DEDUCED RECKONING: Companies with real earning can still be 'your baby true'

In 1943, Louis Jordan wrote a chart topper that was recorded by Frank Sinatra, the Andrews Sisters, Dr. John, B.B. King and 130 others. I find these lyrics very applicable to the current stock market:

“Is you is or is you ain’t my baby? The way you're actin’ lately makes me doubt."

After the Great Recession, the Federal Reserve spent a decade pumping vast sums of money into the economy to purposely “reflate” asset prices, of stocks and real estate. No wonder these two markets reached record high price levels. Home prices are just peaking now but stocks began their swoon last summer. Suddenly investors have become frightened that the world is falling apart and inflation cannot be contained. Notice now how the talking heads are pointing out every little flaw and disappointment in the outlook: jobs, inflation, consumer sentiment, gas prices, and housing costs. No wonder, the weekly poll of Investor Sentiment is currently showing only 35% bulls, a rather low reading.

Inflation was “sub-par” for more than a decade so it’s no wonder that the Federal Reserve was slow to foresee that external factors were changing that circumstance. Were there not a war in Ukraine, I doubt the price of  gas would be over $5 in so many states. If Ukraine didn’t supply a vast amount of the world’s wheat, I doubt that ingredient would be soaring in price. We know that supply chain disruptions caused companies to double order. That is correcting now. Note that fewer ships are now sitting outside California harbors waiting to unload. Lumber prices have dropped in half. Wages are only up <4% from a year ago. Used car prices are falling. The Fed has stopped pumping money into the economy and started withdrawing it instead to further dampen inflation. Starting this month, it is reducing its portfolio holdings by $95 billion per month.

As Q1 earnings season ends, more than 77% of companies have exceeded estimates. This week several retailers reported a need to alter the goods they are selling from sweatpants to office clothes and from stay at home products to suitcases for summer travel despite record high gas prices. Hotel chains are reporting record bookings for this summer. Airlines are more than offsetting the higher cost of jet fuel with ticket prices that are double what they were not long ago. Due to a pilot shortage, some airlines have reduced their summer schedules so flights are flying full.

That puts us on the horns of an investment dilemma. Is a recession really looming? Or is the economy trying to readjust itself to more normal circumstances? During the lockdown and federal cash giveaway of two years ago, Americans stashed away over $2 trillion because there was nothing to spend it on. Investors have grown to love their stock investments in recent years as they rose ever higher. Last year it was wild. People were buying shares in companies with no businesses and/or no earnings. That was just like the tech bubble 25 years ago and has ended similarly. If you select companies with viable business plans and real earnings this year and next, I believe a year from now you will find stocks are still “your baby true.”

Joan Lappin CFA has been called an “investment guru” by Business Week and a “top manager” by the Wall Street Journal. The Sarasota resident founded Gramercy Capital Management, a registered investment adviser, in 1986. Email JLappincfa@gmail.com. Follow her on twitter: @joanlappin. Her past columns appear at heraldtribune.com/business/columns.

This article originally appeared on Sarasota Herald-Tribune: JOAN LAPPIN: Companies with real earning can still be 'your baby true'