Two weeks ago, we sent a client note and market update indicating that with the stock market at or near all-time highs, it was probably a good time to get liquid on short term cash requirements. What a difference two weeks makes. Since then, equity asset classes are off 8-10%.
As of March 2020, during the Covid sell off and in the subsequent rebound there have been few attractive market entry points. Last year we only saw four downturns of no greater than 5%, which is highly unusual. Sell offs of 10-15% are much more common in a typical year. We have a confluence of circumstances that the market is trying to digest. Covid is raging across the world, while Omicron seems less dangerous than Delta, it is much more contagious than previous Covid variants, keeping people at home and from going out and traveling as well. However, the labor market has come back to near pre-Covid levels.
Inflation is another hot topic with the Fed on the verge of raising short term interest rates. This news is highly telegraphed, yet it’s not supportive of risk investing as it has been these last few years. As we have discussed, valuations in the stock market (especially growth and tech sectors) have seen historically high multiples. While we over weighted large cap growth starting in 2019 as part of the Recession Prep Checklist™ and the Recession Prep Scorecard™, last year we reduced growth and added back value positions where prices were more reasonable. This is helping portfolios now as value stocks are holding up better compared to growth. With regards to our thinking on inflation, companies can have the ability to raise prices if their costs are going up, it is generally thought that equities are a long-term inflation hedge.
We have been talking to clients about increasing equity exposure to combat rising interest rates and inflation if they can afford to do so. We define “affording” as having a 30% Retirement Shock Absorber® or cushion to defend against down markets. It is important to know that on the bond allocation in your portfolio we have kept positions on the shorter side of the yield curve in anticipation of higher rates. By staying short we will have the ability to take advantage of higher rates during a rate transition.
It seems too soon to comment on tensions Russia is creating. Certainly, any potential conflict is horrible and adds to the overall world angst; let’s hope diplomacy is effective and tensions de-escalate.
Overall, the economy is recovering and as usual there will be fits and starts in the process. Our clients are prepared for uncertain times. Please click here to see our yearly report showing the various unpredictable world events and corresponding market returns. It’s quite interesting how the market continues to rise in the face of many challenging environments.
For many of our clients, we have dry powder set aside and are looking at these last few days as a buying opportunity. If you have cash outside of your investment accounts and would like us to put that to work, please let us know and we can assist you in doing so.
This time will pass, and we will continue to grow and prosper. Thank you for our relationship together, we are here to support you in any manner.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index and market data from FactSet and MarketWatch.
This Research material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
Not Insured by FDIC/NCUA or Any Other Government Agency
Not Bank/Credit Union Guaranteed
Not Bank/Credit Union Deposits or Obligations
May Lose Value
For Public Use – Tracking 1-05113466