Bull or Bear?

Why It Can Make Sense To Be Bearish On The Market, But Bullish On Individual Companies

After a difficult 2022, much has happened in 2023 that is keeping investors anxious.  The bull/bear debate rages.  Most recently, with several high-profile bank closures, market participants wondered if the Fed’s rapid interest rate hikes were about to lead to a systemic “issue” in the global financial system, or if a black swan was about to fly into view that hatched somewhere in the shadow banking sector. 

For now, the Ukrainian war and Chinese posturing towards Taiwan have faded in public consciousness, although the new rapprochement between traditional enemies, Saudi and Iran, have prompted more discussions of whether or not there is a fundamental geopolitical realignment in process.  None of these issues have been resolved; and hanging over them is a more immediate concern: various macro data points suggesting the likelihood of a proximate recession. 

We generally agree with the JPMorgan Global Economics chart below as a summary of the different economic trajectories that lie ahead from here.

Note the distribution of probabilities here: a 20% chance of a soft landing, in which inflation retreats to levels central banks can view with aplomb, without triggering a recession.  But the other 80% of scenarios are all for recession, with various timing and severity.  The worst option is a systemic problem in the banking system leading to a credit crunch; that would bring recession the fastest.  The two “mid-tier” bad options imply inflation remaining too high and rates continuing at levels which slowly turn the economics south; in short, the same thing, but slower.  This seems like a reasonable assessment to us.

Where we differ from consensus is where we look from the bottom up, not just from the top down.  Yes, the window for a “soft landing” has narrowed considerably, and a recession this year or next seems likely to us.  But if you have some patience, and some psychological capacity to endure a drawdown, bargains in individual companies are beginning to appear, or are already there.  You don’t have to buy the market (unless you are locked in a 60/40 program whose only equity allocation is to index funds).  You can buy companies that are better than the market.

At this juncture, what do we see as the characteristics of companies that are better than the market, and likely to weather a recession, and financial stress, better than their peers?