are still quite confident in the portfolios that we’ve constructed. This confidence is in terms of the quality of the companies selected, the diversification across sectors and asset classes, and our almost exclusive focus on American companies, which we feel continue to be most strongly positioned for growth as we look ahead.

What we can know amid all this uncertainty-and just about all we need to know—is that the great companies in America and the world are already adjusting to this reordering. Just look at the massive write-offs they’re taking on their exposure to Russia. I’m guessing that they’re in the tens if not the hundreds of billions. But ultimately, what is that to 505 companies (marking up the S&P 500) with a market capitalization/value approaching $40 trillion—and to a market for that equity that’s sitting at less than 10% below it’s all time-high?

Meanwhile, there’s abundant liquidity in the financial system. The consumer’s balance sheet is as healthy as it’s been in 40 years. Unemployment is cratering. Everyone who can work and wants to can find employment at rising wages. In every important respect this is the mirror opposite of the Global Financial Crisis, when banks had zero excess reserves and the consumer was leveraged up to the eyeballs.

In short, just try to remember that today’s crisis invariably becomes yesterday’s news. And not only will we not be worried about this stuff ten years from now, but we probably won’t even remember it. Do you remember that the stock market went down almost 20% over six months in 2011 because of a raging government debt crisis in Southern Europe, the threat of a U.S. government shutdown, and S&P downgrading the debt of the U.S. Treasury? No? Well, neither does anyone else. It all comes down to acting vs. reacting: keeping your head down and continuing to fund your plan, looking neither to the right nor to the left. History not headlines. This is a fantastic time to be an equity investor for the long-haul—even if, just at this moment, it feels like we can’t see a foot in front of our faces.

The more you know about past crises—and how the great companies of America and the world absorbed them, regrouped and went on to new heights—the more you may be inclined to entertain the thesis that “This too shall pass.” Remember that it’s not a market of stocks. It’s a market of companies. More historical perspective to illustrate this point can be found in Nick Murray’s most recent piece “Exhaustion is Not an Investment Policy”

But now let’s actually talk about what’s going on with inflation, and the outlook from here, because it is in fact still a bit ‘spooky’. Especially when you think about the ‘safe’ money you keep in your savings account suddenly dropping 8% in value. We of course don’t see that decline nominally expressed on our balance sheet, but we certainly will feel it in terms of purchasing power when it comes time to pay for something. Here are the three more credible forecasts that I’ve paid the most attention to (articles hyperlinked):

We should also talk about interest rates, another narrative that goes hand-in-hand with inflation. Interest rates are rising as a means of reducing demand in the economy, and thus taming inflation. It’s now safe to say that we have entered into a regime of steadily rising interest rates. The Fed has realized that their narrative of ‘transitory’ inflation was doing more to scare participants than to calm them down. Indeed, it isn’t just inflation that harms equity markets, but often it is said that it is embedded future expectations of inflation. Such expectations can cause consumers and businesses to ‘front-load’ spending as they see higher prices in the future. Other folks may stop spending altogether. And others may stop putting excess savings into equity markets, and rather put the cash into a savings account.

The theory that seems to be driving market volatility as rates rise, or with the prospect or rates rising, particularly faster than was previously expected, is that interest rates and stock prices move in opposite directions. The idea is that equity valuations reflect the present value of a company’s future earnings, dividends, or cash flows. Higher interest rates make that future money worth less today, which in turn drags down stock prices.

However, history tells a different story. During the previous eight hiking cycles, the S&P 500 Index was higher one year after the first increase every single time, according to LPL Financial.

Last week, Lael Brainerd, widely regarded as the most Dovish Fed member, changed her tune dramatically to sync up with other Fed board members. She was the ‘last shoe to drop.’ The market responded with consecutive down days, only to stabilize on Thursday 4/7. Her comments signaled a potentially rapid increase in the rate, foreboding 50 basis points (0.50%) rather than 25 basis points (0.25%) consecutive rate hikes given the trajectory of inflation. While it’s worthwhile to note this, it is more telling to see that the market did not melt down, and went nowhere near retracing our prior February 24^th lows.

Indeed, former JP Morgan Chief Equity Strategist Tom Lee (a member of our partner firm’s board of directors) recently published an article in Business Insider declaring his belief that there was a 90% probability we had surpassed our stock market low point for the year, given his analysis of the data of all the historical sell-offs and rebounds in the market. I would have to say, I agree with him, given the fact that now the ‘worst case scenario’ seems to have already been absorbed in terms of fed rate hikes, with the most dovish member moving to hawkish, and with things in Ukraine steadily improving.

Fidelity’s ‘Viewpoints’ piece published today entitled ‘Scanning the horizon for signs of recession’ parses through key data and supports our overall outlook. Despite the numerous challenges mentioned above, the US economy is continuing to grow and likely remains in the mid-cycle phase of the business cycle when stock prices may continue to rise despite volatility. A variety of factors are likely to keep the US economy from sliding into recession in the short term, including strong gross domestic product (GDP) and consumer spending, low unemployment, and rising wages.

We only work with busy people, so this, believe it or not, was my attempt at brevity. However, here are some additional articles that I’ve compiled over the past month which you might find interesting:

We’re here whenever you need us.

Charlie