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Volume 12, Edition 28 | October 16 – October 20, 2023

The Cost of Capitulation

Doug Walters, CFA
Market weakness has the potential to motivate unnecessary and potentially harmful investor action. In all markets, consistency of approach is a recipe for long-term success.

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

The publication of Insights has been a bit spotty in recent weeks, and I take full blame. The kids are both in college, and we have just passed through “parent’s weekend” season. At Strategic, one of our core values is “Live.” Taking a few Fridays off to spend long weekends with the kids is me “living!” But markets don’t take a break, and the past few months have seen some weakness.

The 7%+ decline in equities over the past three months is nothing more than a blip on a long-term plot of the market. Yet, if the number of times I’ve been asked about the “difficult market” in the past few weeks is any indication, it is weighing on investors’ minds. As such, now seems a good time to hit on a basic investing best practice that separates successful investors from the pack.

Consistency. It is as simple as that. Most reasonably considered consistent investment processes will outperform the frequent capitulator. Yet most casual investors regularly change their approach. Why? Often, they “feel” like their process is not working and don’t have the patience to wait it out.

Warren Buffet once said, “The stock market is a device for transferring money from the impatient to the patient.” No strategy will always outperform, and abandoning your strategy to chase what is currently in vogue is a proven recipe for underperformance. In today’s markets, we see investors abandoning their asset allocation for cash and chasing mega-cap tech stocks whose valuations are in the stratosphere. Disappointment seems likely.

It is not that we can see the future. No one can. However, we can see the dangers of capitulation and the critical role of consistency. For us, that consistency comes in the form of an evidence-based approach to investing centered on persistent factors: High Quality, Good Value, Strong Momentum, and Small Size.

8.1%

30-Year Mortgage Rate

Rates reached a multi-decade high this week.

Headline of the Week

Home Sweet Home

The phrase “home is where the heart is” is being altered to “home is where the mortgage is.” With 10-year Treasuries flirting with 5% yields, the 30-year mortgage has pushed past 8%. No matter where your heart wants to go, the mortgage often drives the decision. Housing markets have largely seized up as homeowners are reluctant to move (either to upgrade or downsize) since to do so would entail possibly doubling their mortgage rate. Cash buyers are having to make aggressive bids to entice owners to sell.

The Week Ahead

The course for the coming week can be derailed as the heavy armament along the Gaza Strip can get the green light for ground operations; however, if the West finds a way to buy more time for hostage negotiations, we should see U.S. Gross Domestic Product (GDP), inflation report, and earnings on the front page. A wild card would be if the European Central Bank or Bank of Canada shakes things up and hike rates.

Did I miss the memo?

When the preliminary 3rd Quarter GDP is released on Thursday and if it meets expectations, which are for an expansion of 4.1%, some casual observers will feel like they missed a memo.

  • By most measures, the economy is doing well despite elevated inflation and multi-decade-high mortgage rates.
  • Tight labor markets, government, and consumer spending are behind the driver’s wheel.
  • While the 4.1% expectations put growth at the highest level since the 4th quarter of 2021, estimates are looking for even more robust growth.
  • Atlanta’s Federal Reserve Bank’s real-time GDP estimator is reading an incredible 5.4%. This gauge has had a decent track record in the past.
  • One unfortunate problem… good is not good. A strong GDP print will embolden the Fed to hike more.

All gassed up and ready to go!

The Federal Reserve’s favorite inflation gauge, the Personal Consumption Expenditures Price Index (PCE), is released on Friday.

  • The worry is that the recent run-up in oil prices will exert pressure on prices and mask any progress on inflation.
  • Expectations a week away are for the core-PCE, which excludes food and energy, to trickle down to 3.7%, a welcomed trend extension from 3.9% in August, which was down from 4.3% in July.
  • This report will also pay attention to the Personal Consumption and Income figures.

Running in Place

Both the Bank of Canada (BOC) and European Central Bank (ECB) have rate decisions next week and overwhelmingly are expected to do nothing.

  • ECB is walking a tough road; inflation is still elevated, but it does not have a strong economy as we do to cushion more hikes. Hence, the conversation for when the cuts are coming will be the focus there.
  • Canada’s inflation is cooling like the U.S., and bond yields have moved up similarly by markets, not the central bank, so a hike is highly unlikely.

MegaTech week

In week three of the 3rd quarter, earnings will move away from banks and take an entirely different turn.

  • Despite well-known names like Visa (V), Coke (KO), Merck (MRK), MasterCard (MA), Intel (INTC), Exxon (XOM), and Chevron (CVX) on the calendar, the week will belong to Mega Cap Tech.
  • With Microsoft (MSFT) and Alphabet (GOOG, GOOGL) on Tuesday night and Amazon (AMZN) on Thursday, big technology will dominate headlines.
  • For Amazon’s report on consumer strength and its recent AI (Artificial Intelligence) initiative, Anthropic will be the focus.
  • For Alphabet, the focus will be on advertising spending, while for Microsoft, the focus should be on OpenAI and its recent drawn-out $69 Billion acquisition of Activision Blizzard video gaming company.

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