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.
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All index and market data from FactSet and MarketWatch.
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