Market Insights

Hard Times Demand Sound Advice -- Arrival Capital's Mid-4th Quarter 2023 Update

November 1, 2023

The world can be a dangerous place. We have seen that in Israel, with the barbaric attack by Hamas on civilians on October 7th and the repercussions that attack is having across the globe. There is the ongoing war in Ukraine and all that has done to undermine security in Europe as well as the way it has forged a closer relationship between China, Russia and Iran, all wishing to curtail the power and influence (and thus wealth) of the United States. This period of war and instability comes on top of the stress and dislocations of the COVID era that also destabilized social and economic relationships and systems. We have cautioned in this space not to let the purely political influence investment decisions, but it would be foolhardy to dismiss the current state of the world from our investing analysis.

You could rightfully question the appropriateness of conflating the dollars and cents of investing with the horrors of terrorism and war, but life is always a mix of the outside world with the needs of our families and ourselves. If you have worked hard and been fortunate enough to accumulate excess savings, it is your responsibility to best position those savings to provide for your own needs, whether for retirement, a cushion against uncertain economic times, or for the education and security of your family. Even a seeming non-decision, like "I'll just keep the money in the bank," is an important choice with real implications for economic security. Like it or not, those with assets are managing their capital one way or another. Knowing your own financial needs, goals and vulnerabilities is key to harmonizing your financial condition with the overall economy and financial markets. We all need to come to financial terms with everything from how much to invest in stocks, bonds and real estate to dealing with interest rates and inflation.

We do not operate in a financial vacuum and even as things feel stressed in the world, it is important to keep a clear head as we weigh what to do with money and savings. Unfortunately, the world's traditional media sources and social media do not help investors keep a steady hand. If anything, the push for engagement, clicks and subscribers, even by still respected outlets, often creates an echo chamber of fear, panic and follow-the-herd financial decisions, especially in investing.

It may be self-serving for an investment advisor to highlight the need for financial advice, but a financial advisor knows the importance of getting sound advice and has likely seen the long term benefits of what good financial advice can do for people, from the dispassionate allocation of investment capital to serving as a sounding board for a person's most important family financial decisions. In these turbulent times, it is more important than ever not to buffeted by the day to day news, and overreact or under-react to the headlines and what they might mean for our financial future.

The title of this piece focuses on the importance of "sound" financial advice not "prescient" advice. No one knows the future. Instead we can use facts about the past and present and a thoughtful view about the future to construct an investment plan based on a family's unique economic circumstances. Sound advice uses reason and probabilistic thinking not to predict the future but to prepare for it.

So where do we stand today? For one, stocks remain almost 15% off all-time highs set almost two years ago. Most of the gains in stock indices like the S&P 500 over the past year are due to just a few tech stocks, largely driven by excitement in Artificial Intelligence, as in the case of Nvidia (NVDA) and Microsoft (MSFT), and by corporate restructuring, as in the case of Meta (META). All of these "magnificent seven" stocks (also including Apple, Alphabet, Netflix and Amazon) have been terrific investments this year and almost all represent a stake in future technological breakthroughs that every investor needs exposure to.

Yet there are many companies that have not recovered from the turbulence of COVID, inflation and rising interest rates. Some of these companies have extremely strong yet undervalued businesses that would fit well into an investor's long term portfolio. It just may take some time for the economic cycle to reset in regard to interest rates and inflation to allow profitability to markedly improve and for true value to once again be discovered by the financial markets in companies like retailers Ulta Beauty (ULTA) and Costco (COST), steel maker Cleveland-Cliffs (CLF), and industrials like Boeing (BA) and Raytheon (RTX), just to name a few. The time is now to start building portfolios of great businesses because, as it is often said, "they don't ring a bell at market bottoms" or, it can be added, when a new and profitable investment cycle is about to begin.

One big change in the financial landscape between 2019 and the present is the rapid rise in interest rates to levels not seen in fifteen years or more. Rising rates, on the one hand, can hurt small businesses, but on the other hand are a boon to investors who for several years held mainly cash, as opposed to fixed-income, as a way to hedge stock portfolios. Thus, many Arrival Capital clients were able to profitably pivot from cash holdings to Treasury Bills now yielding over 5%, the trick now being when to pivot once again to longer maturity bonds to lock in higher rates when short-term rates finally begin to decline, perhaps as soon as next year.

The mix between stocks and bonds, as well as the type of stocks owned, will make a huge difference in the relative success of investors. But perhaps most important in these challenging times is to stay invested in a financial portfolio that works for you and your family. Don't chase headlines, especially the bad ones. Instead hold fast in the belief that the world is still filled with smart, hard working people who create products, services and profitable businesses in which we can invest as a stakeholder moving forward. Arrival Capital Management is ready to lend a hand and offer the sound advice you can use today and beyond.

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