Everybody's playing the game. But nobody's rules are the same. Nobody's on nobody's side.
"Nobody's Side", from the musical Chess
The most common misconception around markets is that everyone has the same goal and there is a right way and a wrong way to go about achieving that goal. In reality, nothing could be further from the truth.
Everyone has their own unique perspective. Words like “successful” and “wealthy” mean different things to different people. Perceptions of risk vary wildly from person to person. Time horizons may range from a few years for a 95-year-old to effectively forever in the case of an endowment or foundation. Professional investors armed with years of experience, teams of analysts, and copious amounts of data often draw starkly different conclusions from the same sets of facts. With all of these different goals and approaches guiding investor behavior, it’s no wonder we’re often left looking around wondering if everyone else has gone mad. Yet, when every asset is owned by someone at a given point in time, it reasons that every price makes sense to someone at any given point in time. Everyone is just playing their own game.
This may seem like an odd time to make such a statement. Over the last six months, we have been bombarded by strange occurrences in financial markets. Cryptocurrencies continue to be all the rage and an entire ecosystem of derivatives and tools has evolved to facilitate trading in the thousands of digital coins that have been conjured into existence. There was a massive run-up in the share prices of various media companies followed by a precipitous collapse when it turned out a single-family office named Archegos had duped almost every major investment bank in the world into extending leverage on the same collateral. There have been record prices for physical art, digital art, and collectibles of all sorts. The list could go on.
CORE EQUITY COMMENTARY
We are likely not alone in our surprise at the speed and magnitude of the equity market’s recovery since the lows reached in late March of 2020. In January of last year, if you knew a pandemic would be making its way around the globe beginning in February and how it was going to profoundly impact economic growth, unemployment, and corporate profits, it’s very unlikely you would have concluded that equities in the United States would be up over 15% for the full year 2020, and that the rally would continue into 2021. This thought experiment continues to reinforce our belief that it’s impossible to predict what the markets are going to do in the short term and why we are way better off focusing on what we believe individual companies can accomplish in the long term. And then wait, patiently.
FIXED INCOME COMMENTARY
The Federal Reserve’s (“the Fed”) preferred measure of price inflation jumped 3.4% year-over-year in May, the largest annual increase in nearly three decades. This outsized reading appears to have gotten the Fed’s attention. Fed Chairman Jerome Powell said he still believes the spike is “transitory” and expects a gradual reduction in inflation rates over the coming months, but actions can speak louder than words. In comments made at their June meeting, the Fed also telegraphed accelerated timelines to cutting back both stimulatory measures enacted during the pandemic.