Throughout my career, the ability to manage equity portfolios successfully revolved around grasping the pulse of the market. By this, I mean identifying what drives it, what sustains it, what gives it shape, form, and ultimately its identity. Finding the pulse enables buy and sell decisions to fall into place logically and even naturally.

Finding the pulse requires dogged research, reading voluminous amounts of articles, research reports, corporate statements, and the like. When I home in on the pulse, I can sense it, just as my instincts can also sense when I’m off track.

Over time, I learned that about 85% of available material, from these numerous sources, is useless in terms of finding the pulse. Identifying the valuable 15%, separating the wheat from the chaff, so to speak, is the art, that only the best portfolio managers can do consistently well. The 15% that is insightful has several characteristics. Most importantly, it is truthful and unpretentious. It isn’t produced to prove a pre-conceived notion. It is shared as a discovery of an important truth, often a new revelation, that simply has to be shared. It stands on its own and gives every reader pause.

Moreover, it resonates emphatically only with readers searching for objective truth. For those who aren’t, the essential 15% is indistinguishable from the 85%.  To them, all information, if it agrees with their viewpoint, is acceptable and all information that doesn’t is discarded. Eventually, they are unable to apply any sense of discernment.

This may sound cynical or overly negative, but it is actually quite positive in this sense – Lack of discernment is the precursor to emotional decision making, which creates price inefficiency in the market. Disciplined investors, who can consistently find the pulse of the market, while discarding the daily bombardment of useless, emotional rants, will find opportunities to make buy and sell decisions that will add value to portfolios.

Without further ado, the pulse of the market in 2021…. Investors will be well served to concentrate on understanding these critical issues for 2022:

  1. China – The giant step backward toward oppressive state control, that was outlined by President Xi, is likely to lead to more civil unrest, less economic growth, heightened military tensions in the region, and more internal corruption. How negative this will be for the global economy in the short run, remains to be seen, but it is a decided negative in the long run. Companies involved in world trade, or the global supply chain, will be impacted. To some degree, this involves virtually every company, industry, and economic sector in the U.S. economy. There is a parallel movement in our country toward more government control, higher taxes, and limitless spending, that is worrisome as well.
  2. The Fed’s prediction that inflation will be transitory will likely be proven wrong some time over the next 12-18 months. What will this do to interest rates, economic growth, and corporate profits, remains unclear. We intend to monitor all potential impacts very closely. This too, is a decided negative as we approach the New Year. Higher inflation expectations are slowly being ingrained into consumers and businesses. As this continues, higher inflation becomes inevitable, and I suspect we are close to that dangerous tipping point right now.
  3. The November 2022 interim election looms large on the horizon and is likely to be a very significant event. From a market and economic perspective, the hope is a republican recapture of either or both houses of Congress, producing gridlock in Washington. I would expect the market would react positively toward that potential outcome.

Meanwhile there will be all sorts of soundbites, tweets, cover stories, and social media posts about all sorts of issues and newsworthy developments. This will represent the 85% as described above, that investors should completely ignore, although most won’t, thankfully.

Michael Kayes, CFA    

Recommended Posts