To be honest, it’s really hard to write a financial newsletter considering all of the atrocities taking place around the globe today. We have to lean on what we know, individually & collectively, to have any shot at getting through this as humans. We’ll try to do our part, as best we can, as it relates to the financial markets & global economy; especially staying aware that there are some things we can’t possibly fully comprehend. Think that last part holds true to more than the financial markets. We remain optimistic on the investment front that opportunities will continue to present themselves and are confident that our team & processes will continue to identify some of them.
While the new year has ushered in tremendous volatility across global markets, we believe the following dynamics are heavily interconnected and represent what is currently important to investor portfolios:
• Inflation. Upward price pressures across goods and services around the world was kickstarted in the wake of Covid and has been further accelerated by the ongoing conflict in the Ukraine & the aftershocks of unparalleled monetary stimulus. Inflation in the United States hit a 40 year high in February based on a year over year reading of consumer prices.
• Rising interest rates and a reduction in stimulus globally is tightening financial conditions. On-going inflation is forcing the Federal Reserve and other key central banks to signal an increased willingness to raise rates beyond what was consensus expectation of the markets last year.
• Economic growth is slowing due to the above two points but perhaps most importantly because it was red hot the last 18 months or so. Growth is cyclical and a mild slowdown is underway. We reiterate that this doesn’t mean a catastrophic market correction is bound to happen.
As many (most) investors are hyper-focused on the stock market, the relative drama in the 1st quarter was seen in the bond market. Normally a comparatively “safe” part of a diversified portfolio, the US aggregate bond market has declined 8% thus far in 2022 as interest rates have moved sharply higher. This is a massive move lower; the worst start to the bond market since the 1940’s. As a result, many global investors have fled the bond market this year in droves, as skyrocketing inflation forced many central banks to accelerate plans for rate hikes to try and cap rising prices. We were prepared for this risk across portfolios having entered the year with less “interest rate risk” (aka downside risk in our fixed income allocations) than conventional benchmarks. We are encouraged that our team is now in a position to cautiously look to take advantage of higher yields going forward.
Looking at stocks…it’s been all about what type of companies, sectors and areas of the world an investor has owned this year as significant performance differences have occurred within equity markets. Here are some key takeaways from our vantage point:
• In general, our portfolios have avoided the areas hit hardest by downward price pressure as we didn’t have much, if any, exposure to those areas & also carried a high cash balance into 2022.
• Clients’ have benefited from having direct exposure to traditionally less owned areas of the market such as energy, utilities, & Latin America which have seen relative strength vs. the rest of the global stock market.
• Having been defensive we will now look to incrementally put cash to work at lower prices in select areas of the world economy.
Obviously, many eyes are on war & geopolitics. We aren’t experts on this front and won’t pretend to be. We do believe the number of people who can successfully map out or game theory outcomes when major world power’s differing ideologies collide is limited to, at best, a handful of folks around the world. (Hopefully at least 3 of the 5 work for the US gov’t) Furthermore, we think no human being exists that can map out the exact economic impacts after the geopolitical dust settles.
In uncertain & uncomfortable times, we are left with turning to what we know. We remain diligent in our disciplined data driven processes to identify risks and opportunities as they emerge. We’ll persist in being completely transparent and accessible to all our clients when concerns or personal circumstances emerge. We will continue to try and summarize our thoughts weekly with our Down & Dirty report.
If you need us, we’ll be here, ready to serve any way we possibly can as we do not take for granted what we get to do for all of our clients each day.
We’ll leave you with something we wrote at the opening of our quarterly client letter from March 20, 2020 as we think it’s as true today as it was then:
“In times of great uncertainty, it is most important to stay focused on what is truly important. As society works through what has become a full-blown global pandemic, we want to first extend our best wishes to all your friends and family. Please be safe, stay vigilant and remember we are all in this together.”
Ryan A. Mumy, CFP®,
AIF® – Chief Investment Officer
Disclosures: The information provided in this paper is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal or tax advice. Capital Investment Advisory Services, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of or reliance on the information. This information is subject to change and, although based on information that Capital Investment Advisory Services, LLC considers reliable, it is not guaranteed as to accuracy or completeness. Source information is obtained from independent financial data suppliers. For investment related terms definitions, please visit: www.investopedia.com Past performance is no guarantee of future results. Advisory services through Capital Investment Advisory Services, LLC. Additional information about CIAS and its From ADV Part 2A are available on the SEC’s website at www.adviserinfo.sec.gov