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

New Concerns in the Markets

November was a down month for stock markets as new worries on a COVID variant along with the actions of the Federal Reserve were front and center on investor’s minds.  Both bond and stock markets were significantly more volatile as concerns about future actions and repercussions of potential government actions caused investors to re-examine risks. 

The S&P 500 was down 0.69% for November, with the negative movements concentrated in the back half of the month.  On November 26, news of a new COVID variant, now titled Omicron, caused the worst daily market performance since October 2020.  Governments rushed to adjust flight restrictions and examine populations for evidence of the variant while scientists and drug providers began the process of assessing the impact.  The bond market also displayed characteristics of a “risk-off” trade as well – with US treasury rates falling (leading to rising US Treasury bond prices) and some selling of higher risk bond assets like investment grade and high yield corporate bonds. 

As of now, we know very little about the impact of Omicron on long term business fundamentals.  The digestion of news forthcoming will likely create a more volatile market than we’ve seen in recent months, but this added volatility may go in both directions.  If Omicron has a more severe impact on individuals and causes a re-establishment of restrictions, then the market is likely to experience a decline.  If Omicron is determined to be controllable, and does not alter the prior trajectory of re-opening, then the markets could experience a snapback rally that continues into 2022. 

In other news, comments made from Chairman Fed Jerome Powell on November 30 also suggested that elevated inflation may be with us longer than anticipated.  Noting continued supply constraints along with potential Omicron effects, Chair Powell laid out a stance that could include an accelerated pace of reduction in bond purchases by the Fed.  This commentary led investors to believe that rate hikes may be coming earlier, and at a faster pace, than suggested prior. 

While the concerns of Omicron and Fed action are relatively new, concerns about issues and the effect on market trends are as old as the markets themselves.  There is ALWAYS something to be concerned about.  When markets are rising, it feels like they can’t go up forever and are “due” for a decline.  When markets are falling, it feels like there is no bottom.

Our stance remains that, over the long term, markets follow business fundamentals.  This includes the health of the economy, the health of businesses within these economies, and the valuation (or what we pay) for these businesses.  It is our opinion that nothing we have seen thus far necessitates a change in our outlook.  Reducing the level of support by the Fed does not change how a company generates more business to increase revenues and earnings.  Omicron could have an effect, but it is too early to make the call that this variant will have a significant impact on the healthy US consumer to go out and spend money.

The important part is not to get caught up in the noise and instead focus on the investment plan.  The plan should include taking enough risk to meet your long-term investment objectives but is also prudent and has some level of protection from decline.  Allow yourself to be nimble to market changes and take advantage of opportunity, but not so aggressive that it shifts you dramatically away from your risk tolerance or risk ability.   

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 December 2, 2021 Read More
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