What I Care About This Week | 2021 Oct 18

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by Franklin J. Parker

The Summary

  • Chinese growth slowed quite a bit in the most recent quarter. After expanding at an annualized 7.9% in the second quarter, the Chinese economy grew at a paltry 4.9% in the third quarter. Numerous variables have been cited for the slowdown, but the relevant point for US investors is how this affects global growth. With China turning in considerably slower figures, there is question about whether the US and Europe will also begin posting worsening figures.

  • This week sees a few important data drops: industrial production today, several Federal Reserve presidents speak, and weekly initial jobless claims post on Thursday, per usual. Of most importance to investors is corporate earnings. With the global growth in question, and the Fed expected to begin tapering asset purchases come November, corporate earnings stand to be a catalyst, either for higher prices or lower. To date, 8% of S&P 500 companies have reported earnings, and of those, most have reported positive surprises, a good sign so far.

  • My view is that markets will likely continue trading sideways for the next couple of weeks. With positive earnings, I see investors again pushing prices higher, at least through the first half of next year, though inflation remains a significant risk to investors. It is the summer of next year that I see getting dicey—interest rate increases have historically created downside for markets, and that is about the time markets will be pricing them. For now, our portfolio strategy is to use dips to deploy cash, and remain steady-as-she-goes otherwise.

The Details

I’ve been writing a book.

The book is a technical manual on goals-based portfolio theory, which has been a serious topic of my research over the past several years. It isn’t ready yet (I’ll let you know when, don’t worry), but what it has forced me to do is consider the many of the implications of a goals-based approach. The one that stood out to me last week was how goals-based investors approach markets, and how markets might go about discovering price (I have talked about this before).

In a world where investors are trying to accomplish specific goals, market pricing looks entirely different. Contrary to accepted theory, market pricing is reflective, not just of the financial fundamentals of a business, but also what it is the investors themselves are trying to achieve. By viewing investments through a goals-based lens, investor pricing (and therefore price discovery) shifts considerably.

Last week, I spent time analyzing how goals-based investors might approach portfolio hedging. Similar to how investors price other securities, my research shows that individuals are willing to pay different prices for the exact same hedge. This is no surprise to investors and practitioners, of course, as it squares with our intuition. However, to date, these intuitions have been generally considered irrational by traditional economic theory.

My genuine hope is that this research not only helps real people organize investments in such a way as to better achieve real goals in life, but also that broader economic theory would begin to accept that people are not quite as irrational as we have been led to believe!

Stay tuned, there is more to come.

Chart of the Week

Inflation was the big news last week. Though in-line with expectations, 5.4% inflation is high by anyone’s standard. What’s more, it is getting harder and harder to argue that all of this is just transitory.

This week’s chart shows the percentage of small businesses who are planning to raise wages in the coming months. As we can see, this is the highest figure in 30+ years. While a positive for workers, higher wages are passed along through higher prices so small business wage increases are likely to further fuel inflation pressures. The danger is we become trapped in a wage-price spiral where rising inflation pushes wages higher, which in turn pushes inflation higher.

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