We hope this letter finds everyone well and ready for spring. It’s hard to believe the first quarter of 2022 is behind us. To start the year, we’ve had quite a few things happening with the economy, the markets, and events across the rest of the world that we are going to discuss. We view the start to the year somewhat as expected given where market valuations were and the current global turmoil. Our outlook remains largely positive in spite of some of this volatility and we are paying close attention to clients’ portfolios making sure they are close to our target allocations. In this quarter’s letter we’re going to give you a brief recap on our thoughts on the first quarter, what we expect the rest of the year, the most popular questions we’ve been getting and how we’re thinking about positioning portfolios in today’s backdrop.
To start the year so far has been a bit of a departure from global markets positive performance over the last 18 months. Since the volatility in the early days of the COVID crisis global markets have largely trudged higher in the face of quite a bit of uncertainty and headlines, and it appeared not much could stop the continued rise in stock prices. We began the year seeing portions of the stock market as relatively overvalued. Said another way, stock-prices of certain segments of the market were trading well above their long-term average multiple of what the underlying companies were earning. Over long periods these valuation levels are simply unsustainable. This was particularly true in U.S. large-cap growth stocks. The overvaluation of these stocks largely drove the market sell-off until late February when the Russian invasion of Ukraine exacerbated volatility within markets. As we write this, markets have been trading in up and down in within a range, but largely remain down four to six percent across most equity asset classes.
The rest of the year will face challenges, but we feel there are some strong undercurrents worth following. We are monitoring the latest events in Eastern Europe but predicting the outcome of these events is incredibly difficult. The likely result over the next few months is continued short-term volatility as headlines may surprise markets with any significant change in events in Ukraine. As global economies re-adjust to new sanctions and re-routing of supply chains, American consumers may feel additional pressures in gas, food, and other goods prices. We don’t see additional significant impact to American consumers. Undercurrents we are following are the core drivers of markets and the economy, especially here in the United States. First, the overvaluation of markets that we started the year with has largely abated. We believe most parts of the global markets today as being largely close to fair value. This can be a good time for investing cash or excess reserves. Fair valuations also represent a more positive outlook for future returns. The second is the state of the U.S. consumer. Our economy is made up of consumers spending. More specifically, 70% of our economic activity is the result of Americans spending on various goods and services (FRED Economic Data St. Louis FED). Therefore, paying attention to consumer health is critical to evaluating the economic environment and companies’ abilities to grow profits. The good news is that the American consumers financial health remains strong. After the significant amount of stimulus and bills such as the child-tax credit, there is still an additional roughly $2 trillion dollars in American consumers bank accounts when compared to pre-covid levels (FRED Economic Data St. Louis FED). We view that as a large positive for people’s ability to be able to spend and absorb some of the shorter-term impacts of rising inflation. It’s important to remember that consumer spending drives economic activity, which in turn drives corporate earnings of companies we are invested in and over the long-term tends to push stock prices higher.
Interest rates and Inflation have been concerns more many clients we have met with and we’d like to take a minute to address them. The market is currently forecasting seven to eight interest rate hikes before the end of the year. That means we’d expect short-term interest rates to climb to nearly 1.5% up from zero since the start of the COVID crisis. The Federal Reserve has largely signaled this as their plan to attempt to reduce inflation. This impact on stock and bond prices we feel has largely already been priced in. Inflation is likely to continue to be higher than the low figures we were accustomed to over the last decade. There are two factors driving this; the first we already mentioned, pressure on globalized trade, energy supplies and supply chains because of the Ukraine invasion. As the world deals with the significant sanctioning of Russia, a major economy and large energy producer, short-term price increases of energy and commodity prices are expected. The second factor is demand. We mentioned the large amount of cash and health of the consumer as driving economic activity. When there is more demand than supply, prices will increase. This type of inflation pressure isn’t necessarily negative as more economic activity is a net positive. We’re paying close attention to the causes of inflation, where it is occurring and its possible larger impact on economic growth.
Portfolio positioning is currently largely consistent with the environment we believe we’ll be in for the next 18 months. We are making sure client portfolios are allocated close to our “neutral” position. Given current stock market valuations and the impact being felt from global events in Europe, we remain overweight U.S. equities, and specifically small and mid-sized companies. We are speaking with portfolio managers of our fixed income positions to judge the impact of rising interest rates and if a change in this positioning is warranted. You may notice a portfolio re-balance over the coming weeks if we find any client portfolios are in fact too far away from our “neutral” positioning. We want to make sure clients are as close as possible to our target allocations.
Around the office you may have heard a new voice. In December we hired our newest team member, Senior Relationship Manager Greg Holman. He is working alongside James Whitlock* on making sure planning items are complete and up to date as well as managing our client experience. Robert Jeter* recently returned to the office after the birth of his first child, a boy, Campe Steele Jeter. Mom and baby are happy and healthy, and of course, tired. Eric Johnston* recently took his family on a weekend trip to New York City to see their first Broadway show. The city adventure was a full one.
We hope everyone enjoys the last of the nice weather while we have it and look forward to seeing you soon. As always, thank you for your continued trust and business.
The views are those of Robert Jeter, CFP®, CRPC®* and Eric Johnston, CFP®* and should not be construed as specific investment advice. Investors cannot directly invest in indices. Past performance is not a guarantee of future results.
The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results.
Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.
Investment Advisor Representative offering securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker dealer and a Registered Investment Adviser. Cetera is under separate ownership from any other named entity.*