This week I had the opportunity to attend Kingdom Advisors annual conference. Aside from allowing me to escape Pennsylvania’s winter weather for a few days, I always find this particular conference to be an excellent combination of industry knowledge and perspective. This year was no different, and as fear of military action against Ukraine became a reality midweek, it was a timely opportunity to hear from some industry thought leaders.
One seminar by Finny Kuruvilla, CIO of Eventide Funds and Bob Doll, CIO of Crossmark, was particularly helpful in this regard. Doll reiterated his 10 market predictions for 2022 (which you can read on the blog here), while Kuruvilla provided an insightful analogy for how we should view the market in the year ahead.
The Owner And The Dog
The investor Ralph Wagoner is credited with likening “the market to an excitable dog on a very short leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.”
Where Is The Dog Headed?
Market volatility has the current dog lurching all over the place. Inflation, rising interest rates, Covid variants, supply chain issues and geopolitical turmoil have all served to pull the dog on a seemingly disruptive course. Investors focused merely on the dog can find the volatility we’ve experienced recently deeply concerning. Kuruvilla, however, reminds us to take a closer look at the direction of the owner walking the dog.
Where Is The Owner Headed?
If we view the owner in this case as the overall economy, and start unpacking the factors distracting the dog, it appears as if the owner is still headed in the right direction. Consider the following examples:
- Inflation – without getting too technical, comparing Producer Price Index (PPI) to Consumer Price Index (CPI) indications point to slowing inflation. Increased inflation has actually increased wages in many cases, and inflated housing costs have led to new household net worth highs for homeowners.
- Covid – concerns are fading, even with possible new variants, as people learn to live with the virus. Wastewater measurements (measuring Covid particles in sewage) also show a decline in viral signals below pre-Omicron levels.
- Consumer and Business Debt – while several interest rate hikes are likely in 2022, consumer and business debt ratios are at record lows.
- Demographics – many Millennials will potentially be starting families and buying homes in the next decade, business productivity has increased post-pandemic, and the U.S. continues to be a leader in innovation.
Conclusion
An excitable dog, much like a volatile market, always captures more attention from investors than its less excitable owner or a steady economic data. The market “dog” leaps in any direction at any moment, making short-term dynamics nearly impossible to predict. When considering longer-term trends and the economic indicators mentioned above, however, the current direction of the owner appears positive.
While indications point to a solid economy, this doesn’t guarantee a year of high market returns. Much like Doll’s predictions for 2022, Kuruvilla sees a mixed bag of “flattish” equity returns for the year, high volatility, gradually falling inflation, supply chain improvements and fading Covid concerns. In short, while the ride might get wild, at least for the moment it appears as if the owner is still headed in the right direction.
