Q1 2022 Market
Commentary
Experienced. Objective. Passionate.
Inflation, Rising Rates, and Russia/Ukraine War
It has been a delicate balancing act navigating markets so far in 2022. With many factors impacting your portfolios and wallets, we are looking ahead with a focus on inflation, interest rates, and global conflict. Of these three headliners, inflation and increased interest rates were widely expected, while Russia invading Ukraine came as an exogenous shock. The result has been choppy markets. Several rounds of vast stimulus flooded money into the economy for the last two years, and now the Federal Reserve must react. The Fed said they would start hiking rates, and they did, approving a 25-basis point increase in March and reiterating a hawkish stance. The language used by Fed Chairman Powell indicates the Fed will aggressively pursue rate hikes throughout this year and next to combat inflation. These hikes immediately increase costs to consumers as mortgage, credit card, and auto rates are among the first to rise. Inflation continues to climb; based on February numbers, the consumer price index was up 7.9% from a year ago. Many economists are calling for it to peak closer to 9% this summer. Gas prices tend to grab the most headlines, but this is measurable inflation across the board. As of February, housing rentals are up 17% from a year ago, and as many have noticed at their local grocery stores/restaurants, food costs are up 7.9% in that same period, the highest since 1981. The Fed does not have much of a choice at this point. The trick is going to be if they can navigate hiking rates in a way that slows the economy down enough without pushing it into a full-on recession. A tall task indeed. The market rarely appreciates a surprise. The Fed is playing into this by clearly indicating six additional hikes this year, giving the market a chance to price in the information.
Equity Markets
U.S. equities started 2022 by falling more than -12% to early March lows, only to rally back, finishing the quarter down -4.9%. For several weeks, equities indices were either up significantly or down significantly daily, with little middle ground. We interpret this activity as a sign of healthy market participation with buyers and sellers looking for simultaneous exit and entry points. A contributing factor to the rapid swings has been a significant rotation from growth to value. According to Morningstar, as of February, YTD fund flows (mutual funds and ETFs) saw approximately -$29.2 billion out of Large Growth funds and $26.7 billion into Large Value funds. It is not surprising that growth stocks were hit the hardest when the market began to fall. This is typical in a market downdraft and has supported our several quarter efforts to increase value positions in portfolios. As an example of the recent disparity, from the start of the year to the low on 3/14/22, the Vanguard Growth ETF fell more than -20%, while the Vanguard Value ETF fell only -3.5%. We are long-term buyers of equity markets but always look to make tactical decisions to favor short- to intermediate-term trends. We continue to allocate toward broad equity exposure, but current over weights include large-cap value and value-oriented mid/small-cap core positions. While we like to barbell sectors between growth and value, the value side currently includes industrials, materials, commodities, and infrastructure/utilities. Another recent change has been to scale back (cut in half) allocations to all international equities, both developed and emerging, in the face of Russia/Ukraine escalations.
Fixed Income and Commodities
As noted in our most recent market update at the beginning of March (which can be found on our website), we are approaching recent bond market volatility with optimism as we see opportunity in the movements. Q1 2021 Market Commentary With rising rates comes falling bond prices and a significant pickup in yield that comes with it. We remain confident in solid earnings and strong balance sheets, providing a floor to the individual corporations that we look to buy and hold. The same can be said about the municipal market, which we have largely stayed away from in recent years as little to no yield was available. Now more than in recent months and years, we are seeing opportunities to add meaningful yield to portfolios across corporates and municipals.
In commodities, we continue to hold both a broad commodities basket and a more concentrated exposure to energy infrastructure/utilities. In the face of rising inflation and interest rates, owning commodities gives us the flexibility and purchasing power to take advantage of downward moves in equities and bonds alike.
What’s Next?
The next several months will include rate hikes and more heightened inflation prints—net negatives for the market. But times are strange. Transparency, relative economic strength, and continued foreign investment in the U.S. lead us to believe further growth is ahead. Picking and choosing where to invest will be critical, as we are entering a phase of value-rewarded investing that we have not seen in quite some time. While global tensions will always exist, the war is a period of tragedy and heightened anxiety, and any relief in the form of peace talks will be a trigger to boost market morale. Value, commodities, and buying into equity and fixed income downdrafts are where we will be focused this coming quarter. We look forward to navigating the challenges along the way.
Interest Rate Hike Expectations
This is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation of any products or services. Opinions are subject to change with market conditions. The views and strategies may not be suitable for all investors and are not intended to be relied on for legal or tax advice. There is a risk of loss of principal when investing in securities. Bonds and bond funds are subject to credit risk, default risk, and interest rate risk and may decline in value as interest rates rise. The best wealth management firms are provided through National Asset Management, Inc. (NAM), a SEC Registered Investment Advisor; dba Clapboard Hill Private Wealth The information provided is not directed at any investor or category of investors and is provided solely as general information about products and services or to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither National Securities nor its affiliates are undertaking to provide you with investment advice or recommendations of any kind. The performance herein represents past performance. Past performance does not guarantee future results.
