Overall, market conditions remain very difficult. We are mired in a storm of runaway inflation and concurrent historic rise in interest rates, a simultaneous selloff in stocks and bonds, geopolitical uncertainty putting additional upward pressure on interest rates and downward pressure on global growth, and finally a rapid transition from extraordinarily accommodative monetary policy to much more conservative (even hawkish) policy. In my view, we are at a once-in-a-generation crossroads and the markets reflect that. To say investing has been tough in 2022 is an understatement.
I have had regular conversations with some of our advisor partners about all of this and, more importantly, about how we view circumstances going forward. Today, I thought I would point out a few facts (as I see them), both positive and negative, as well as my takeaway in dealing with the current investment climate.
The following statements are simply my opinions and interpretations based on publicly available data that has been published over the past several weeks. Sources include but are not limited to FactSet, the U.S. Federal Reserve, and government reports.
Positives:
1. Corporate earnings remain strong. Corporate profit margins are at 13%, despite inflationary pressures. This is the highest corporate profitability on record.
2. Earnings growth translates to higher stock prices.
3. Consumer and corporate balance sheets are strong. Consumers have significant savings on hand, which should translate to continued spending, even in the face of higher prices.
4. U.S. GDP growth remains above trend and is expected to continue over the next 18 months.
5. There remains significant pent-up demand and room for services expansion as the world economy normalizes after the Covid-19 pandemic.
6. Supply chain issues are expected to improve going forward.
7. There is some evidence that inflation is currently peaking.
8. The bond market has already been beaten down and may be close to a short- to medium-term bottom.
9. Bad news is everywhere. Anything less than the worst-case scenario may be viewed favorably by investors.
Negatives:
1. The broad indices have fallen back below their respective 200-day moving averages, increasing the likelihood of testing the early March lows.
2. Most individual stocks in the S&P 500 are also below their 200-day moving averages.
3. Nasdaq stocks continue to underperform, and many components are in technical bear markets already.
4. The underlying economic dislocations (and resulting monetary response by the Federal Reserve) caused by the Covid-19 pandemic is without precedent. The ability to unwind the fallout is unknown.
5. The war in Ukraine has the potential to upend the global economy as a result of shifting political and security alliances.
6. The bear market in bonds will eventually overwhelm stocks if it continues.
7. Things may get worse before they get better.
Overall takeaway:
Control the things you can. Remain diversified and allocate to quality. Healthcare, staples, dividend payers and utilities make sense to me. Bonds have a place in a risk-managed portfolio. If the bear market comes and stocks fall off a cliff, investors will usually rotate to safety and interest rates will fall.
Have a process that is objective and allows you time to weather whatever storm may come. Don’t ever forget the wisdom of “this too shall pass”.
