A brief missive on the current market environment

Once again, the dog days of summer are approaching fast.  We are all preparing for a much more normal summer season than last.  Predominantly vaccinated and ready to let loose, it looks like the metaphor of the roaring 20s is appropriate. 

Let’s start by addressing the elephant in the room – inflation.  It isn’t coming, it’s already here.  You name it: lumber, steel, gas, homes…prices are up.  A dearth of supply paired with increased demand as the world economy comes quickly back to life is causing the highest inflation reads in over a decade.  

Our Fed contends this is transitory and we think they may be right.  The backed up demand is pulling forward future orders at a time when supply is truly constrained from the residual lockdowns.  Over time, a reversion to the mean will dampen demand, we think, around the same time supply comes fully on line.  With this mindset, we expect interest rates to stay relatively low. 

On the positive side, there is overwhelming consensus of a continued expansionary trend.  Some of the often referenced points supporting the case are that retail sales are growing at the greatest clip since 1984 (personal consumption makes up about 2/3 of US GDP),  interest rates remain relatively low, travel and hospitality industries are on fire, and wages are rising.  

Corporations have been reticent to spend on property, plant, and equipment (PPE) for years, hoarding even more cash after the pandemic hit.  Japanese Kaizen (continuous improvement) is still sound, but just in time manufacturing may have to look more like “just in case” as companies start to keep additional inventory to avoid running into the supply issues we have today.  Increasing the possibility that some of this money makes its way into the system furthers the bullish case. 

As you can see from the market’s performance this year already, it is easy to paint the rosy picture of the future to come.  It looks to us that the earnings are finally catching up to the stock prices and valuations are getting more reasonable.  

Eerily, it feels a bit like the end of 2019 where we had no reason to believe there were any speed bumps on the well-paved road to the future.  As 2020 reminded us, we never truly know what lies ahead, but we try to gauge and manage according to the known knowns.  We continue to stay the course, buying great companies with great management teams and great products.

What could create a so-called air pocket in the market’s current flight path?  Inflation, as mentioned above; a spike in interest rates could lead to air coming out of the speculative bubble we see in speculative meme fueled stocks; some unexpected tumult in US politics…insert your own worry here.

On a personal note, we have added Kimberly Arguello to our team.  Kim is a Chartered Financial Analyst (CFA) and has a MBA from University of Miami.  She brings extraordinary experience to this role.  We hope to introduce her to you soon. 

As always, we truly appreciate your trust and confidence and we are working diligently on your behalf.

Peter L. Bermont
Managing Director

Michael D. Gold
Managing Director