The volatility of the stock and bond markets started at the beginning of the year as both markets faced headwinds due to negative world events and economic uncertainties. We have not seen this type of volatility since Covid rattled the markets in March of 2020; In fact, we have enjoyed a strong bull market since that time. On a relative basis, our model portfolios are performing quite well as compared to their respective benchmarks. Moves that we made in client accounts over the past months have added to performance during this time. On the bond side of the portfolio we drastically shortened duration and increased credit quality to help protect returns in an increasing interest rate environment. The good news is that portfolios should be able to benefit from higher yields as rates continue to rise.
As we have communicated before, we took profits from high P/E (multiple) stocks where we were overweight (i.e. Growth) and added more reasonably priced value positions into the portfolio. This has helped a great deal so far in 2022. There is still some good news out there, but the bad news seems to grab the headlines. Some things to consider:
- Will Russia/Ukraine conflict come to a resolution?
- Will the China lockdown ever end?
- How entrenched is inflation and is it part of a Covid hangover?
- Do company earnings still matter?
- Will the 10-year treasury dominate the economy forever?
- Is the Fed going to be able to navigate a soft landing without tipping the economy into a recession?
- Midterm election years tend to be more volatile leading up to election day.
On the good news side, while these issues are dominating headlines these problems always resolve with the passage of time and the human response to negative events. Corporate earnings have been strong along with corporate balance sheets. The main driver of the economy, the consumer, continues to grow due to Covid pent up demand. Its also important to note the average intra year decline on the S&P 500 is 14% and the market often reverses course by year end (click here for chart). Due to strong returns since 2019, clients have solid Retirement Shock Absorbers along with dry powder that was set aside earlier this year. All this to say we believe that you are prepared to weather this period. We will be buying on market weakness from the dry powder that was set aside months ago. This should help enhance results over time.
While we are not immune to down markets, we believe you are well positioned to ride this out. Its also important to remember that we instituted the Recession Prep Scorecard in 2019 and those scores are even higher now. Please know we are here to discuss any and all of the above and truly appreciate the confidence you place in Brown and Company. In times like these, you may have friends, family or associates who would like us to evaluate or provide a second opinion regarding their portfolio, it would be an honor.