A New Narrative

Investing is all about confidence.

Low interest rates gave venture capitalists confidence and that gave founders confidence and that gave investors confidence and that gave consumers confidence. But inflation put a wrench in the chain and now we’ve gotta figure out how to get our groove back.

For the first time in a long time, investors are no longer willing to believe every story. “Everyone” believed in SPACs a year ago. The average one listed in 2021 is down 60%. “Everyone” believed that growth at any price was an acceptable way to invest. $10,000 invested in Peloton one year ago is worth $1,260.

Confidence is gone and it usually doesn’t reappear overnight. I happen to agree with Lightspeed, who recently wrote that “The boom times of the last decade are unambiguously over.”

Most people are now confident that confidence has left the building and isn’t coming back anytime soon. But it’s worth considering, what if everybody’s wrong? After the strongest week for stocks since November 2020, the S&P 500 is just a 16% rip away from taking out new highs. As improbable as it sounds, there’s still plenty of “buy the dip” muscle memory from the past few years. One or two more weeks of rising prices, and we could be off to the races.

The narrative on the downside made a lot of sense; inflation isn’t going away, inventory is building up, the fed has to cool demand, AKA cause a recession, valuations are normalizing, etc. What stories will we tell if we race back to new highs?

I don’t see this happening without inflation materially cooling off. So, I guess we’ll say that “inflation really was transitory”. I guess we’ll say “remember when the ten year went all the way up to 3% and people thought the world was ending?” I guess we’ll say that “the consumer really was never more prepared for an economic slowdown.”

It could happen, but I don’t see it. I really don’t. I just think we have only begun to see investors lose confidence and given all the negative headlines, I’d be surprised to see it end as quickly as it started.

I hope I’m wrong, but I think this is a rally to the bottom.

Josh and I discussed this and much more on tonight’s What Are Your Thoughts?

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