J.P.Morgan Insights (audio)

In weighing the value of any security, the scales of financial markets are supposed to maintain a fine balance between fundamentals and price.  The plate of fundamental factors is piled high with macro trends, geopolitical issues, weather and environmental events, policy decisions and individual security attributes.  The other plate is far more sparsely occupied – price stands alone, accounting for half of any assessment of the opportunity and risk in the purchase of an asset. 

When future historians reflect upon the current age, they might call it “the worry years”. As America emerges from the pandemic, there are still serious health concerns, a yawning political divide, rising autocracy around the world, a brutal war in Europe and the highest inflation in 40 years. Moreover, anxiety triggered by these genuine problems is being amplified by cable channels and social media which ever more efficiently gather their audience by appealing to fear and outrage.  

On Saturday, Sari and I made our annual pilgrimage to Kimballs for lobster roll.  Kimball Farm, which started as an ice-cream stand in Westford, Massachusetts, has ballooned into a huge enterprise over the years and there was a big crowd lined up in front of us when we arrived.  Undaunted, we traced our way to the back of the line and hoped it would move fast.  It did not.

Whatever else anyone may say about Jay Powell’s much-awaited speech in Jackson Hole, it had two distinct virtues. It was clear and it was brief, running to just 1,300 well-chosen words. In the same spirit, and despite a sharp 1,008 point slide in the Dow Jones Industrial Average on Friday, it is important to be succinct in discussing both where the economy is and potential Fed policy going forward. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

The phrase “drawing a line in the sand” has an unhappy history.  In the U.S., it is said to have originated with Colonel William B. Travis, who drew a line in the sand at the Alamo declaring his willingness to fight and die rather than surrender.  In 2008, following the takeover of Bear Stearns earlier that year, federal authorities drew a line in the sand and let Lehman Brothers go bankrupt.  And in recent weeks, Fed officials have seemed to draw a line in the sand on inflation. For the podbeam description, can we add the following line towards the end: “For additional insights from Dr. David Kelly, listen to the Insights Now podcast.”

Normally, the great challenge in talking about the global economy is finding a theme.  The economic fortunes of nations are usually driven by such a disparate array of political, financial, demographic and environmental cross-currents that it is impossible to establish a framework for analysis.  Twice however, in this still young century, events have unfolded to provide just such a theme as the world battled the global financial crisis in 2008 and the global pandemic in 2020. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

After weeks of steamy hot temperatures, a cold front is set to move through the Boston suburbs on Tuesday. While the relief will be nice, in truth, the temperature will only edge down from the low 90s to the low 80s. However, it is the start of something and, as we are well aware in this part of the country, longer-term forces will bring us much colder weather before too long.

The long history of financial markets, like most classic novels, is full of misunderstandings, miscalculations and mistakes. Despite all of this, the story normally twists and turns its way to a happy ending. This may yet be the case for investors in the very unusual economy that has unfolded following the pandemic recession and recovery.

When engaged in the more mundane tasks of my job, I often have classical music playing in the background. A piano concerto, in the hands of a great orchestra and soloist, is a delight to the ears as the rush and energy of the first movement gives way to the softer pace of the second. And when the conductor downshifts the tempo, the musicians follow with effortless precision.

Last Friday’s strong jobs numbers came as a relief to many who feared that the U.S. economy was quickly sliding into recession. On its face, the June employment report seems to support further aggressive Federal Reserve tightening, leading to higher U.S. interest rates and a further appreciation of the dollar, and offsetting forces impacting U.S. equities. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

One minor side effect of this terrible pandemic is that we have all become more educated on our own immune system.  Looked at objectively, it is a masterpiece of evolutionary excellence.  The outward signs of infection are normally easy to see – coughing, sneezing and obvious fever warn other humans to keep away, while our own exhaustion makes us less mobile and thus less likely to infect.  The extraordinary havoc wrought by Covid-19 is primarily due to the virus’s ability to make someone contagious even before these symptoms appear. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

In times long gone by, a popular event at town fairs and school sports days was the sack race.  The competitors would assemble at the starting line, each encased up to the waist in a burlap bag and gripping firmly onto its sides.  At the gun, they would hop furiously in the direction of the finish line, 100 yards ahead.  As a sporting contest, it lacked dramatic tension, with most of the competitors biting the dust in the first 50 yards.  But it was entertaining to speculate on which brave athlete would roll over first.  For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

I refuse to believe, despite gathering evidence to the contrary, that I am getting older.  This being my mindset, I am perpetually astonished by the increasing youth of my colleagues.  According to the Census Bureau, the median age of an American today is 38 years which doesn’t, on its face, sound extraordinary.  However, what it does mean is that most of the people I work with have only experienced two recessions in their adult lives – the recession of 2007-2009 and the recession of 2020.  For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

I have been on many delayed flights recently and have a certain sympathy for the pilots who, having repeatedly told us that we would be taking off shortly, have to continually backpedal due to weather or staff or equipment. They always thank us for our patience but in reality they are the patient ones. We, the passengers, are seething, and what’s more, we have suddenly become vocal experts on dodging weather, managing staff and fixing planes. But to get us safely to our destination the pilots have to keep their cool.

Following a solid jobs report last week, investors this week will turn their attention to inflation which, to say the least, has been more of a problem this year.  We expect this Friday’s CPI report to show a 0.6% increase in prices overall and 0.4% excluding food and energy.  On a year-over-year basis, we are looking for headline inflation to fall from 8.2% to 8.1% and for core inflation to drop from 6.1% to 5.7%.

My father, otherwise a very accomplished man, never learnt how to type properly. However, he compensated for a lack of skill with an intensity of application. As children, we would hear him behind the door of his study, pecking away at his Remington typewriter using only his two index fingers. In the afternoons, it would be a gentle, relaxed clicking, interrupted every 20 seconds or so by the merry chime of the carriage return bell.

Last Wednesday, the Treasury Department announced a record monthly budget surplus for April of $308.2 billion.  The report elicited no noticeable market reaction, as investors continued to fret about high inflation today and slowing growth in the months ahead.  However, a Federal Reserve recognition of the economic implications of a fast-falling budget deficit could hold the key to a recovery in recently battered stock and bond markets.  

In the movies, in order to convey the passage of time, a director will sometimes film a scene as the seasons quickly pass before your eyes.  With wistful music playing in the background, the snow melts from trees, buds blossom, leaves rustle in the summer sun and then turn yellow and red as fall arrives.  It all, of course, seems a bit quick, but no doubt the movie has places to go and hopefully things will settle down for a while and allow the plot to evolve. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

In any given year, four big exogenous forces tend to have the most impact on portfolio returns, namely, earnings, interest rates, taxes and the dollar.  While the tax environment appears to be stable, in all other respects, 2022 is shaping up to be a difficult year with slowing earnings growth and fast-rising interest rates.  In addition, the dollar has risen significantly so far this year, as it did in 2021 and this is having negative impacts on both portfolio returns and economic growth.  For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

Economic data in the week ahead should highlight a stumble in economic growth and a surge in inflation in the first quarter. While second quarter numbers will likely partly offset both of these trends, they will remind investors of the challenges faced by the Federal Reserve in trying to return the economy to a path of steady growth and moderate inflation. While some Fed officials have advocated very aggressive tightening, both the likelihood of near-term moderation in growth and inflation and longer-run disinflationary forces suggest it would be wiser for the Fed to take a slow and steady approach in battling inflation. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.