Since the Mortgage/Banking crisis in 2008, interest rates had been kept extraordinarily low. We were also fortunate to have low inflation for over a decade. However, now, in combating the massive economic dislocation of the COVID-19/lockdown, our government responded with massive deficit spending. This, combined with other factors has resulted in rapidly accelerating inflation.
When interest rates and the inflation rates are low, corporate earnings, which are still several years out, look very appealing in present value terms. However, when they are high, discounting those future earnings looks far less appealing. Under high inflation, and rising interest rates to combat inflation, investors want earnings now. This explains why the price of technology Growth stocks, with their high price to current earnings and their promise of growth in future earnings, have currently sold off while the stock price of established Value companies with solid current earnings has been stable. This explains the decline this year of Growth stock prices and the stability behind the prices of Value stocks with their immediate earnings and dividends.
Our investment strategies were designed with these events in mind. We continued to believe in Value stocks even when they were being outpaced by Growth Stocks, and we continue to believe in Growth stocks now that they are being outpaced by Value stocks. The strategy is to own a core of diversified investments that deliver long term results despite constant, and often abrupt changes in the markets.
As always, know what you own, do not overinvest, and stick with quality.
-Cliff Jarvis