We’ve been on a market rollercoaster ride recently, witnessing some of the biggest swings in more than two years. I call this the “Inflation Phantom” rollercoaster.
It would seem that we’ve already forgotten we had a similar rollercoaster ride – the “Covid Looper” - in early 2020, when it was the fear of what the “virus from nowhere” would do to the world. With entire economies shutting down, company stock prices fell hard like we’re seeing today. The panic was near-universal as we couldn’t see an end to the market drops.
But the rollercoaster ride did come to an end. We resumed our lives in a new state of normalcy and settled in once again.
While you were on the rollercoaster, there were twists and turns, highs and sudden lows. It’s easy to forget how scared you were once your feet hit the ground.
Whether it’s the “Covid Looper” Or the “Inflation Phantom”, the results will always be the same with any market rollercoaster. We may feel sick or shaken, but we will survive.
Riding the Inflation Phantom
There’s an old saying that goes something like this: The past may not repeat itself, but it sure can rhyme.
So, what’s so different about this ride, the Inflation Phantom?
- It’s affected growth stocks, which have fallen harder, and longer than the last time
- It’s driven by higher interest rates, which in turn are driven by higher energy prices
However, the Inflation Phantom is not new. Economic growth challenges, high inflation, and rising interest rates also existed in 2018, leading to a significant market decline (see below).
Correction and Recovery: S&P 500 September – December 2019.
Source: Bespoke Investment Group
“What’s missing from the bigger picture is the reality of growing revenues and profits that growth companies are reporting and the amount of cash they hold on their balance sheets.”
The Bigger Financial Picture
What’s missing from the bigger picture is the reality of growing revenues and profits that growth companies are reporting and the amount of cash they hold on their balance sheets. Investors are missing these facts.
The reality is that when you own the stocks of a company, you own a share of its business, and businesses with growing revenues are a good thing.
So, to measure the strength of a business, consider its financial strength, its revenues, and if its customers are still using its goods and services, despite the current market and economic environment.
When we look at the revenue of the leading technology companies – the businesses whose services we all use everyday, despite high inflation and ongoing supply chain problems, you’ll find that they’ve improved. You can see the facts for yourself in the following table, where we can see recent earnings and revenues.
Proof: Top Five Nasdaq stocks: Apple, Microsoft, Amazon, Tesla, Alphabet (Google)
Source: Counsel Portfolio Services. EPS and Growth statistics Jan.1 – Dec. 31, 2021. Total return as of May 11, 2022.
“It’s important to understand that the reason for these price drops is that some investors in the previous year took an aggressive position and are now forced to sell.”
Let the Markets Run their Course
It’s important to understand that the reason for these price drops is that some investors in the previous year took an aggressive position and are now forced to sell.
As an analogy, think about the houses on your street. One of your neighbors is experiencing financial trouble and is forced to sell their house immediately; perhaps they got laid off or have too much debt. The result of their actions is that they may have to sell their home for a lot less than it’s current market value – and this has implications. Because they sell at less than market value, the price for all the houses on your street drops as well, even though they’re not for sale, and their owners are not forced to sell. So, you experience a price drop that does not reflect the true value of your house. This is similar to what’s happening now in the markets, and it will correct itself over time.
We urge you not to fear the future when there is so many reasons to be optimistic. We’ve been through so much already and have survived and even thrived.
Now, is not the time to panic about price changes when the reality of revenue growth is still strong.
My advice? Now, is not the time to panic about price changes when the reality of revenue growth is still strong. Stick to your long-term strategy and let the markets do their work. If you still have concerns about how your investments are currently positioned, speak with your advisor about a comprehensive portfolio review.
In the meantime, I will leave with a quote from 50 AD, by Seneca the Younger, a Roman philosopher.