Ukraine

 

The Ukrainians’ incredible fortitude in the face of Russia’s invasion and merciless tactics has inspired the world. NATO has a renewed purpose, economic sanctions have been swift and arguably more severe than imagined just a few months ago, and the corporate exit from Russia has helped lift the information veil. After all, it’s one thing for an uninformed Russian citizen to make note of the volatility of the Russian Ruble, but quite another when the doors of prominent global retail outlets are literally closed overnight.

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After an incredibly resilient 2020, most stock market prognosticators expected only modest gains in 2021. The conventional wisdom was that markets had raced ahead in anticipation of the 2021 COVID-19 earnings recovery thus already “pricing in” the good news.   The extent of the 2021 earnings recovery, however, has far exceeded even the most optimistic forecasts.  For instance, this time last year the consensus Wall Street forecast for 2021 S&P 500 earnings was $164.  While the Omicron surge could negatively affect fourth quarter reports, the current 2021 S&P 500 earnings estimate is for $207, a whopping 26% better than expected and 20% ahead of pre-pandemic 2019 earnings. (Source:  FactSet)  We’ve often remarked over the years how the consensus view is regularly the wrong one.  Yet the magnitude of this miss has surprised even the long-term skeptics of Wall Street forecasting.

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The third quarter proved an eventful one for investors. Interest rates ticked higher, the Delta variant reminded us that COVID-19 is still very much with us, and the supply chain disruptions of 2020 started coming home to roost. The confluence of events, and some profit taking given the strong first-half gains, contributed to September’s 4.8% and 4.1% declines for the S&P 500 and All-World equity indices. September’s losses wiped out the gains for the quarter, but considering the major equity indices are still up 14.8% and 11.6% thus far in 2021, it is tough to complain.

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Our April Market Commentary was titled, The Opposite of Cabin Fever. In short, we expected social and business activity to resume abruptly as vaccines were distributed and the threat of the COVID-19 crisis receded. The caption seemed somewhat bold at the time. Admittedly, we were rather proud of it. In hindsight, we still underestimated the pace at which activity would resume. Pent-up demand for goods and services, the desire to get out of the house (though not necessarily back to the office), and record levels of cash on personal and business balance sheets have combined to fuel the highest level of U.S. economic growth since the early 1980s. 

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“Let the good times roll, let the good times roll. I don't care if you're young or old. Get together, let the good times roll. Don't sit there mumblin', talkin' trash. If you wanna have a ball. You gotta go out and spend some cash, and. Let the good times roll, let the good times roll.” - B.B King

At the same time, once in a generation demographic, cultural, and secular business shifts are unfolding before our eyes. Higher wages, coupled with improved household balance sheets, have meant workers are quitting or retiring at a record pace. Technology continues to change the way we work, shop, and coming this fall, support our favorite college football players/teams. Moreover, when measured in trillions of dollars, the range of policy proposals on the table in Congress are as wide as we have ever seen.

"If you're feeling good, don't worry. You'll get over it." - Yogi Berra

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