Broker Check

Second Quarter 2022

Mark Twain once said, “History doesn’t repeat itself, it rhymes.”  Although, many of today’s economic challenges were last seen in the 1970’s, the comparisons can only go so far. Some events are similar but the reasons behind them are not the same. Today’s economy is threatened by a ripple effect from the global pandemic which has led to spiking commodity prices, rampant inflation, and higher interest rates. In addition, energy prices and supply chain issues have been exacerbated by the Russian-Ukraine war.

Unemployment is low and wages have gone up. Demand is alive and well, but due to lack of supply, the cost of goods and services have gone up and inflation is running red-hot. The Federal Reserve is committed to cooling off demand, but it will take time to work out the kinks on the supply chain side. Good news is the market has priced in worst case scenario for 2022, elevating interest rates in the process, and giving the Fed leeway to take less aggressive action in the future.

Market performance for the first half of the year was brutal. The S&P 500 dropped over -20% entering bear market territory in June. Whereas, bond investors saw, for the very first time in history, the Aggregate Bond index fall more than -10% by the end of the second quarter. Most diversified investors saw their portfolios perform somewhere in between. It’s a painful reminder of how volatile the markets can be in the short term.

As long-term investors, we have positioned portfolios for long term growth. We use large cap as core positions in our equity portfolios for a reason. Quality companies have lots of cash on their balance sheets, so they do not have to succumb to higher borrowing costs. Investors have discounted future earnings due to higher inflation and interest rates causing a rotation away from large/mega cap growth companies (like Big Tech). We feel that is short-sighted because many of these companies have the dominant market share and can continue to make profits in a low-growth environment. This bodes well for them during recessionary times.

To recover losses and participate when the market does turn around, it makes sense to pair up quality growth stocks with dividend payers and dividend growers. This has been our strategy all along. We also still maintain a favorable view in health care and real estate and have kept hedges in both sectors.

As for bonds, we have lightened up our positions in mid-term and long-term bonds, which will likely continue to be threatened by high inflation and rising interest rates. However, we have maintained some exposure to core quality bonds as every portfolio needs a safe haven, especially during recessionary times.

Since we cannot time the market or control the risks affecting the economy today, it is important to focus on what you can control. When it comes to your cash needs, we suggest a “3-Bucket Strategy” where each bucket has a different purpose and time horizon: NOW, SOON, and LATER. The money you need NOW (say in 0-3 years) should be in cash or cash alternatives, where it stays insulated from market volatility. This is your “zero tolerance for risk” bucket. The SOON bucket should contain money you’ll need in say 4-7 years. The LATER bucket should contain money you’ll need in say 8+ years. You can afford to turn the dial up for risk as your time horizon goes further out. Our investment approach may be used in conjunction with the 3-Bucket Strategy.

Market selloff’s can be hard, but we’d like to remind you that you have the power to make a difference in your own financial life. We’re here to help you along the way. We encourage you to engage our advisory services to evaluate any changes in your financial circumstances or needs. We should also review your risk tolerance and make sure it’s in line with your target mix of stocks and bonds.  Our services are enhanced when we are working in partnership toward your financial goals and objectives.

In closing, we would like to reiterate how much we appreciate your trust and loyalty.  It is truly a pleasure working for you and we look forward to helping you through these uncertain times.