GW&K Investment Review 4Q 2022
ECONOMIC COMMENTARY
Lately I've been noticing that even news articles with positive headlines that begin as uplifting pieces turn negative. It's as if the editor or writer could not just stay with the best of the article's intent.
This behavior is an example of what seems to be occurring in our society and economy. It seems difficult for many to smell the roses and understand how far we’ve come in the last three
years. When Covid first hit, it was hard to imagine that our economy and society would be as healthy as they are now.
Reflecting on this widespread pessimism, it almost feels like Americans are dealing with post-traumatic stress, and that Covid has taken away some of our optimism for the future. That feeling of vulnerability is real even now, as friends and relatives continue to be struck with the virus. This fear probably impacts many of our behaviors. The need to live life to the fullest drives our need to socialize and have fun. Certainly restaurants, airlines, and hotels are benefiting from the spirit of “let’s live.” Part of that is the need and ability to enjoy a normal life. That psychology has also affected the workplace. Many never returned to work or chose a simpler lifestyle. But even those who have come back want to enjoy flexibility in scheduling, whether it be days at home or flexible hours. When I reflect on my life, I see three events that have caused a major change in national behavior and attitude — Vietnam, 9/11, and Covid — in each case, the country turned (for better or worse). Those seismic events could not help but change behaviors. Our confidence in the future was challenged. Our previous way of life seemed to be no longer possible. But it also meant that it was critical to understand the changes and adapt.
As to our present circumstances, we are trying to move forward as a community and society. Much has been done to reinforce our stamina. We had a clean midterm election, we now have a more consistent foreign policy — particularly our full commitment to the Ukrainian people — and finally we are talking to our adversaries with respect. But even if the backdrop is becoming more stable and maybe healthier, we still are fighting our personal demons.
I believe the stock market is a reflection of this national attitude. We know the ultimate worth of equities is based on confidence in the company and country. Valuation is then a matter of what the investor is willing to pay. It is that simple. The more excited you are about the future, the more you will pay, and vice versa. As Covid dissipates and our confidence in the medical industry continues to grow, I believe we may be laying the groundwork for a new bull market. The base may take a year or two to strengthen, but I think there will be a shift from pessimism to optimism. Rates will decline in a year or two. Lessons learned from the pandemic will become part of a new model, i.e., less dependence on supply or need for inventory. Smaller is better. Employees are getting their share of profits, all within the framework of a new awareness and ability to adapt.
Monetary and fiscal policies enacted during the Covid period may have been required (that can be debated), but appropriate or not, they created excesses that needed to be squeezed from the system. We are in a period of reset, for assets and behavior. It is a complicated time, but, as is often the case, it is a healthy correction.
It is important to understand that what the Federal Reserve may or may not do will not be relevant in a couple of years. Short-term rates will go higher, but as the economy softens, they will also be lowered. We may have a recession, or we may not — but even if we do, it will be temporary. Inflation will decline to an acceptable level. The drumbeat will change as the economy finds its way back to some level of normalization. This temporary slump in values provides an opportunity for investors to buy assets at an attractive level. It is as true for bonds, which finally look competitive, as it is for stocks and other risk assets. Think of this year as a healthy and necessary reset of valuations from unsustainable levels. And be patient as the turbulent transition unfolds.
Harold G. Kotler, CFA
Founder-Chairman, Chief Investment Officer