What a difference nine months can make. At the beginning of this year we expressed caution about the surfeit of optimism among investors; now the pendulum has swung the other way and there is clearly too much pessimism. The change is due to macroeconomic factors. Some we anticipated. We’ve worried about inflation for years now, to the point of sounding like Chicken Little. Even so, we didn’t anticipate a global pandemic and then a war between Russia and Ukraine. Both of those occurrences have helped to break the global supply and demand equilibrium, igniting the inflationary tinder that was already smoldering. Unfortunately, the major world economies were unprepared for inflation and global supply disruptions. We are living with the consequences. That doesn’t mean that the sky is falling. But it does mean that financial markets will be volatile until an equilibrium is regained.
In this letter, we take on the question of why the stock market is so pessimistic despite signs that the economy remains strong. Then we shift to the long view, specifically highlighting our research on investing opportunities in the energy sector.