Anyone know what's going on?
If you use metrics designed for one set of assumptions and apply them to a different reality, the chances are that you will end out with conclusions that may not help you and may be wrong. And that is what bothers us about the information we keep hearing from financial analysts, government analyses like Statscan. These are predominantly short-term traditional and non-nuanced measures such as inflation rate, rising costs and interest rates.
We live in turbulent times and we are in a slow-down compared to the last few years, but the usual metrics just do not appear to provide a full picture. To quote the New York Times (July 28, 2022):
“Let me repeat what should be the mantra of 2022: No one knows anything.”
We are just emerging (and only just, maybe) from an unprecedented time as a result of the Covid pandemic. For two years, governments appropriately focused on dealing with the pandemic as a health issue. So, we stayed at home, shuttered businesses such as restaurants and retail stores, stopped travelling and even isolated ourselves from friends and families; all this, while governments handed out money to those most affected by these actions, reduced interest rates to almost zero, and managed to keep the economy stable.
Remember April 2020 when we thought the economy was set to stall – instead we saw huge growth. When we look at multiple years, things don’t seem anywhere as bad as when we simply look at 2022 Year-to-date. For example, QQQ (a measure of Nasdaq) was 230 on Feb 20th 2022, 400 on December 20th 2021 and is now at 290. The Dow Jones was 29,000 in Feb 2020 and is now at 31,000, The S&P was 3300 and is now 3900. However, YTD 2022 S&P is down 17.4%, Dow Jones 12.4%, and QQQ down 25%. When you look at the YTD metrics, it looks pretty dismal, but when you look at multiple years from before the pandemic - not too bad.
Take a Long View - Percentage Change in Value between Jan. 1, 2020 to June 30, 2022
For sure, inflation is up – how can it not be after the amount of money handed out and a stalled economy coming back to life? But, there appears to be very little unemployment. In fact, Canada has a significant labour shortage. And, at the same time, Russia attacked Ukraine causing major issues with energy costs, as well as food costs, and the cost of diverting money to the military. And one more “as well”: we have had a 12 - 13 year bull market which is unprecedented even before the start of Covid. Could this be the correction?
It seems obvious that using simple year-to-date metrics showing huge inflation, stocks dropping and raised interest rates is just one metric we should be using. One other is to use a longer time horizon for perspective : 3, 5 and 10 year view of the economy, inflation, stocks and interest rates. Let’s use some new statistics and measures that take the unprecedented event of Covid into account. This is not a first – pre computer modeling managed to muddle some sense of growth and measurement after the Second World War. Now, we are waiting for the economic leadership to show some guidance with Covid in consideration. But, we have not seen any great insights yet - all we know is that screaming headlines about inflation and stock market drops is not the whole story.
Some things are clear. It is clear that consumer sentiment is shaken – but there too it is not stalled – on its July 2022 Prime Day, Amazon sold more than 300 million items with sales over $12B, up from 250m items last year, making it the biggest Prime Day event ever. Consumers are still spending for now, but they have to be freaked by the news from the media telling us how dismal the year is.
Clearly we are witnessing an economy spluttering to ramp up to speed. And clearly it is a bumpy road.
Unclearly, we don’t know where or when this is taking us. Will we bounce back soon if the Ukraine war ends (or quasi ends), supply chain issues are solved and inflation is tamed? Or will the recovery take a few years of full recession, high inflation and an overall slowdown? As optimists, we think it will be a bumpy but reasonably quick recovery; but we would not be surprised if we were wrong. Consequently, we are planning and spending as if we were wrong.
As an early-stage investor, looking at longer term trends is what matters most. Our companies are building value over a 5 to 10 year period, so we are not directly impacted by short term volatility. Obviously, they need to survive and adjust to the current environment but technology adoption, growth and ubiquity is the trend to rely on.
Consequently, as a VC during turbulent times, we need to look in two directions. We work carefully with our existing portfolio, making sure that every company spends prudently but capitalizes on opportunities. All of our portfolio companies need to be paranoid and preserve resources. From our Fund’s perspective, we look closely at where to re-invest and what valuation policies to follow.
Looking forward: as an early-stage investor, when it comes to new investments during times like these, our experience teaches us to :
Go slow. Don’t rush into new investments too fast – prices are coming down and stabilizing and the balance is “with the investor”.
Invest in companies that are not quarter-to-quarter dependent on huge growth and sales until the economy stabilizes. Investing in companies building IP rather than selling makes sense at times like these.
Make sure companies raise enough money to see this through.
Stick to fundamentals of strong teams with strong IP.
We certainly live in interesting times. Patience and fundamentals will win out as they always do.