I have a friend who owns and operates a small specialty machine tool sales and service company. His customers own machine shops and factories in the northeast. Thus far in 2021 his business is already up 160% over his 2019 levels. Some of this increase comes from his own efforts; his experience and his reputation for excellent service. But most of the increase is coming from the fact his phone does not stop ringing. Machine tool owners are replacing or rebuilding old machines and expanding their operations to meet demand. When this friend tells me about his long hours, I hear good news – both for him and for the rest of us. And sometimes a wind at your back can make waves that, as investors, you need to navigate. 

On Thursday March 18 conflicting economic data was reported. The reports came just a day after another dovish Fed meeting in which the central bank committed to keeping rates low, and stated they were not concerned about inflation becoming a meaningful headwind anytime soon. Reuters reported higher than expected jobless numbers and a surprise surge in manufacturing. Initial jobless claims came in at 770,000, 10% higher than expected, and the Fed’s business conditions index registered its highest reading since April 1973 at 51.8. The reported data suggests we are living in an economy in which production is high and trending higher. 

So, the Fed is dovish, the economy is kicking, and we have pent up demand ready to accelerate spending as soon as the pandemic is under control. Given these positives, why has the market been grinding sideways rather than marching upward? The answers are interest rates and rotations. As Charlie wrote in his last blog, rising interest rates has changed how the market is valuing certain stocks. For example, technology stocks are seeing their valuations trimmed, with valuations in financials moving higher. The changes in valuations are causing a churn in the market. As we move through this rotation, we continue to focus on the themes we believe will continue to drive profits; innovation, normalizing interest rates, re-shoring, and global recovery. 

One of our favorite areas of innovation is green technologies, both goods and services. We believe the near future will include more changes in the way we grow, deliver, and consume food. We believe demand for clean energy is here to stay and that it will increase the importance of basic materials. We believe the next car you buy may be an electric vehicle, which means increased demand for batteries, software, semiconductors, and copper. We believe managing our waste will become more important as China is no longer buying our recycled materials. 

We believe that the normalization of interest rates is “hydraulic”. We do not necessarily expect nominally high rates, rather rates that are significantly higher than the zero rates we experienced in the depths of the Covid pandemic. Accordingly, we have been including a full allocation to financials in our models. 

We are confident that supply chains will be secured, and re-shoring of industrial production will be a continuing trend. To meet this opportunity, we have been adding to industrial, basic material, and semi-conductor exposures. In other words, the U.S. will be producing more widgets right here at home. 

Lastly, growth is not a zero-sum gain. The U.S. does not grow at the expense of other countries. China will continue to grow, with or without us. Europe, India, and the Pacific Rim will grow as demand picks up in the U.S. and China. Even Africa, South America, and Russia will grow as demand for raw materials increase. 

While we may have choppy seas for a while, we are optimistic that times will normalize, and growth will return. Yet, the path from here to a growing economy may not be a straight one. Regarding your portfolio, our recommendation is to take the near-term choppiness in stride and to remain focused on your personal horizon. Please do not hesitate to reach out to us if you want to make sure that we fully understand which horizon you see for yourself.