What I Care About This Week | 2023 Feb 20

green mountain
Photo by Quang Nguyen Vinh on Pexels.com

by Franklin J. Parker, CFA

The Summary

  • Markets seem pretty bipolar these days. For the past few months, investors have latched on to “the Fed is almost done raising rates” narrative. That has led many assets higher (including stocks). That narrative is shifting yet again, however, as investors are reassessing the path of the Federal Reserve (trust me, I am as tired of talking about the Fed as you are of hearing about it). Anyway, stocks are feeling a bit “toppy” at these levels, and a correction seems likely, especially in light of the Fed’s continued aggressiveness.

  • Earnings season is coming to a close, with about 80% of the S&P 500 having reported. It has been pretty disappointing, and it appears that companies have made about 5% less money than this time last year. This, coupled with the deteriorating fundamental economic data, urge caution. For investors with shorter time horizons, this is the time to batten down the hatches. In my view, there are more pressures downward than upward right now.

  • This week we get data on the global economy, and we get the Fed’s preferred inflation gauge: Personal Consumption Expenditures (PCEs). Investors are watching closely for PCEs to continue their downward trend (+5.0% was last month’s print). A flatlining here would be troublesome for markets. We also get data on personal incomes, and with WalMart and Home Depot reporting earnings, we also get some insight into the health of consumers.

The Details

Investing ethically is something talked about a lot these days, but what does it really mean? In my recent book, I give an example that illustrates the key point of ethical investing:

Imagine a company that makes 65% returns a year for its shareholders. Not only are these returns doable, but in your estimation 65%/year is a conservative estimate. The catch? This company employs slave labor in their manufacturing process (overseas, of course).

Clearly, no one would invest in this company! Given an entire marketplace of investors who turn down so lucrative an offer, there is, therefore, no investment return that justifies the enslavement of other humans.

Which illustrates an important point about investing ethically: we all do it, at least on some level. We all have a set of ethics which we would not violate, no matter the potential return.

Yet beyond some common items (which are mostly enshrined in law codes, anyway), we are all a little different in what exactly matters to each of us individually. Some investors prefer not to invest in oil & gas companies, others would prefer not to invest in gambling companies, still others would prefer to take an active role in their proxy voting, and some investors are fine with what the law says on a given topic.

And here is the key point: Investing ethically is just as individualized as everything else about us. Which means there is no one-size-fits-all solution. Your ethics matter. Imputing your ethics into your investments requires considerable portfolio customization, just like your other financial goals. What’s more, determining what you may be willing to give up to achieve those ethical objectives is yet another nuanced conversation that should be had.

In the end, this is a topic that requires care and conversation. And that is something we would love to discuss with you.

Chart of the Week

Finance can be rather heartless. We often talk about big-picture things such as inflation, Fed policy, interest rates, and so on. Yet, there are real human struggles underlying these figures. That is the subject of this week’s chart.

The “Misery Index” is a reflection of the that unemployment and inflation are the two leading causes of economic pain. In the chart below, we can see the Covid-induced spike, which was primarily driven by unemployment. Now, however, levels are being driven by inflation. Of course, both of these were not compounded, which is the danger in a recessionary environment (like the 1980s, when this index was at its highest levels).

It is good to remember that under all of these facts and figures, market swings, and economic data are reflections of actual human experiences.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

%d bloggers like this: