Market Outlook

Throughout our weekly newsletter communications, we’ve often shared out thoughts on where we feel the market is likely to move, the challenges facing it, and the reasons for our outlook.  As we continue to move forward through unprecedented financial news flows and challenges, our goal is to keep focused on providing consistent performance in spite of all this market volatility.  (Please let us know if you have not been receiving our newsletter!)

With the festival and holiday season upon us, and continuing through the end of the year, it is natural to focus on the retail side of the story.  Looking at the various aspects of it can provide interesting insights into the upcoming year.

As a backdrop, the markets are showing a lot of volatility.  The news flow has competing opinions on almost every data point that comes out.  Good news for some is bad news for others, and vice versa.  An unusual combination of a strong jobs market, respectable balance sheets for homes and businesses, and Federal Reserve induced recession fears has everyone wondering how others are going to interpret each little data point that comes out.  The persistence of the inflation challenge is causing the Federal Reserve Chair and presidents to use a combination of rate hikes and public statements to try to cool the economy.

From the shopper’s standpoint, the intention for a good holiday season is there.  Retail sales aren’t coming in as low as feared, and various surveys have indicated an inclination for shoppers to spend at least as much as last year.  We will see how intention and reality match up, however.  For current homeowners in fixed mortgages, the increase in mortgage rates has not had an impact.  For renters, as their contracts are coming up, or as they are moving to new units, landlords are making up for Covid era forbearance losses as well as inflation justified adjustments to increase rents as high as the local job market will support.  This disproportionately affects the younger and the lower earning demographic groups.

Prices in stores had been moving up due to supply chain induced scarcity for many types of goods and services for most of the last two years.  However, as the supply of computer chips is normalizing, gasoline and oil prices have come down, and shipping volumes have been steadily ramping up, port delays have been shortening, and shipping costs have been coming down.  In recent CPI reports, the fuel and oil prices have moved downward significantly, which will begin to trickle through the distribution networks, product input costs, and delivery systems.  Combined with the strong US dollar making international goods cheaper, retailers fears of supply shortage overcompensating with larger orders, and pricing pressures should come down over the next quarter or two.

For those considering traveling during the holiday and festival season, ticket prices will likely still be high due to staffing challenges for airlines.  However, once you arrive at your destinations in Europe, South America, Southeast Asia, India, or almost any mainland destination you are considering, you should find prices to feel quite reasonable with the current conversion rates.  On a relative basis, the US Dollar is the strongest it’s been in over 20 years!

In Summary:  We continue to watch rising interest rates and quantitative tightening battle, with a strong US Dollar putting pressure on the global economy.  We are monitoring various economic, financial, and business related information coming out of China, and are trying to determine the real potential impact on the global economy.  If the global economy continues to struggle, commodity prices will continue to come down, which helps markets like the US, but stresses the emerging markets that depend on commodity exports.  US Dollar strength will make commodities such as oil and gold, which primarily trade in US Dollars, more expensive in non-US markets.  Again, no matter how much the news narrative continues to try to tell us the entire economy is in a bad place, most of us still feel like our local economies are doing pretty well.  Those who are looking for work are able to find it, however the Federal Reserve’s actions have cooled some of the price competition for acquiring talent.  Small companies continue to hire, consumers continue to spend, and the government is passing legislation for us to monitor and evaluate going forward. 

What does this all mean for Kubhera’s investment strategy and your portfolio?  It continues to mean:

  • Balance and flexibility;
  • A bias toward companies with a competitive advantage and moat;
  • Investment strategies that are flexible enough to switch in and out of cash positions to minimize the risk of catastrophic losses;
  • Non-correlated investments in strategic infrastructure private equity investments that have demonstrated themselves to be pandemic proof;
  • Limiting our interest rate sensitivity with a stronger focus on shorter duration of fixed investments, as the inverted yield curve is not rewarding long term commitment;
  • Strategically deploying and reallocating capital based on the Federal Reserve’s actions, observed dislocations, and global trends that we are monitoring.

The next few quarters should provide much greater clarity for the medium-term economic trends in both US and global markets, and we are paying close attention.