I have recently been giving a talk around Sarasota about tropical cyclones, which I find endlessly fascinating. One of every three hurricanes in the Atlantic hits us in Florida. Today I was thinking about that old saw, that if you don’t like the summer weather in Sarasota, just wait an hour and it will change. Just now the stock market seems to change mood by the hour, too. That makes it very challenging to know how to approach your investments within any given day. On Tuesday the DJIA was flat and then it was off 400 points. The S&P 500 hit 4100 and stopped at that wall. So during the course of any day, you can have whichever circumstance fits your investment outlook: up, down or sideways.
As much as I don’t like to admit that I missed the bottom in mid-June, I am beginning to think I did. Holding a lot of cash works until we must reckon with how quickly the market or particular stocks can and do turn up after sellers are exhausted and they have made their bottoms. Over $2 trillion was parked on the sidelines for much of the first half. Some has flowed back into bonds but a lot of it is waiting for economic clarity.
Right now, the big debate concerns whether we are in recession after GDP has fallen for two quarters or if it is coming soon to an unemployment line near you. Fed Chairman Jerome Powell spoke last week about his resolve to rein in inflation with the blunt tools he has at his disposal. The principal one is increasing interest rates but rates take months to take effect. Powell and President Joe Biden do not believe we are in a recession yet because new jobs are still being created at a good clip. If we all know it is coming, maybe the timing doesn’t matter. We already have prepared for the worst.
So far, the Fed has raised rates 0.25% in March, 0.50% in May, 0.75% in June and another 0.75% in July, bringing the intra-bank federal funds rate to 2.25-2.50% from near zero. More increases will occur as the year unfolds. The market surged last week when some investors concluded that the worst of the rate increases was over. Only time will tell.
This week 150 of the S&P 500 companies will report. Many companies are beating lowered estimates. Some are reporting higher revenues resulting from inflated prices that are not being matched with higher profits. Some stocks have big short positions and they rise when results are better than expected. Guidance for the next quarter is more important than ever. Remain wary of companies with no earnings and insufficient cash flow to fund their forward operations.
I was stunned to learn that UBER has lost a total of $25 billion since its launch in 2009. That means this “disruptor” has lost on average $2 billion a year putting all the local taxis around the world on the ropes. UBER peaked in October at 49 but was up 5 on Tuesday to 29 because, for the first time in 13 years, the company reported positive cash flow even though its losses continued.
On the other hand, giant companies like Walmart pre-reported a bad quarter last week and the stock dropped 10%. By the end of the week, it had regained all its losses. When it reported, Microsoft (which we own) intends to utilize its vast bank balances to take advantage of a weak economy to build for the future. That implies that the biggest companies will add strategic acquisitions of smaller ones with good ideas but not enough cash to reach the promised land while the economic weather remains unpredictable.
Joan Lappin CFA has been called an “investment guru” by Business Week and a “top manager” by the Wall Street Journal. The Sarasota resident founded Gramercy Capital Management, a registered investment adviser, in 1986. Email JLappincfa@gmail.com. Follow her on twitter: @joanlappin. Her past columns appear at heraldtribune.com/business/columns.
This article originally appeared on Sarasota Herald-Tribune: JOAN LAPPIN: Market gyrations continue to challenge investors