Evolution of Market Expectations
There has been slowly a evolving narrative with respect to the economy and inflation that is important to note. Data and market commentary has shifted from concern about a potential recession / US Federal Open Market Committee (FOMC) managed soft landing, to concern about more persistent inflation. This has led to higher long-term interest rates in sympathy of the potential for sticky inflation. The result has been an increase in equity downside volatility and movement of capital flows out of risk assets. Some of this volatility has been driven by program trading, and this provides potential investment mandate adjustment opportunities for our portfolio managers. The evolution of the change in narrative can be viewed by following recent management and central bank commentary:
- Towards the end of summer, there was constructive commentary with respect to how resilient the economy has been. The expectations of a “soft landing” were increasing… “The economy continues to grow with a number — another great GDP print for the second quarter. And fears of a recession or at least a severe recession have largely subsided, and the consumer is generally healthy. There’s PCE spending, continues to grow, albeit at a slower rate” – The Home Depot ($HD ) Executive Vice President Edward Decker
- There were also a number of constructive comments from members of the central banking community…. “We are very close to a good point and then we’ll let the economy tell us when it’s time to move things down” – Cleveland Fed President Loretta Mester
- Then over the last few weeks, there were a number of data points that showed that inflation remains sticky. There were a number of comments from companies that they were still dealing with inflation in their supply chains. The following from UNP and Darden are good examples of large companies that see inflation in the system… “If I frame where we are today, the difference is, we do have a lot of inflationary pressure, and the inflationary pressures we have to take care of” – Union Pacific ($UNP ) CEO Jim Vena
- “Commodities might be easing, but labor is still pretty high. If not — it’s getting a little bit better. But even if commodities are deflationary, there’s still net inflation, at least in our business, and I’m guessing in other businesses too. That said, we have seen a slight increase in promotional activity, but particularly with one barn grill competitor and in the family dining segment.” – Darden Restaurants ($DRI ) CEO Rick Cardenas
- This ultimately led to commentary from FOMC Chair Powell and the change in FOMC member expectations that we wrote about in the Investment Outlook last week.
“This means that” over the last couple of weeks, we have seen more downside volatility in risk assets in general. This is not unexpected as the market works though the data and its changing expectations. As a generalization, we maintain substantial cash positions that our funds and mandates and continue to look for opportunities.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
Changes in Leverage. We are increasing the asset ceiling to 2.0 times the market value of equity for Pathfinder International Fund and Pathfinder Real Fund to be consistent with Pathfinder Partners’ Fund and Pathfinder Resource Fund.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.