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Pessimism can be costly for investors at this bleak time of year

20 January 2022

Covid, inflation and interest rates are on the horizon, but there are pockets of opportunity.

It is Blue Monday as I write – supposedly the most depressing day of the year. In the US they are having a public holiday – not to drown their sorrows but to mark the birthday of Martin Luther King.

If you are reading this later in the week then it will no doubt still be gloomy. The days lengthen by just three minutes every 24 hours at this time of year, and it is dark by 5pm.

Looking at the markets, there is also plenty to be bleak about. The S&P 500 is close to a record high – if you are of a pessimistic disposition then you will be saying there is little upside left and point to the volatile and disappointing start to the year. And then there is inflation and Covid.

You might have been similarly bleak on Blue Monday in 2020. But, hey, two months later it got worse! The impact of Covid sent the S&P 500 down 30% in three weeks. In February 2020 the World Health Organisation said it did not expect to see a vaccine in under 18 months. The Pfizer vaccine arrived nine months later.

Markets have recovered. They have gone past where they were on that bleak Monday in 2020 (before its tumble) and past where they were on the same day in 2021 – up 40% in two years. Pessimism can be costly for investors.



As the data on the Omicron variant emerges, it looks like we are in the latter stages of the coronavirus crisis. The lack of hospitalisations and the uptake in vaccinations suggest we can think once more about life returning to a version of normality. We are looking at companies that will benefit from this.

A theme we like is “survival of the fittest” – one of our holdings, Planet Fitness, is a perfect example. With its basic and affordable offering, it is close to becoming a US national gym brand. Its facilities are for the everyday exerciser, not for meatheads pumping iron. There are no spas or fancy extras. Around 20% of its competition have shut their doors permanently during the pandemic. Planet Fitness has muscled in on their territory. It is profiting and highly profitable.

Another sector likely to benefit from a return to normality is healthcare. As hospitalisations due to coronavirus decrease significantly, hospitals can offer more treatments and operations to those whose beds have been taken up by Covid cases during the past two years. Another holding, Intuitive Surgical, is a market leader in robotic surgery.

A surgeon sits behind a console and directs the arms on the company’s Da Vinci robot to make incisions and perform operations such as appendectomies and gall bladder surgery. It makes procedures less invasive and faster and also speeds recovery, cutting costs and increasing efficiency. We expect its business to grow this year.


Many people are worried about inflation. In the US CPI inflation is running at 7% year-on-year. We are probably close to peak, but will it endure at high levels? Inflation is being driven by several factors, not least supply chain shortages.

The industry most obviously impacted is the second-hand car market: few new cars have been available. As a result, average second-hand car prices were 28.6% higher in November 2021 than they were 12 months earlier.

Prices need to rise by 7% every year to have consistent 7% aggregate inflation. This level of increase is unlikely to continue. As the production of new cars catches up, we would expect used car prices to fall – that is a deflationary impact. The same downward force on prices will be seen in other sectors as supply chain issues are resolved.

Of course, the labour market is tight – and we have to address wage inflation, too. We have experienced what some are calling the Great Retirement, with large numbers of baby boomers retiring earlier than they may have planned due to the pandemic.

A considerable number, mainly women, also left the workforce to provide childcare during the Covid crisis. Others have resigned to set up their own companies.

The US hospitality industry, which is disproportionately female, has seen an average of 700,000 employees leave each month during the past year. If we look back at the peak of the 2009 recession, there were seven unemployed people for each available job opening. Today there is only one.

We think this will be a more persistent source of inflation, but higher wages – and higher costs – will bring people back into the workforce and encourage others to retrain for better-paid jobs. This will take time, but it should help.

The bigger concern is perhaps how the Fed responds. Will it accelerate into quantitative easing too quickly? Will it raise interest rates too sharply? Hopefully not, but we do expect interest rates to rise – which will help bring down inflation, too.

Higher interest rates may hurt high-growth technology stocks that are in the process of building their customer bases, growing revenues rapidly but not yet profitable. As interest rates fell during the pandemic the valuation of these companies increased considerably.

Investors are now questioning the multiples applied to these stocks. Close to 40% of companies in the Nasdaq, home to many tech stocks, have at least halved from their peak, even though the index itself is only down 7%.

Not having much exposure to these companies hurt us in the past two years. Now we hope to benefit. We own an eclectic mix of businesses. To those I have mentioned you might add Pool Corporation, the world’s largest wholesale distributor of swimming-pool products; Advanced Drainage Systems, the biggest manufacturer of pipes in the US; and the Norfolk Southern Railroad.

These companies are all profitable parts of the world’s biggest economy, which is moving from pandemic to endemic and getting back to work. It may be gloomy out there, but you do not have to look too hard to find reasons to be cheerful.

Cormac Weldon is manager of the Artemis US Smaller Companies fund and the Artemis US Select fund. The views expressed above are his own and should not be taken as investment advice.

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