From the Desk of Brad Murrill, CEO Redfish Capital
Updated: Aug 9, 2022
As I write the S&P 500 is up year to date around 25%. No matter what you were hoping to see that is a big year folks. So how did we get here?
Once again, the leader of all market moves was COVID. Congrats COVID and would love to see you go. Most of the upside we saw was due to the reopening of the economy. We had a hiccup in the form of the Delta Variant, but the markets made it through Delta. Now we have Omicron. Omicron was found first in South Africa. This should not be too hard to believe that the entire country has a vaccination rate of around 27% which is extremely low. We are seeing a sell off right now (November 30) as this letter is being written.
So let me for a moment delve into why Covid has such a significant impact on the stock markets.
As I have mentioned before, the markets love certainty and hate uncertainty. Markets try to reflect the current market price of a company plus the expected growth. Covid throws a massive unknown in the overall economy. As you can appreciate, when the economy shuts down, people cannot leave and go to work. No products are being made, no one is around to transport these products, and no one is in the store to buy these products. That’s a problem! So, the stock market really became a Covid Hospitalization Watch Party. As this number rose and fell, the market followed suit.
Once the virus looked as if it was slowing down, the economy slowly opened. What happened then? Everyone ran out of the house and went shopping, eating out, and some traveling. Demand was there. The problem was a lack of supply. There were not enough goods on the shelves, employees in the restaurants, drivers in the trucks, and you get the picture. You can go back to high school economics class and remember the lesson we all learned on supply and demand. What we received was a big dose of inflation. Prices on the goods that we did have shot up. This inflationary scenario produced a new saying in economics...transitory inflation. In other words, once the supply increases in theory the prices should also come back down. Arguments from all sides were hitting the market blogs and conversation and the jury is still out on this.
What we did see consistently was volatility. These dips and rises in the market were fast and furious which can make investing a nervous venture. What we saw in 2021 was the stocks of companies that had a clear growth window did well. These were typically companies that were in technology that regardless of the economy we could forecast strong sales. Where that forecasting became foggy was in companies that required the consumer to be out and about to use their products (restaurants, casinos, travel, entertainment, theme parks) or simply put the cyclicals. The cyclicals were extremely volatile however that volatility did produce opportunities for savvy investors who were able to take advantage of these moves.
I expect 2022 to be a solid year. This COVID mess has sure been interesting to say the least and has added significant volatility to the markets that I fully expect to continue. As the news of new strains and hospitalizations come through, we are beginning to see somewhat of a pattern. Let me break 2022 down to a few topics.