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“Clean up in Aisle 7”

“Clean up in Aisle 7”

May 22, 2022

Generally, the market isn’t always right, but we should always know what it’s trying to tell us. Walmart and Target earnings announcements due to supply chain issues showed consumers are feeling the pinch. A decrease in discretionary spending plus a broad “trade down” to private label generic products is setting off alarms…and shuttered the market’s recent attempts at a comeback.  Many branded consumer companies got pounded… Thanks inflation.

 But the cure for inflation might just be inflation itself. Costs are getting high; it’s negatively affecting demand.  Inflation pushed rates higher and are starting to bite. Home debt service increased more than 30%, cooling housing related areas of the economy.  And if supply chain bottle necks ease at all, substantial relief might be in sight.  So maybe we’ve seen peak inflation rates and maybe 3.25% on the 10-year treasury is a firm rate ceiling. 

As a result, maybe investors get relief from the absolute beating stocks have taken. S&P and growth indices? -18% and -30% year to date. Ouch. Berkshire Dividend? It’s down a more palatable -7%. The good news is valuations have been reset in a major way.  Since Jan 1, 2022 the S&P multiples compressed from 30 to 19 and now sit slightly lower than 40 year averages. That’s healthy long term.

Recession threats are elevated, but recessions alone don’t cause large draw down’s. Unlike say 2008, we don’t see an obvious one that will create wide scale panic. Banks are well reserved and the financial system, we believe is much stronger. 

Currently, growth related equities are getting pounded. Robin Hood stocks, emerging “disruption” stocks, fringe crypto stocks were all early and dare we say predictable causalities symbolic of rampant, irrational speculation. Many of these speculative favorites took hits to the tune of 50-70%. More recently the routs in Netflix and Facebook made it clear the rout was going after mainstream growth stocks. Even stocks like Microsoft and Apple are under pressure. Capitulation means you even sell the stocks you love. By that measure, we think we are close to a near term bottom.

Each strategy has a specific job to do…Blended returns are likely to be very attractive given what’s happening around the globe.

Long term, we generally still prefer equities vs. fixed income because of their inflation fighting ability and their ability to compound your wealth. Within equities, we prefer large high quality domestic dividend payers vs. smaller growth companies because they offer little yield and less volatility. We will continue to emphasize domestic equities over foreign ones. Within fixed income we prefer high quality intermediate maturities vs. low quality long maturities because rates are still low.

You are likely to see moves in the portfolio in the coming weeks…We monitor your accounts and markets on an on-going basis. Even when we don’t make a ton of changes to your portfolio you can be sure it is based on a conscious disciplined decision-making process.

Despite what is happening in the market, please have confidence your long-term financial plan is on track. As always if you would like to discuss your portfolio and the market volitivity please let me know…