Notes on the Week Ahead

Washington games and their consequences for risks, taxes, stimulus and investing

There is an old house with a box of dynamite in the attic.

Every few years, for as long as anyone can really remember, the children of the house have brought the box downstairs and played games with its contents.  The owners have never seemed very concerned – after all, so far, it has never exploded.  But each generation of kids seems just a little more reckless and irresponsible than the last and it takes just one mistake……

Speedbumps on the Road to Recovery

The parking lot of our local high school is fortified by great ranges of speedbumps. These ancient mounds of asphalt were erected in the distant past by school authorities, presumably in tribute to the precision and focus demonstrated by our town’s youngest drivers.

Monetary and Fiscal Timetables

Investors, in the week ahead, will have little time for financial analysis. The headlines will be dominated by the U.S. withdrawal from Afghanistan and the terrible impact of Hurricane Ida in Louisiana. Meanwhile families will be trying to stretch out summer days, while making all the adjustments necessary for a return to work and school in a still-untamed pandemic.

The Profits Wave

On March 23^rd of last year, at the start of the coronavirus pandemic, the S&P500 briefly traded below 2,200.  Since then it has more than doubled, surfing on a wave of corporate profits, in a sea of central bank liquidity.  However, investors should recognize that this wave will face challenges going forward while the tide of monetary easing should turn.  As this happens, a focus on valuations should be more rewarding than has been the case in recent years.

The Investment Implications of a Mutating Economy

Much has been written about the mutating virus and how its more contagious Delta variant has spurred a surge in cases, hospitalizations and fatalities.

However, the economy is also mutating and adapting. These adaptations are reducing the ability of pandemic waves to slow the economy. They are also boosting productivity and profits. However, a failure to recognize this resilience is promoting inappropriately easy monetary and fiscal policy, potentially setting the stage for higher inflation and interest rates and a significant rotations in asset class performance.

New Palette Same Picture

Every few years our talented colleagues in marketing tell us we need a new palette for the Guide the Markets. They’re right of course – staring at the same colors, year after year, gets boring. But a new palette requires us to change almost every color on every page which is fairly labor intensive work. Moreover, if we do it right, the new chart will just convey the same message as the old one.

The Variants and the Vaccines

The week ahead will be a quiet one for economic data and a busy one for corporate earnings. It could also be a pivotal one in Washington as the Biden Administration tries to advance its agenda in Congress.

Speeding More Slowly

My wife, Sari, was born with a lead foot. 

By all rights, she should have accumulated a bountiful harvest of speeding tickets over the course of her career.  But she understands how the system works. 

If she is, for example, buzzing along at 75 in 55 mile-an-hour zone and sees the state police ahead, she dons a sunny smile and gently taps on the brakes.  This action, of course, still leaves her well above the limit.  However, for some reason, the police seem to appreciate the gesture as a respectful acknowledgement of the majesty of the law.  Speeding more slowly is apparently regarded as akin to not speeding at all.

After the Storm

When my wife, Sari, was 9 years old, a tornado touched down in Grand Rapids, Michigan and destroyed most of her home.

 

Luckily she and her family were at her grandparents that evening and so weren’t there when the storm hit.  But the next day, when they all drove back to the neighborhood, it was barely recognizable with many houses destroyed or badly damaged.  Her great concern, at the time, were the family pets who thankfully managed to ride out the storm unscathed.  But her parents must have been traumatized by the destruction they saw all around them, wondering how long it would be before everything could get back to normal and whether there were some things that would just never be the same.

The Season of Supercharged Demand

After a long period of absence, I’ve visited New York multiple times in the last month. Each time, the city has seemed more bustling than the week before, with fewer masks, more crowded restaurants and more New Yorkers expressing their emotions by their habitual cheery and liberal use of their car horns. As cases of Covid continue to fall, it is as if springtime has arrived in the city and in the nation.