Let The Fed Talk
Recently the Fed has had a lot to say about rising inflation and its plans to get it under control. Unfortunately, not everyone believes the Fed is going about fighting inflation the right way with some implying that time is needed to allow the recent rate hikes to work before considering more. Fed Chairman Powell believes Americans will experience some pain, which he considers reasonable, while the Fed attempts to bring inflation in line. Many financial pundits have called Powell’s words dangerous rhetoric suggesting that a recession is not inevitable but rather a policy choice. These same critics argue that attempts to control inflation without addressing issues such as corporate price gouging, supply chain issues, and spikes in energy prices caused by the war in Ukraine are futile.
We say let the Fed talk, dangerous rhetoric or not, as their policy choices and inflammatory rhetoric tend to create opportunities in the market. In fact, let all the experts speak and muddy the waters as they give conflicting opinions about how to resolve historically high inflation. While pundits continue to provide their opinions, we need to be mindful of the facts regarding rising inflation and interest rates. As interest rates rise it is true that future cash flows are worth less today as will be the value of the stocks in your portfolio. Also, the converse is true when rates fall. Fortunately, attempting to reprice stocks held in portfolios is not an exact science and may cause markets or individual stocks to fall much lower than they should creating opportunities. Why is this process of pricing or determining the “real value” of the market or individual stocks so difficult?
Directional market moves result from the collective actions of all market participants, so imagine all of these players attempting to revalue their individual portfolios with an anticipated rise in interest rates. How likely is it that these market participants will arrive at the “real value” of assets held in their portfolios as they scramble to adjust their individual holdings as inflation and interest rates rise? It is not likely because the valuation process has too many uncertainties. These uncertainties vary depending on your valuation method, but the most accurate process would be discount cash flow analysis. This process brings the challenge of attempting to ascertain unknown variables like long- and short-term discount rates, long- and short-term growth rates for future cash flows, and not to mention determining future cash flows. Add to this the tendency of portfolio managers to rotate out of growth stocks into sectors or industries that are considered less sensitive to rises in interest rates and you have the makings of tremendous opportunities to buy mispriced securities.
At Investoristics, we are constantly on the look out for high quality growth stocks that have been quickly dismissed and/or mispriced by investors who fear a decline in their portfolio value resulting from changes in interest rates. Fortunately, some growth stocks are sold too soon by investors trying to avoid the pain and negative impact of rising inflation. These discarded stocks quickly become the next market winners likely to provide investors with returns significantly higher than the market. If your goal is to significantly outperform the market with lower risk, then feel free to contact us to discuss the details of our portfolio to determine if it is right for you.
