Over the course of the last nine months, volatility in global equity markets has risen due to a spike in inflation, a rapid rise in interest rates to quell rising prices and the destabilizing effect of the War in Ukraine. These themes have been well explored by headline writers who traffic in what we might uncharitably call the negativity narrative. To wit:
- “Recession fears haunt executives during earnings season” – Bloomberg
- “Pain of breaking inflation will reverberate around the world, top finance chiefs say” – Globe and Mail
- “University students contemplate third jobs, relying on food banks amid high inflation” – Globe and Mail
- “What if the drivers of inflation are here to stay” – Wall Street Journal
That we have entered into a more challenging economic phase is undeniable but it is worth balancing these narratives against recent reality to ensure that the negativity does not get the better of us as investors. Now that publicly traded companies have completed their second quarter financial reporting, The Journal decided to examine results achieved. What we found is that businesses in aggregate continued to perform well – in a decidedly tough environment. The companies that make up the S&P 500 reported year-over-year earnings growth of 8%, even as gasoline prices touched $5 a gallon, and central banks globally embarked on the most rapid financial tightening in decades. Further, forward earnings guidance from management teams for the balance of 2022 was largely unchanged. This stands in sharp contrast to the negativity narrative that continues to make the rounds in the media.
Despite this strong 2nd quarter performance and guidance from management, the macro environment remains unsettled – particularly in Europe. Central banks remain steadfast in their commitment to bring down inflation. Similarly to businesses second quarter results, it is worth mentioning the positive regarding inflation – the growth rate of inflation has moderated.
Particularly in uncertain times, like today, one theme we continue to notice is that good news (like strong corporate performance and moderating inflation) is often overshadowed by negative headlines. Investor Francois Rochon described it this way:
“Media outlets are quick to present us with one crisis after another, along with constant economic and political worries. With the help of the Internet and many television stations, bad news circles the planet in no time. With the right twist, plain old bad news begins to look more and more like an imminent catastrophe and for many investors, the perfect reason to sell their stocks! Good news, on the other hand, remains largely unnoticed since it seems to represent a less valuable source for ratings and clicks.”
As we digest the national and international news, we do not doubt what is being written. But we do strive to understand – for ourselves – the facts so we can make fully informed investment decisions. For Coleford, a balanced accounting is vital as we assess risk.