Tom Bradley: Getting back to normal is fine, unless you’re an investor

Normal, it’s not stocks that are trading at 50 times the sell, oil being rejected and investors ending up worse off holding a bond

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Things are getting back to normal as the pandemic subsides. We travel again, go to restaurants and socialize in person. Some things are different from the pre-COVID-19 world, but we have a good idea of ​​what normality is going to look like.

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Investors, on the other hand, have a skewed view of normal. When markets are up, stock picks are working and returns are good, that’s normal. When prices fall, people wonder what is wrong with the stock market, even though it is down from highs and still above its long-term trend line.

It is an asymmetrical vision. Up is normal no matter how high. Down is abnormal, regardless of the starting point.

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I make this observation because capital markets have been doing a lot of normalization lately. We are going through a significant return to the trend. Here are three areas where price moves are making headlines, but this may just be a return to normal.

Interest rate

The normality of interest rates is not obvious. Fixed income markets have been on the rise for 40 years, with rates dropping from teen highs to near zero (remember bond prices rise when yields fall). But things have been very different lately. Rates are rising and exchange-traded funds (ETFs) that track the bond market are down 8% year-to-date, continuing a trend that began last year.

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Is this an aberration or a return to normal? The answer lies in the two components of a bond yield: the expected rate of inflation and the actual yield. For most of the bond market’s history, yields have outpaced inflation, leading to positive real returns, but central bankers’ obsession with economic growth and full employment has changed the given in recent years. Yields were below the consumer price index (CPI), even before inflation spiked.

A negative real yield means that investors’ capital buys fewer assets when the bond matures. An investment guaranteed to leave the holder worse off is not sustainable, suggesting that the normalization process needs to go further. To achieve positive real returns, we will need higher yields, lower inflation, or a combination of both.

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Stock prices are inextricably linked to corporate earnings. Prices fluctuate much more than earnings, but over time they reflect the success of the underlying businesses.

A feature of this bull market, however, has been investor enthusiasm for funding fast-growing companies that have the potential to be profitable, but are currently losing tons of money. The nonprofit sector soared to dizzying heights last year despite continued losses.

More recently, the shares of these growth companies have fallen. For example, DoorDash Inc., Tilray Brands Inc., and Peleton Interactive Inc. are down 50-80% from their highs. Holders might think the stock market has lost its mind, but another explanation is that buyers are now pricing more reasonably what remains a very uncertain future.

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Like any business, these companies must turn their promise into profits. Only then will we know what normalcy really is.


It’s harder to call the dramatic rise in commodity prices a normalization. Prices for some things have skyrocketed due to supply chain issues and the war in Ukraine. But much of the rally in commodities and resource stocks has just been a rebound from a starting point that was anything but normal.

Prices were depressed and there was not enough capital invested to maintain production, let alone increase it. Oil was considered dead even though the world was consuming 100 million barrels a day. Copper prices were in the doldrums as the metal had an important role to play in digitizing and electrifying the economy.

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These commodities are very cyclical, but one could argue that their prices are much closer to normal than they were two years ago.

There is no right answer as to what is normal as this column makes clear, but we do know that it is not stocks that are trading at 50x sells, oil being rejected and investors ending up worse off holding a bond.

Markets always overreact, so getting a sense of what’s normal now, or at least digging deeper, can uncover wonderful opportunities and avoid big mistakes. Think about that before you celebrate your brilliance in the good markets, or scream at your screen and call the market crazy when stocks go down.

Tom Bradley is President and Co-Chief Investment Officer at Steadyhand Investment Funds, a company that provides low-cost investment funds and clear advice to individual investors. He can be reached at [email protected].


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