Geopolitical Risks Come to the Forefront

Markets faced a second straight month of declines as geopolitical fears combined with existing inflation concerns increased market volatility and led to a rise in fear-based selling.  Stock markets are now firmly in correction territory from the all-time highs seen on January 3rd, 2022. 

The main issues facing investors right now are increasing risk from rising prices (inflation) and geopolitical events (Russia/Ukraine conflict).  The issue is that these are somewhat correlated as well.  Because of the economic sanctions and restrictions imposed on Russia, as well as the continuing effect on Ukrainian exports, commodities such as wheat and oil may continue to rise in price.  This exacerbates the inflation already present in many goods and services due to high demand and limited supply.  When you combine these concerns with the near certainty of the US Federal Reserve increasing interest rates to combat inflation, there is question as to how much the US economy and consumers can handle. 

Despite these issues, not all the news in the markets has been bad – some news remains quite positive:

  • COVID cases, hospitalizations, and deaths are falling dramatically
  • Restrictions as a result of COVID are declining, which should begin to reduce supply constraints
  • Economic growth, employment, and the US consumer remain relatively healthy
  • The US has little to no reliance on Russian oil or gas
  • The majority of S&P 500 companies have reported earnings that exceeded expectations
  • Earnings growth projections for 2022 remain in the 8-10% range and companies are healthy

At the beginning of the year, we communicated that one of our caution flags for 2022 was the valuation of the market.  Simply put, stocks were expensive.  As a result of this correction, and the limited change to the fundamental forecasts, stocks are now cheaper than they were at the beginning of the year.  Now, could stocks continue to fall and get even cheaper?  Absolutely.  Stocks are coming down from elevated levels, but they still are not cheap.  Time will tell if valuations continue to decline for the markets, but the price paid for stocks is more reasonable now than three months ago. 

Another area we are seeing higher than average volatility is the bond market.  Bonds typically provide ballast against stock market declines as investors look to bonds for safety when stocks are not working.  This hasn’t been the case in 2022 as inflation and economic growth provide upside pressure to interest rates.  When interest rates rise, bond prices fall.  Furthering the difficulty in certain bonds is the elevated fear levels in the market, and investors during these times require higher premiums to take on default risk (called the credit spread).  At the end of the year, credit spreads were near all time lows as there was little evidence of economic concern.  Since that time, these spreads have been rising which also put pressure on bond prices. 

Overall, most traditional investments have been challenging in 2022.  Outside of precious metals like gold, there hasn’t been a lot of areas for investors to achieve positive returns year to date.  These trends don’t last forever but can be painful when we are going through them. 

These times are the most important to have a sound investment plan that incorporates both safety and growth assets.  Times of high volatility usually means greater positive and negative swings and increased emotion as a result.  Being concerned and emotional regarding investments is absolutely normal and should be expected.  However,  avoiding irrational action based on those emotions is the key to achieving your long term objectives. 

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on March 2, 2022 Read More

Volatility Creates Opportunity

Markets stumbled out of the gate in 2022 after a very strong end to 2021.  In January, most global asset classes were down as the primary concern of investors transitioned from COVID to rising inflation.  While market corrections are unpleasant for stock investors, they are common over time and the volatility derived from a correction can create opportunities to add value over the long term.

The S&P 500 index declined by 5.17% as investor concerns around inflation and what the US Federal Reserve would have to do to curb inflationary prices created selling pressure on stocks.  NASDAQ stocks, which are more weighted toward growth technology and biotech, fared worse than the overall markets and had their worst January since 2008.  US small cap stocks and both international developed and emerging market stocks also faced declines for the month.

For the bond markets, interest rates were the primary detractor for the Barclays Aggregate Bond Index.  The 10-year US Treasury rate increased from 1.52% to 1.79% during the month, creating a headwind for bond prices.  This has been the general trend over the last year as the widely utilized bond index has had negative performance during that time. 

During stock market corrections, there is typically a wide swath of reasons provided for the price declines.  At no time in market history have there been zero concerns in the markets – it is simply a function of investing for an unknown and uncertain future.  The primary concern is now inflation.  We are at the highest levels of inflation since 1982 which has real consequences for the economy as companies have to pay more for employees and raw materials.  Those increased costs can also suppress the spending appetites of US consumers.  Higher inflation also tends to spur the Federal Reserve into action as one of their mandates is keeping inflation at controlled levels.  Currently we are well above their inflation threshold and, as a result, Fed commentary has transitioned from “if” to “when and how much” on the trajectory of rate increases.  The concern that comes from rate rises is the Fed becomes overly aggressive and chokes off the growth of the economy.

In our opinion, inflation and the Fed reaction are worth monitoring but are manageable risks.  We expect inflation to be elevated for the remainder of the year, but we see a path for deceleration in price growth in the summer.  Further, while the Fed is transitioning away from the support it has given the economy since COVID, it doesn’t automatically mean we are nearing the end of growth in the US economy.

When we examine the fundamentals, our stance is still relatively positive.  US consumers are healthy, have jobs, and their wages are rising.  Additionally, there is pent up demand for spending that hasn’t been fully unleashed yet due to continuing COVID cautiousness.  Companies are generally beating their earnings expectations, and growth is expected to continue at an above average pace despite the headwinds from rising prices.  Lastly, as a result of the recent correction, stock price valuations have come down.  Stocks are still not cheap, but the valuations for some companies have now come to levels where they are more attractive than they’ve been since the significant decline in 2020. 

Based on this data, our fundamental forecast and outlook has not changed.  We still expect bonds to have a challenging 2022 as we expect interest rates continue to rise throughout the year.  For the stock market, we still believe markets can work higher, but our expectation of higher volatility in 2022 has already come to fruition. Corrections are a normal part of investing and the relative calm of last year is the exception, not the rule.  Staying invested through the challenging times, and remaining nimble and flexible toward opportunities, remains the best approach to meeting the long-term objectives for your money. 

If it is a commentary: To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on February 2, 2022 Read More

The Only Constant is Uncertainty

As we close out 2021, it was most definitely a year filled with ebbs, flows and great amounts of uncertainty.  Looking back, it will be considered a very strong year for the stock markets while safer assets like bonds lagged.  Given above average returns in both 2020 and 2021, it has been an impressive string of performance given the many challenges faced by consumers, businesse, and investors in both years.

  While some would consider recent performance as “easy money conditions gone awry”, the markets haven’t been without risk.  Events have happened at a frenetic pace, including:

  • A global pandemic that has had significant ramifications for how we live, how we work, and even understanding what “normal life” now means.  
  • Cryptocurrency and meme stocks that were profitable for some left others with significant losses and volatility that makes the stock market seem tame.  
  • Lastly, the rise and fall of “pandemic” stocks, or companies that benefited from stay at home restrictions, is a case study in how speculation can have very different outcomes depending on your investment time frame.  Companies such as Peloton (PTON), Teladoc (TDOC), and Citrix (CTXS) all faced meteoric rises as well as significant collapses in value over the past 20 months.  

Regardless of the time frame, and in good times or bad, market uncertainty will always be a part of investing.  There is always something on the horizon that could have a significant impact, good or bad, on market prices in the future.  This has been true for decades, and a smart assumption is that this will be a part of investing in the decades to come.

However, as uncertainty is a part of past, present and future markets, investing with a plan has always been the antidote to this uncertainty.  No one knows for certain what the future holds, but building a plan that considers risk and is flexible to changing markets and adaptable to life circumstances is the best way we can combat against the unknown.  Understanding the difference between rampant speculation in the latest fad versus prudent long-term investing is critical to making money work for you to achieve your objectives.  

As we think about what the market is going to look like in 2022, we rely on the same fundamentals that have defined market performance over the last 100 years.  

  • What is the state of the economy?
  • What is the state of the companies within that economy?
  • What is the valuation (or what we are currently paying) for those businesses?  

We believe the economy is still on relatively solid footing but is not without challenges.  Despite the many curveballs of the COVID pandemic, consumers are learning to live and adapt to ever-changing conditions and are financially healthy with jobs growing and wages rising.  This usually portends to a strong US economy as much of our economic growth is derived from consumer spending.  

The economic backdrop is positive for business revenue and earnings growth.  Companies have bounced back from a difficult 2020 to grow earnings substantially in 2021, which we believe will continue (albeit at a slower pace) in 2022.  Over the long term, markets tend to follow corporate earnings growth, and both are currently at all-time highs and earnings growth is expected to remain above 10% next year as well.

The final consideration, valuation, is at the high end of its historical range.  We are paying more for companies than we did in prior years. However, interest rates remain relatively low and sentiment is that economic growth will continue to be robust, supporting a higher level of valuation.  So, while markets are expensive and we wouldn’t expect significantly higher valuations from current levels, they are manageable if economic and company growth remains above average.  

Because of these conditions, we believe that interest rates are more likely to rise than fall.  This, combined with a very low starting point of income, keeps us cautious on bond returns.  Bonds will provide some income as well as ballast to the volatility of the stock market, but we would expect very low to potentially negative returns in the bond market again in 2022.

For the stock market, we believe that markets can still go higher based on the reasons described above.  Remember though, volatility should be expected and corrections of 5% or even 10% can happen once or many times in a given year.  Given the strong performance of the past few years, it is wise to be prudent, but not overly cautious.  We would expect a higher market, but likely not to the level of recent years.  

Now, our perceived good conditions don’t come without potential threats.  COVID, politics, inflation and the Federal Reserve can all play a role in market sentiment and could be a headwind to market performance if they deviate away from expectations.  Further, there are sure to be other instances of uncertainty that are unknown to us now that may play an even bigger role in how the market perceives future risk.  

However, all of these issues act as inputs into the long-term fundamental drivers of economic health, business growth and valuation. Understanding current events while keeping focused on the fundamentals is the cornerstone of how we manage your money.  Using this in conjunction with your tailored investment plan to provide a customized solution that meets your objectives within the bounds of your risk tolerance will, as always, be the main goalposts on what we would consider a successful partnership.  

Posted on January 4, 2022 Read More
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