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Market Update - May 2022

"In the short run, the market is a voting machine but in the long run it is a weighing machine." - Benjamin Graham

Economist Benjamin Graham inspired and taught Warren Buffett this simple principle. At present, the votes being cast are decidedly negative, weighing down stocks and the financial markets. But as we look further down the road, we may be seeing the market setting up for a refreshed, expansionary market. Now may be the time to look for opportunities to invest in excellent companies, those whose “weight” has been discounted amid the volatility of the market and the general pessimism.

As might be expected, volatility increased across all asset classes and financial markets as investors reassessed their holdings. Equity markets corrected sharply, bond yields increased dramatically, and commodity prices—corn, wheat, cotton and of course, oil—rose at the fastest pace in over a decade.

As we’ve seen over this past week, first quarter earnings reports and corporate profitability guidance for the year have been somewhat disappointing. Earnings from Amazon and Netflix, for example, showing high cost pressures and slowing growth, were met with significant selling in their stocks and an increase in broad market volatility. The week ahead is similarly stacked with reports from companies in a broad range of economic sectors, from travel and tourism, to semiconductors, healthcare, energy, consumer products and services.

Additionally, we will hear from the Federal Reserve its decision on interest rates and guidance on how it plans to continue to battle inflation through monetary policy. This once again sets the stage for what could be another volatile week in the markets.

A similar theme is playing out at the local level as federal and local government spending finds its way into infrastructure development and revitalization. Companies that supply the industrial equipment and resources necessary to execute these projects should be significant beneficiaries.

Seasonally, late April and into May equity markets are weakest as general liquidity (number of market participants) falls and companies typically strike a sour tone to set a low bar for earnings expectations going forward. Given high inflation, rising interest rates and a host of other concerns, in the near-term, it is going to continue to be a challenging time for investors to navigate successfully.

Still, there is evidence that the market may bounce soon. The market generally rebounds when most investors are pessimistic, as is the case now where investor sentiment is highly negative. The AAII Investor Bull-Bear spread is a good indicator for investor sentiment. The spread is the difference in percentage terms of bullish investors to bearish investors. A positive reading would indicate most investors believe the market will continue higher, while a negative reading is a sign most investors believe the market will decline. The spread works very well as a contrarian indicator as we are seeing signs of extreme bearishness on the part of investors, which may signal a reversal.

Long-term Outlook

As this week’s earning reports unfold, it will be interesting to watch each company in the context of their economic sector to get a sense of what to expect with our investments. Typically, when the economy is in the late stages of expansion – our current business cycle – companies that provide necessities tend to outperform those dependent on discretionary spending. Consumer staples, energy, healthcare are examples of those that may have stronger performance in the coming days.

Source: Hunkar, David -

In fact, we have been seeing strong performance by those late-stage companies relative to companies in technology and financial (services that tend to thrive in early expansion markets). These performance discrepancies offer some insight on where we are heading and as Parkview makes investment decisions, we will look to position ourselves not only for today’s market environment, but the cycle that typically follows.

"Uncertainty actually is the friend of the buyer of long-term values." - Warren Buffet, Forbes, Aug. 6, 1979

While the quote above is decades old, the observation is enduring. I think it quite fitting that we heard from the Oracle of Omaha himself, Warren Buffet, this weekend at the annual shareholders meeting of Berkshire Hathaway holding firm on his market views.

Indeed, understanding the nature of financial markets is half the battle to success. During this bear market, Buffet’s perspective remains broad, his focus is sharp, and dedication to achieving long term results is strong. Parkview will adhere to these same principles through all market environments and strive to be prudent stewards of your capital.

With sincere regards,

David W. Malmgren, CFA

Founder and Principal

Parkview Capital

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