Market Insights

Spring Cleaning -- Q2 2023 Investment Update

April 21, 2023

"Spring cleaning" is a term we have all heard for years. But, as we head into the middle of this year's springtime, what exactly are we supposed to be cleaning up? I suppose we could go through our closets and see what we did not wear over the winter (or the last ten winters) and decide to give away some clothes. Or, we could look at the unnecessary papers, cartons and boxes that have built up over the winter and decide to create some space. The windows could all probably use a good cleaning after the cold, wind and rain of wintertime left their mark. But I think "spring cleaning" may also mean an opportunity to take a look at some of our accumulated perceptions and half-formed ideas, not to mention our recent fears and sources of anxiety, and at least re-examine them to see if they still fit into a realistic and clear headed assessment of the world and economy we live in today.

In the investing world, "spring cleaning" likewise has both a physical and more cerebral connotation. Arrival Capital's office is filled with stacks of annual reports from all the various companies we have invested in for clients, and yes, we read all of them, in particular CEO letters about what is most important to them to communicate with their investors. Additionally, we have all just concluded tax season, and besides getting cleaned out of some money by the IRS, there are now the piles of tax documents and receipts that must be filed away for seven long years. There is also a pile of ideas that have built up over the past year that could use a good sort through. 2022 was a tough year and it left certain expectations and fears about the state of the world and US economy that may not hold up to reality as the warmth of spring returns, whether in regards to the path of inflation, interest rate increases, the probability of recession and the general state of the American consumer. All of our ideas about these subjects need a reassessment as we fine tune our investing for the rest of the year and beyond.

To start with this spring cleaning of our investing mindset, it is informative to look at ways our thinking about the future is clouded by experiences of the past. A good example of this occurred last month.

A banking panic swept away Silicon Valley Bank and Signature Bank. Almost all of us remember the pain and dislocation of the Great Financial Crisis of 2008-09, which at its heart was also a banking crisis. Our first impulse last month might have been to see the SVB failure and weekend of panic as a replay of 2008. But, whatever the dislocations of last month's panic and bank run, it was not on a level with 2008, as it was caused by the increase in interest rates rather than a collapse in housing prices and mortgages that were at the heart of the 2008-09 crisis and of an order of magnitude more destructive of wealth. Last month investors were still tempted to sell-off the largest banks and other financial institutions that were not at risk of bank runs and could even be seen as beneficiaries.

Likewise, in technology, the poor results of 2022 may have reminded investors of the popping of the tech bubble in 2000 and the collapse in technology as an investable sector for several years. But again, being too reliant on the past to accurately analyze the present would have led to wholesale abandonment of tech stocks like Apple, Nvidia, Meta, just to name a few, that are remarkably more powerful, profitable and resilient companies than the almost fly-by-night companies that dominated tech investing in 1999-2000. The issue with technology in 2022 was the overhang from the stimulus and explosive growth in use of technology in the pandemic years of 2020-2021. A different lesson was being taught, and so far, 2023 has seen a climb back up in value by many of today's most dominant tech companies.

2023 is not 1980, with its runaway inflation, it is not 2000, with the popping of the tech bubble, it is not 1968, with that era's political and cultural upheaval; instead, 2023 is its own time and place. We are informed by the past but should not be dominated by it and need to free our minds to analyze the investing world we find ourselves in. So let's all do some spring cleaning, to create more space in our closets but also in our investment approach so that we can generate the new ideas and accurate picture of the present that good wealth management demands. Arrival Capital is here to help you reassess your investment plan and work towards a more prosperous future. Happy Springtime!

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