November Thoughts - Glass Half Empty or Half Full?


Headlines of Covid-19, inflation, troubled labor force, supply chain constraints, and a surprisingly low third quarter 2% GDP growth number may have you scratching your head as to why stock prices remain persistently high. It certainly can be viewed as an important inflection point. Will current stock prices fall from here to reflect current realities, or will current realities improve to reflect current stock prices? Always the investor dilemma – predicting what will happen next. As baseball-playing philosopher Yogi Berra once said, “It’s tough to make predictions, especially about the future.” The Glass Half Empty View

Covid-19: Predictions of the pandemic ending sometime next year are too optimistic because the global reach of the virus will keep it active and new variants will emerge causing continued economic disruptions. Inflation: Higher prices are here and will continue to be persistent due to supply shortages. This will cause the Fed to move aggressively from their supportive stance and will raise interest rates and taper bond purchases faster than expected in an effort to combat stagflation (low economic growth with higher prices). Supply Chain: The supply shortage is not due to increased demand, but rather poor buying conditions caused primarily by Covid-19 related issues. This will take some time to work itself out and any higher prices will cause demand destruction. Labor Force: Scarce labor is causing firms to adapt by increasing wages at the expense of profits. The participation rate is at its lowest rate since the 1970’s which will slow economic growth due to not having enough workers to deliver goods and services. Economic Growth: The surprise drop in the third quarter is evidence that extraordinary policy measures have failed and not just a supply driven “hiccup.” Higher prices for goods, rent, and fuel combined with various supply chain bottlenecks are causing a deceleration in consumer spending and demand. The Glass Half Full View


Covid-19: There's enough immunity in this country from a combination of enough people getting vaccinated and enough people having been exposed to the virus. Infections and death tolls will plummet in 2022 and business in the United States will accelerate its “re-opening.” Inflation: The “transitory” narrative is still intact, suggesting that the economy will not overheat. The Fed will not have to move quicker than expected, remaining conducive to continued stock market outperformance. Price declines for goods will offset price increases for services and temper inflation overall. Supply-Chain: Although supplies are limited, demand remains strong and will increase even more when economic growth reaccelerates. As Covid-19 concerns dissipate, supply issues will begin to alleviate with demand remaining strong throughout the process. Labor Force: The revival of labor force participation will begin to accelerate as schools reopen, unemployment benefits expire, and the Delta variant fades. Labor-force participation will ramp up allowing economic productivity to meet demand. Economic Growth: It is more likely that the recent 3rd quarter slowdown reflected demand deferral than demand destruction, due to the rise of the Delta variant. Indications are that strong growth will resume in 2022 at an above average pace and “the economic tide will lift all boats.”

Conclusion: Longtime readers of our newsletter can certainly wager their inflation-adjusted cash on which way our team at Ranch Capital views the glass. It is not that we are eternal optimists, because there will be a time when we recommend a much more defensive positioning of portfolio assets. But now is not that time. Likely, we will land somewhere between the various predictions which can be viewed as the Goldilocks economy… not too hot and not too cold. But, as legendary investor Warren Buffett always says, “Never bet against America.” We agree. From our Ranch Cap family to yours, we wish you a very Happy Thanksgiving and pray you get the opportunity to spend it with the people you love and in a true spirit of gratitude. “For where your treasure is, there your heart will be also.” Matthew 6:21