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Volume 12, Edition 4 | February 6 – February 10, 2023

Keep Pushing the Investment Flywheel

Doug Walters, CFA
Businesses often talk about the “flywheel” effect. Investors have their own flywheel, which is equally as powerful. Are you pushing yours?

Contributed by Doug Walters, Max Berkovich, David Lemire, Eh Ka Paw

This past week our leadership team took a couple of days out of the week for our annual planning meeting. I always look forward to these sessions. It is an opportunity to step out of the day-to-day work “in” the business to focus “on” the business. We often talk about the flywheel concept, and it struck me how relevant this concept is for investors.

The flywheel was an analogy popularized by Jim Collins in his book “Good to Great.” It is this idea that it is challenging to grow a business at first. It is like a stubbornly heavy flywheel at rest. But with consistent small pushes in the right direction, a business can build momentum over time until one day they find their growth is inevitable and exponential. Looking back, there is not one action that has led to this success, but rather many pushes over time in the right direction.

Investors can learn something from this analogy. For a lucky few, wealth has come in one fell swoop. For most, though, wealth is a long journey. For these investors, the flywheel is a great analogy. At first, the flywheel of wealth is stubborn. You are contributing to your investment account and investing wisely but not seeing much in the way of results for your efforts. The goal of financial independence seems a long way off.

But the beauty of investing is that returns compound. 10% return on $100,000 this year is $10,000. Now you have $110,000. 10% on that is $11,000. In other words, with consistent pushes in the right direction, your investments will grow exponentially. Progress may seem limited at first, but as long as you keep pushing the flywheel in the right direction, your assets can start to do the hard work for you… as long as you keep pushing in the right direction.

What would be a push in the wrong direction? Examples include:

  • Market-timing (jumping in and out of the market based on speculation),
  • Chasing the hope of high returns in risky investments (hedge funds, crypto, high-growth stocks),
  • Under-diversifying (e.g., too much home bias),
  • Generally, believing that spotting the next big thing in investing is the key to your success.

These pushes could be in the wrong direction and have the potential to slow down or even stop the flywheel. Our evidence-based approach is designed to consistently provide the flywheel with little pushes in the right direction. Whether it is putting proven factors at the core or opportunistic rebalancing, every action is designed to give the flywheel a little nudge until your investments are doing all of the hard work for you.

Headline of the Week

The headline this week is more about the small print. Headlines get all the attention, especially those with big unexpected numbers, like last week’s job report and continuing tech layoffs. However, it is often later in the story (8th, 9th, or even 15th paragraphs) that the most meaningful information can be found. In this case, some of the more interesting insights were not only buried deep in the story, but the story came out a week after the original headline.

Last week’s employment report showed eye-popping gains. This number coming out just prior to the Fed’s most recent meeting added an extra sizzle to the headline. Fast forward another week, the Wall Street Journal offered an interesting take on some of the underlying aspects of the current employment picture that has the potential to influence inflation, the Fed’s rate path, and how markets move.

Some sectors of the economy saw massive overhiring during the pandemic. Conversely, some sectors saw massive downsizing. Both areas could be normalizing; think Peloton layoffs and restaurant hiring as illustrative examples. Last week’s jobs report revealed normalization in those areas hit hardest by the pandemic. No doubt, many folks were enticed back into the job market by higher wages. But, if understaffed firms can fill positions more easily, it could prevent more drastic steps that could accelerate a wage/price spiral. Needless to say, the soft landing still requires much work, but big, bold headlines don’t always tell the full story.

The Week Ahead

The Consumer Price Index on Valentine’s Day may be as hyped up as the big game on Sunday, especially since inflation seems to be the most important data to the Federal Reserve.

Topped out

The labor market seems to be healthy, which is not what the central banks want to see right now. However, despite monetary tightening, the strong jobs report arose jubilation from markets as a soft landing is still a good possibility as long as inflation is tamed.

  • The headline Consumer Price Index (CPI) on Tuesday is expected to show easing inflation, up slightly for January and down to 5.8% oyear-over-yearyear basis.
  • The report is expected to show inflation but at a decelerating rate.
  • Excluding the more volatile food and energy (core-CPI), the year-over-year number is expected to come in at 5.3%.
  • Similar decelerating inflation results are expected from the Producer Price Index (PPI) two days later.
  • Core-PPI year-over-year is expected to finally read under 5%.
  • With a strong labor market, it has been a bit puzzling that retail sales have fallen by 1% for two straight months. Hopefully, the January results end that streak.
  • The bounce back of 1.4% that economists expect is supposed to make up for a weak December result that was dragged down by a cold snap.

The Dark Horse

The Gross Domestic Product (GDP) from Japan and European Union for the 4th quarter is out this week.

  • The European Union is expected to report growth in Domestic Production, narrowly avoiding a decline for the quarter.
  • Japan had a negative GDP last quarter but is expected to have a bit of growth in Monday’s numbers and narrowly avoid a recession.
  • Japan is also going to announce a new Central Bank Governor Tuesday when Prime Minister Fumio Kishida announces Kazuo Ueda as the new head of the Bank of Japan (BOJ).
  • Kazuo, the 71-year-old academic and former member of the BOJ policy board, was not even considered a dark-horse candidate, yet he will get the nod as the front-runner. The current Deputy Governor of the Bank, Masayoshi Amamiya, declined the job.
  • Kazuo, if confirmed by the parliament, will be appointed to serve a five-year term because the current head, Haruhiko Kuroda, will step down from his role in April.

Have a Coke

Earnings season is losing steam, but there are plenty of big names due to report this week.

  • Deere & Company (DE), Cisco System, Inc. (CSCO), AirBnB, Inc. (ABNB), and Marriott International, Inc. (MAR) will garner Wall Street interest. But it’s The Coca-Cola Company (KO) that will have the biggest audience.
  • Reporting a few days after archrival PepsiCo (PEP) topped expectations and set a high bar.
  • Coke has beat earnings per share estimates for eight consecutive quarters and missed on revenue only once during the stretch.
  • As consumers, we will anxiously look for hints of an end to the price hikes.

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