Imagine a tennis ball having been thrown up into the air, naturally it stops going up and falls. When it comes down from its longest height it hits the ground and bounces. The first bounce is usually the highest, the second a bit lower and so on until the ball stops bouncing and ends up on the ground. It stays there until someone comes around, picks it up and throws it up in the air. This image mirrors the behavior of the capital markets as the broad indexes are motivated to move higher, until they are motivated to move lower, until they are motivated to move higher again, and so on.
This where active participation in managing investments comes in handy. Because the big question is always, at what price does the ball stop dropping, or where does the price go to when it bounces? In most instances the prices involved are not unsurprising when viewed, for example, as a 3yr chart. From that perspective, 2yrs ago we saw the broad indexes drop approximately 35% from their levels reached preceding the realization of a coming pandemic. So much for the trigger to make it stop going up, and where it finally rested before bouncing around and landing has given analysts, such as myself, a price of reference to chart the ensuing rise in prices. But while the technical aspect of analysis is compelling in its long term consistency, the external influences that affect markets activity have been a growing phenomenon for nearly 3 decades, each decade more influential than the last. Which brings us to my favorite avenues for researching and analyzing potential investments, Economics, Politics, and Popular Culture. In a world where the consumer rules nearly every GDP breakdown among developed western economics, these three focus points inform us less about when an index will move higher, nor when it will move lower, but more about why it will move.
For example, the biggest challenge facing the capital markets at the moment is inflation, and the biggest uncertainties regarding inflation is how high. One way to gain perspective on this is from recent releases of economic activity coming out of the last month of 2021. It started with employment payroll growth data that was released in the first week of January coming in at 199k and missing expectations of 450K, Retail Sales declined 1.9% also falling well below expectations but still up over the year 16.9%, Industrial Production declined 0.1%, below an expected gain but most features of the index still up over 5% for the year. Existing Home Sales, very strong coming out of the pandemic, declined 4.6%, but the prices of existing homes increased nearly 9.6%. Lastly Housing Starts increased 1.4%, following an increase of 2.5%. Interesting because single family housing starts haves slowed considerably, but multi-family starts are up nearly 53.2% over the year. The obvious point is coming out of the pandemic is the economy saw an enormous surge in growth in Housing, Production, Public Consumption and by the end of the year it definitely started to slow down.
On a final note, the Consumer Price Index (CPI) curiously came in above expectations, while the Producer Price Index (PPI) came in below. So, the question is, can inflation continue to increase if the economy shows signs of slowing? In my opinion, more likely less than projected, but we need to be open to that possibility, since the ball was thrown up buy a politically driven machine, and how high the ball bounces is still uncertain. The good news is, today Fed Chairman Powell provided some clarity and the uncertainty reflected in the capital markets will respond suitably.