Inflated Fears?

Investors received another head fake from the major indexes, last week, as they opened slightly higher but eventually slid lower again by week’s end. The “villain” continued to be inflation, with CPI (Consumer Price Index) numbers on Friday coming in hotter than expected, reaching 8.6%—just above March’s 8.5%, marking a new 40-year-high.

Less surprising was the main driver for the ongoing rate climb, as presumably everyone has seen prices rise at gas pumps and grocery stores. Core CPI, however, which measures inflation without food and energy, came in at 6%—lower than the last several months. Despite the mixed bag of results, the headline number spooked traders and led to a selloff Friday. This led to concern about a shift in the ‘peak inflation’ debate and whether it leads to more aggressive policy from the Federal Reserve.

Wall Street has a tendency to believe the current environment will never change. When things are good, excessive risk taking often occurs with an attitude of unending good times. When things become rocky, analysts can swing the opposite way and sell based on fear rather than news or numbers. This can provide opportunity to buy value, especially companies that are priced far below normal.

A recent example is Novavax, a company that worked to develop the first traditional, non-mRNA Covid-19 vaccine. When their FDA approval looked uncertain and encountered many obstacles, we existed the position. Since then, the FDA Advisory board has voted 21-0 recommending granting an Emergency Use Authorization for the vaccine and, pending a review of their manufacturing process, looks poised to receive it. However, while their story improved, their stock moved significantly lower, providing an opportunity for investors to capitalize on a company in much better standing at a much lower price.

Keeping our eyes on the fundamentals of the marketplace, what current numbers are really saying, as well as what history tells us is the path that should lead to the best long-term returns. Of course, doing so is no easy task when others (including several that drive the markets’ values) struggle with ‘overinflated’ fears.  As 2 Timothy 1:7 tells us, “For God gave us a spirit, not of fear, but of power, love and self-control.”  As sellers flee quality companies based on fear, our team searches for value at discounted prices to add to our portfolios.

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