The April Fool’s Day rally was nothing more than a cruel joke as markets quickly turned red (downward), ultimately finishing the month with an atrocious sell-off across all three major indexes. Once again, the tech-heavy Nasdaq lead market declines by notching its worst month since 2008 falling a whopping 13.3%. What caught the attention of most investors was Wall Street’s titan, Amazon, missed earnings. What’s even worse was that included a surprise loss and weak guidance sending its stock down 14% in a single day. The headwinds continue to be: inflation raising interest rates (3% on the U.S. 10-year), supply chain issues, war in Ukraine and, the newest potential culprit to corporate earnings, the strengthening U.S. dollar.
For many investors, Omaha, Nebraska is their version of Mecca and this April, many began their pilgrimage. The event resembles more of a rock concert than a shareholders’ meeting, but who can blame them when the headliners are Warren Buffett and Charlie Munger. Whether you’re a fan or not, everyone interested in investing should take time and listen to the many thoughts, stories and anecdotes shared at this shareholders’ meeting. Over my career, I’ve found that just listening to Buffet’s pragmatic and rational answers has a calming effect during periods of extreme volatility and global unrest. The key worry at this year’s event was inflation with one standout question being how you can protect yourself against its damaging effects. Buffett’s answer was simple, be exceedingly good at something. If you’re the best at something, people will be willing to pay more. It’s a simple answer to a hard question. How can we translate Buffett’s advice to our personal portfolios? We must ask ourselves, are the companies in your portfolio exceedingly good at what they do? Are they the best? Are customers willing to pay more for the good and services they provide? If the answer is “yes”, your portfolio should be able to adapt to inflation harmful effects in the long run. It’s key to remember that investing in companies with pricing power is the holy grail to protecting your nest egg from the “swindling” effects of inflation.
One of Buffett’s more interesting purchases was a 14% stake in Occidental Petroleum worth more than $7 billion. Given Buffett’s track record for investing for the long-term, it would suggest to me that he agrees with my previous thesis that the green energy transition is going to take a lot longer than anticipated and that traditional energy is fundamentally attractive. For those same reasons, I’ve owned and continue to own Occidental Petroleum and other high quality energy companies throughout client portfolios.
In my view, one of the most positive things that has come out of this market shake up is a return to investment basics. The temporary suspension from investment reality that COVID caused is now gone, the markets have come back down to earth and many have been left shaking their heads in disbelief at their stock choices. There’s no better depiction of this than the followers of Cathie Wood of Ark Invest. Her flagship Ark Innovation ETF is down 28% in April and over 50% just this year. This is now trading below its pre-pandemic value. The shift continues as the market transitions away from a liquidity and momentum-driven market to one that rewards cash flows and fundamentals. It seems for the time being the word “disrupter” has lost its luster with investors getting impatient with excuses and requiring results.
We all know the elephant in the room is clearly inflation. The Fed has been vocal on their path to raise interest rates to address inflation. Unfortunately, a hawkish Fed and jitters surrounding the economy have strengthened the U.S. dollar to levels not seen since 2002. A strong dollar hurts U.S. exports as they become more expensive to foreign buyers. Also, as large multinational companies exchange their international sales back into a higher U.S. dollar, it causes losses due to FX exchanges and becomes another headwind for companies who are already facing a plethora of other challenges. This is definitely an issue to keep an eye on for the quarters ahead.
In addition to my positive comments last month on Chinese stocks, we’ve recently witnessed further relaxation of the Chinese government’s rhetoric towards its own large cap tech companies. President Xi Jinping stated that he is committed to delivering …“economic growth target and support the healthy growth of internet platform companies”. This is a far cry from the confrontational stance taken just late last year. This development in combination with the country’s pledge to resolve U.S. listing requirement issues are steps in the right direction. For the time being, it seems that the government is realizing the true difficulties of achieving a GDP target of 5.5% amongst COVID lockdowns and regulation uncertainties. These recent positive steps were welcomed by the stock market with Alibaba up 10% on the last day of the month although still down considerably from its highs.
