Investment Committee – March 2024
The Duality of Markets
The Investment Committee convened to deliberate on the underpinnings of current global stock market valuations and the implications for our investment strategies. The discussion was anchored on the premise that market valuations are predicated on the expectation of a US market soft landing, which entails the Federal Reserve adeptly managing inflation, interest rate changes aligning with investor forecasts, and a steady ascent in corporate profits.
However, the Committee noted the incongruity between these expectations and the signals from the inverted US dollar yield curve, which historically portends economic downturns. The observation that listed companies’ inventories and earnings are significantly above trend levels further underscores the potential disconnect between market valuations and underlying economic realities.
The Committee expressed skepticism regarding the sustainability of the market rally, attributing the current market support to the residual excess liquidity from the COVID crisis of 2022. With this financial backstop anticipated to diminish by the end of the quarter, the Committee advised against increasing stock allocations at present valuations.
The discussion highlighted the juxtaposition of peaked earnings and equities rebounding to pre-2022 highs, rendering them more expensive than before the 25% sell-off. The Committee identified several risk factors: stalled profits, elevated valuations, contracting money supply, historically high policy rates, overstocked inventories, and persistent inflation. The consensus was that the current environment is more indicative of a VIX 20 scenario, rather than a VIX 13, suggesting a cautious approach as we anticipate potential triggers for increased equity volatility.
Conversely, the Committee acknowledged the transformative impact of modern technology and Artificial Intelligence on business operations, profit distribution, and wealth creation. Using Nvidia as a case study, the Committee debated whether the growth trajectories of large capitalization companies could surpass analyst expectations and continue to drive the US market—and by extension, global markets—higher. This led to a consideration of whether valuations, in such cases, might still present compelling investment opportunities despite broader market concerns.
In conclusion, while the Committee maintains a conservative stance on the overall investing environment, we recognize the importance of closely examining individual growth stories such as Nvidia, which could potentially defy broader market trends. The Committee will continue to monitor these developments and adjust our investment strategies accordingly to navigate the evolving market landscape.
The minutes reflect the Committee’s commitment to a prudent and analytical approach to investment decision-making, balancing caution with the recognition of unique growth opportunities that may arise even in a challenging economic climate.
Authors: John Couletsis and Kostas Metaxas