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Hard To Find The Positives                                                                                                 Join our Quarterly Newsletter            October 2022                                                                                             

Mark R. Hoffman

CEO, Principal


I am generally an optimist.  I won’t say that I’m a perma-bull, but my bias is that in the investment world, we will find a way through.  And I know that at some point, we will find our way through this one, too.  We always have.  We have recovered from every correction, every bear market, every recession in history.  We will bounce back.  But the list of obstacles in our way this time is very long.

 

Not to depress anyone (including me), but here is some of what we are observing:

  • Through the third quarter, both the stock market and the bond market have been hammered. A portfolio with a traditional 60/40 stock/bond mix is down 20%.  Bonds as a diversifier have not worked, as that “safe” component is down 14% YTD.
  • Inflation is “down” to 8.3% (year-over-year) at the end of August. While we are moving in the right direction, it remains persistently high and in the crosshairs of the Fed.  Factoring in inflation to calculate real return, this is trending towards the worst calendar year 60/40 performance ever.
  • In an attempt to battle inflation, the Fed has raised interest rates at the fastest pace over a 6-month period in the last 41 years. What was the tag line over the last decade as rates were falling and the market was roaring?  “Don’t fight the Fed.”  The same could be said now, too.
  • The US dollar index started rising at the beginning of the year and currently is up 20% YTD vs. a basket of currencies including the Euro and the Yen. Largely a result of our Fed raising interest rates faster than other countries, the strong dollar has big implications on the stock market.  International and multi-national companies selling goods to the US market are feeling the brunt of this.  And I don’t have time to go into it here, but the years following an “overvalued” currency have proved difficult for that that country’s stock market.
  • The price to earnings ratio (P/E) has come down from 22-23x to a current ~17x. But this is still roughly 25% higher than the long-term average. 
  • So far, solid earnings have helped stock prices. But there are chinks in that armor, too, as earnings estimates have begun to slide.  The bottoms-up 2022 S&P 500 earnings per share estimates declined at a rate of 6.6% in the third quarter.  Easily the largest drop since the onset of Covid.
  • And I haven’t even mentioned what’s going on outside the US. Here is a ridiculously simplified summary:  inflation is higher than ours, jobs markets are worse than ours, all of Europe is in a recession – where there happens to be a literal war going on in their back yard, supply chains are a mess, China – the engine for global growth – has had its growth forecasts cut to 3% for the year and may actually be contracting right now, etc., etc., etc.

 

With all of these headwinds and a highly cloudy immediate future, I repeat myself:  we will make it through this.  Eventually.  What do you do in the meantime?

  • Maintain a long-term perspective. Knee-jerk reactions rarely work out positively.
  • If you’ve taken some risk off the table, thank your advisor and remain patient. We all want to put money back to work.  But you may want to wait until some of these clouds clear.  There will be great buying opportunities.
  • If you’re in bond funds, ask yourself why. If it’s because someone advised you to be in them, ask yourself why you are listening to them.  Individual bonds may be OK, and at some point a laddered bond allocation could make some sense for the first time in years.
  • If you’re in non-correlated diversifiers and alternative investments, fantastic. If you’re not, ask us about whether or not they would make sense for you.
  • In the public stock markets, what do we like? Not much right now.  This is subject to change, but US over international.  Large cap over small.  Quality companies.  High free cash flow companies and dividend payers.
  • Try not to look at your portfolio value every day. It could give you an ulcer.

 

I promise to be back to positivity at some point.  Hopefully sooner rather than later.

 



Mark is a co-founder of Lanier Asset Management and serves as its Chief Executive Officer. Prior to founding Lanier, he was a partner at The Boston Consulting Group. Mark is an honors graduate of The University of North Carolina at Chapel Hill with a BA in Economics, and holds an MBA from The Harvard Business School.