Dear valued client,
Markets posted significant gains this week as investors were squeezed between two crucial pieces of economic data; the December inflation report and quarterly earnings reports from the financial sector.
U.S. inflation data was released on Thursday and investors were encouraged by what they saw; the CPI came in at 6.5% for December (compared to 7.1% in November and 7.7% in October), marking its 6th straight month of declines. This further bolsters the case that the war on inflation is bearing fruit. The Federal Reserve will likely want to see more corroborating data before ceasing their interest rate hikes (their target inflation rate is 2%) – but perhaps this will warrant a rate hike of only 0.25% rather than the anticipated 0.5% when they next convene on Feb. 1st.
Four major financial institutions released their quarterly earnings this morning (JP Morgan, Bank of America, Citigroup, and Wells Fargo). The banks showed mixed results as revenues were up for the most part due to higher interest rates – but these will likely be short-lived as consumers are pulling back from major purchases that would require taking on debt. Lenders themselves are engaged in internal restructuring to compensate for the current economic climate; Goldman Sachs, for instance, laid off over 3000 employees this week and Wells Fargo has announced it’s shrinking its mortgage business.
Why are reports from the financial sector more heavily scrutinized than other sectors?
Banks and large financial institutions tend to serve as a barometer for the broader economy as they extend mortgages and credit to numerous consumers as well as lend to a diverse range of commercial institutions. Their tentacles reach into practically every sector and industry of the economy.
I’d like to share a passage from The Laws of Human Nature by Robert Greene. Greene incorporates the eloquent metaphor of scaling a mountain in his chapter on perspective, which relates very nicely with the proper attitude in investing. It reads,
“We can compare this to the following visual phenomenon: At the base of a mountain, in a thick forest, we have no ability to get our bearings or to map out our surroundings. We see only what is before our eyes. If we begin to move up the side of the mountain, we can see more of our surroundings and how they relate to other parts of the landscape. The higher we go, the more we realize that what we thought further down was not quite accurate, was based on a slightly distorted perspective. At the top of the mountain we have a clear panoramic view of the scene and perfect clarity as to the lay of the land.
For us humans, locked in the present moment, it’s as if we are living at the base of the mountain. What is most apparent to our eyes – the other people around us, the surrounding forest – gives us a limited, skewed vision of reality. The passage of time is like a slow ascent up the mountain. The emotions we felt in the present are no longer so strong; we can detach ourselves and see things more clearly. The further we ascend with the passage of time, the more information we add to the picture.”
Have a terrific weekend,
PW
