By Terry Treiber, CFP®
Chief Investment Strategist
The main message of the markets year to date is that if you have not had some commodities you have underperformed. Oil and gas especially, with increasing demand and uncertainty around some major suppliers, have been the star performers so far. And as much as we would like to invest in alternative energy sources for the good of our planet, as committee member Eladio Santiago pointed out, “an M1 tank will not run on solar panels” referring to probably the main disruptor of the markets this year, the war in Ukraine.
For the month of March, we got a little bounce in the markets that had sold off. Year-to-date numbers are a little uglier. But as we like to tell our clients, it’s time in the market, not timing. Looking back one and 10 years, the major indexes look a bit better:
|Index||March||YTD||1 year||10 years|
|Dow Jones Industrials||2.3%||-5%||5%||165%|
Currently inflation has been a problem. The 10 year treasury yield is currently around 2.63%. If you’re the owner of the 20 year treasury ETF (symbol TLT) you would be down 12% year to date. Or if you’re in the Vanguard Intermediate Treasury Fund, a MorningStar four-star fund, you would be down 6.5% year to date. The Federal Reserve has been more aggressive in trying to fight inflation by raising rates.
As Brian Westbury of First Trust has observed, the economy was artificially boosted by the Covid stimulus, increasing the M2 measure of money supply to 140% of where it was pre-pandemic. The excess reserves the government has pumped into the system are creating inflationary pressure that needs to be worked out. While he acknowledges the inversion of the yield curve is typically a sign of pending recession, he believes it could be just a response to reopening the economy and is not certain the recession will take place.
Ryan Caldwell, Lead Portfolio Manager of the FS Chiron Capital Allocation Fund, thinks we may be in a “cycle within a cycle” and is focusing on companies that have pricing power and free cash flow. He points out one of the greatest challenges currently is the speed of change in markets as they respond to news. It’s very difficult to be an active trader in these types of markets.
The investment committee is focused on value in large, mid-cap, and small company stocks. We believe the growth opportunities from well-positioned value stocks will overpower any negatives of inflation pressures. The committee recommends avoiding international and emerging markets, for both equity and debt, especially for new investments. Even if not adjusting current allocations, these are problematic areas worth avoiding when putting new money to work.
Some investments that may capitalize on the dominance of value overgrowth include the ETF cash cows (COWZ) the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), or even Invesco QQQ Trust (QQQ).
Here is the consensus thinking of the committee which we submit for your consideration as you update your own strategy.
We are still positive on equities but suggest having cash on the sidelines ready to put to work. We anticipate more positive news in the coming earnings season.