Friends,
As predicted, financial markets have been challenging thus far this year. Both domestic and foreign stocks are down around 7% year to date with value sectors (energy, financials, materials, etc.) outperforming growth sectors (technology, consumer discretionary, etc.). While bonds have traditionally provided a hedge against falling stock prices, that has not been the case this year as the U.S. bond market is down about 6% year to date. Going into 2022, we knew that we were facing headwinds that would put pressure on both equity and fixed income returns: decelerating economic growth, the winding down of extraordinary fiscal stimulus (aka “free money”), tighter monetary policy to include higher interest rates, and inflation. Unfortunately, Russia’s invasion of Ukraine has exacerbated all of these factors and led to an environment with even more uncertainty and volatility. Given all that, it’s actually surprising that the stock market has held up as well as it has.
While the war in Ukraine is horrifying and an absolute humanitarian crisis, we do not believe that the war itself will have a significant long-term impact on the U.S. economy and financial markets. Having said that, the headwinds noted above will continue to drive markets in the near term. The Federal Reserve, in a long overdue move, has finally begun to tighten monetary policy by raising short-term interest rates, primarily in an effort to tamp down inflation. The Fed will attempt to navigate the elusive “soft landing”: raising rates to reduce inflation without tipping our economy into recession. We wish them well.
Despite these concerns, we still expect that the U.S. economy will be among the most resilient economies in the world. Our energy independence and relatively lower commodity consumption vs. the rest of the world’s economies provides us with a very significant advantage. As of now, we are still enjoying strong economic growth, low unemployment, strong corporate earnings and strong corporate and household balance sheets. We are generally maintaining our equity allocations although we have been shifting towards more quality and defensive sectors since 4Q 2021. Likewise, in our fixed income investments we have been moving towards shorter duration bonds in order to mitigate at least some of the risk of rising interest rates.
Our investment strategy, which is based on asset allocation and diversification, has held up very well this year. For example, we were not chasing the popular, high flying stocks that made headlines during the pandemic…many of which have sold down recently as much as 60 to 80% off their highs. There will always be pullbacks, selloffs and corrections. Our approach has been and will continue to be to stay patient and take advantage of those opportunities as they present themselves.
Please let us know if you have any questions or if we can do anything for you. We appreciate your encouragement and support.
Matt and Andrew