Complexity, Acquisitions, ESG

Complexity

Markets of all kinds are feeling the rolling aftershocks of lockdowns, Covid variants, inflation, a hawkish Fed, and supply chain challenges. These complex dynamics create multiple cascading waves. Some waves end up canceling out, while others amplify our problems. While we wait for these aftershocks to roll through, market participants are attempting to toe the line between patience, fear and optimism. The most important factor here is the decision by the Fed to systematically remove stimulus until we see inflation back to 2% or lower. The market expects a 3% fed funds rate by the end of this year, and we’re at .75% today. Any revisions downward for any reason could spark a market rally. One thing to remember is that markets today move faster than ever, and six months from today can present an entirely different world.

The multiples of high-quality, out-of-favor, growth companies have compressed dramatically while their revenue growth and earnings results have continued to increase. Many of these valuations suggest the market is not focused on valuation at all and is more focused on the health of capital markets in the near term. These low valuations could turn many companies into acquisition targets. Companies with hefty balance sheets are walking into an excellent period for acquisitions.

ESG – Environmental Social Governance

In a curious twist, the S&P ESG committee recently removed Tesla from its index, citing issues with worker conditions and self-driving accidents. I find this change odd, considering Tesla is a clear electric energy leader at a time when climate change management and carbon production matter a great deal. This decision is even more peculiar because Exxon Mobile sits in the top 10 of the S&P ESG index. It’s safe to assume that nearly every ESG investor does not expect to own Exxon in favor of Tesla in their ESG allocation. Unfortunately, while noble in its intention, the term ESG is more of a marketing tool. Know what you own.