NOTW #10: Markets up, now what?
Hi reader,
Indices were significantly up this week and have recovered much of their short-lived correction. In my opinion, this shows what the market demonstrates repeatedly: forecasting the short term is a zero-sum game.
Without further ado, let’s get on with the articles of the week.
Articles of the week
I published two articles this week. The first one was Constellation’s earnings digest.
The company reported great earnings again, and it’s honestly incredible what it is achieving at its scale. I discuss this in the article, but only 6 publicly traded companies across the US and Canada satisfy the same conditions as Constellation. I also addressed the valuation and when I would consider adding to my position, although this part of the article was reserved for paid subs.
The week's second article was the earnings digest of the latest addition to my portfolio, a company that operates in the aggregates and real estate industries.
The company continues executing its development pipeline with little to highlight, but the thesis is on track.
The calendar for the coming weeks
Here is a short update about the calendar over the coming weeks. I will be on holiday the week of the 26th of August and will be somewhat inactive the first week of September (I have a trip planned to Colombia), although I will try to bring content that week.
I plan to work through the remaining earnings digests next week for paid subscribers so that I can leave with those done. If I have time, I will also bring a short update on Texas Instruments’ special capital management update call, which the company is hosting next week.
A new podcast this week
I published a new podcast this week. I was lucky enough to speak with Lawrence Hamtil and Douglas Ott about an ongoing trend in the United States that promises to impact many industries and, therefore, many companies. Many believe the trend got kickstarted during COVID, but the truth is that it has been going on for a while. You can listen to it on Spotify:
Or you can watch it on Youtube:
Market Overview
Both indices were significantly up this week after the solid intra-week recovery they enjoyed last week. The Nasdaq rose more than 5% whereas the S&P 500 rose almost 4%:
It’s interesting because after initiating a correction some weeks ago and facing the panic of the Yen carry trade, many permabears thought this would be when the indices would start to fall sharp and fast. The reality is that both indices are now somewhat close to fully recovering from this slight correction:
Now, this doesn’t mean that indices can’t fall precipitously next week; that’s a plausible scenario, although it is probably as likely as them going up. Just a short note here…overconfidence is the biggest enemy of an investor, so if you ever see me claim that the only possible path for the market is up, then that’s when you should be very careful because it means they are probably going down. I highly doubt that I will ever say that because I am well aware of my inability to forecast short-term moves, but never say never.
What I am trying to say with this is that forecasting the immediate future is a fool's game, and the market seems to have an embedded mechanism to demonstrate why. When people think markets will zag, they tend to zig, and vice versa. One of the reasons is that if something has become a consensus, it might already be baked into the current price, and therefore, its predictive power greatly diminishes. There’s a lot of money at stake in the short-term forecasts, but it honestly seems like a zero-sum sum game.
The Nikkei is another interesting example. After dropping significantly over the past month and being impacted by the yen carry trade, many claimed that Japan would be completely demolished because the yen carry trade was just the catalyst. Well…the Nikkei is up almost 21% from its August 5 “low”:
Again, the objective is not to claim that it will continue going up from here; it’s simply to show how tough it is to get macro forecasts right and timely. And I am not surprised by its complexity, to be honest. The global economy comprises thousands of variables, and investors are constantly bombarded with new macro and company-specific data every day. The key for any investor should be to understand what data will be relevant over the long term and which data will be completely irrelevant. The toughest part about this is that maybe less than 5% of data will be relevant 5 years down the road, whereas the other 95% will be mostly noise.
Let’s look at an example…let’s take Hermes. When inflation surprises to the upside, the market tends (or at least it has been like this over the past years) to drop, taking stocks like that of Hermes down. But…how relevant will current inflation be for a company that can raise prices significantly above inflation to a customer base that doesn’t have to worry about the money they have? The most probable answer is that it will not matter much. So, when faced with the following question…
How much will the current rate of inflation matter for Hermes in 5 years?
The answer should be that it will not matter much, or better said, that it will not make or break the thesis. When I tweeted out the following…
My good friend @Borlaug replied that this depends on the company one is holding, and I completely agree. If one invests in companies where macro can break or make the thesis, they’ll need to be 100% focused on interpreting the macroeconomic data. On the flipside, if one invests in companies they do not expect to be permanently impaired by a recession because they either have…
A very solid financial position
A resilient business
Or both
Then, one can pretty much ignore (and take advantage of) the macro data that’s constantly in the media headlines. The market tends to shoot first and ask later. It’s short-term oriented, so, likely, companies that are macro agnostic (over the long term, this is) will also move in sympathy with the indices, providing good opportunities for long-term investors. I always make the caveat that being a “macro agnostic” company doesn’t mean that macro doesn’t impact the company’s numbers; it does, but it doesn’t break or make the company long-term. If anything, macro can serve as a purgatory for those weaker competitors that will inevitably go under during a recession.
The industry map was exactly as one would expect in a week when the Nasdaq was up more than 5%. Nvidia rose almost 19%, but people continue to claim that markets are very efficient over the short term. I struggle to find a reason that explains why Nvidia is worth 20% more this week than last week or, the same thing said differently, why Nvidia was worth 20% less last week than this week:
The fear and greed index improved to fear territory, but I honestly don’t see much fear in financial markets. I do think, though, that any event or catalyst can bring significant fear to the market in a very short period, but this is just a non-founded prediction:
This is the free content for this week, have a great weekend!