A Market Update To Our Most Recent Investment Letter.

 Clients will be opening their mailboxes by the end of this week and find their year-end portfolio summaries.  Rarely in this business, now spanning over thirty-five years, have I felt the need to revisit what I have written so soon out of the box after I’ve sent these reports out.  One of the major topics I covered  in that report was the  higher probability of a major market correction in 2022 and briefly touched on the hidden damage that’s been going on away from the major market indices for months now.  Well, we’ve now had that correction.  Once again the old Wall Street saying that “stock prices take an escalator higher and an elevator lower” is proving prescient. Although markets rallied higher today, the damage we’ve seen to stocks in the past few weeks has been fast and furious.  Most major indices are down between 8% and 15% so far in 2022.  Most made what now look like major tops in December.  Many of the more speculative areas, of the market, along with many individual securities are down nearly 50% from their highs.  The question of whether we’re having a more than a run of the mill correction has now been answered with a resounding yes!  The question of course is now what?  

 I’m not going to go through most of the things that have investors concerned because you can read that in my January letter, however, I’ll briefly cover two issues.  The first is the fear of slowing economic growth.  Investors are worried that the combinations of covid health related issues, along with supply chain issues, rising inflation and rising interest rates will lower economic growth from current expected levels.  I’ve also given my thoughts on this in my January letter, so I won’t detail that here.  What I believe is being overlooked is what’s going to happen as the various Covid related restrictions start to unwind in the coming months and the supply/demand shocks we’ve been facing in the past two years begins to abate.  

 

First thing that must happen for sustained economic growth is that people need to be able to get back on with their lives.  They’re now doing that regardless of governmental mandates.  Probably 250,000 fans packed NFL stadiums this weekend to watch the playoff games.  I don’t know what the mask mandates were in the various cities where the games were held, but I saw very few in the crowd.  More and more places are now in defiance of many of the most onerous restrictions that have been placed on individuals.  Politicians will soon follow suit or face the likelihood of being booted out of office.  People want to get out and they also want to do and buy everything with all that money they haven’t been able to spend in the last two years.  They want to be able to find the things they want to buy like cars.  They want to travel again like they did before the virus.  They want to go out and do the things they did, free of being told how to do it.  It is hard for me to envision a sharp economic slowdown in the face of that kind of demand.  It’s hard for me to see a contracted drawdown when every business in the country is desperate for workers.  My guess is the next two quarters will see slightly slower economic growth, just because of what we’ve been through with the Omicron surge, but the back half of the year will see the economy expand at a rate higher than what most economists are currently expecting.

 

The other issue that’s beginning to weigh on stocks is the situation in Ukraine and since I’ve had a couple of people ask me about that, I’ll weigh in.  Right now, unless you know what’s going on in Vladimir Putin’s mind then the situation over there is a mystery.  Let’s say right up front that if the Russians invade Ukraine, then stocks will hit a rough patch.  War isn’t good for business.  However, the probability of direct military involvement by NATO forces also seems very low right now.  It’s more likely that Western nations will employ economic sanctions to hurt the Russian economy as much as possible.  That’s not a great solution, but it’s one that becomes manageable for economies and their markets once they adjust to the new paradigm.   There’s also the real possibility the Russians will get what they’re after in some manner at the bargaining table.  Hard to know what’s going to happen in the Ukraine, but all my years doing this I’ve learned that it’s hard to not only anticipate the outcome but also to anticipate how markets will react.   Unless something’s changed with your personal situation, my instinct is to stay the current course until we receive more clarity on what’s going on over there.

 

Markets are showing all the signs that some attempt at a short-term bottom may be in place.  Stocks rarely come down this fast without at least an attempt to rally higher.  Given my investment outlook, I believe we are at the trading point now where longer-term value is being created.  We may not be done with the corrective phase, but unquestionably many indices are cheaper today than they were a few weeks ago. My investment philosophy is that you should evaluate your portfolio and its assets with a 6–18-month time horizon.  That’s how I consistently model what I own in client portfolios.  I think for those that share my investment philosophy, there’s a higher probability today that what you are buying will make a reasonable return in that timeframe.  However, I will again warn you, that we are likely to see increased volatility in 2022.  Also, while there’s a higher likelihood that some sort of short-term bottom may be coming for stocks, probability also suggests we’ll see more market gyrations until we see some clarity on how things might look in the 2^nd half of the year.  In short, be prepared to ride out a bit of a rough patch in the coming months.  I’ll be looking for ways to take advantage of volatility if asset prices decline and value is created.  Nothing I’m seeing changes my longer-term view of things which I’ve repeatedly outlined for you in past letters.

 

The evidence as I still see it points to a better risk/reward environment based on where we will likely be with the economy later this year and by how much certain parts of the market have come down in price.  Ukraine is an outlier, and it is impossible to know if we’ve put in the final bottom for this corrective cycle.  I like to buy things when they are cheap.  I realize that sometimes means the assets I’m buying may become cheaper still, which is why I rarely go all in at any given moment.   But I think assets purchased now, given where I believe we are in the economic cycle, will be well rewarded within our timeframe even if there’s some back and forth in the coming months.  It is also easier to adopt this approach when you are achieving diversification by using ETFs.  I would also note that ETFs based on the major market indices have declined but have lost less value than for example the more than 50% of the Nasdaq that is down nearly 50% as of this writing.

 

Having said that, now would be a great time to review your asset allocation with me.  Let’s discuss if there’s any changes in your life that might need us to revisit how your portfolio is positioned.  Let me know if anything’s changed, what’s bothering you about the market or any thoughts you might have about your investments with me.

 

Nobody likes corrections.  That being said, they’re part of the investment process.  They clear out the deadwood that inevitably accumulates in periods when they investment crowd careens towards exuberance.  They also ultimately lead to the next advance whenever that may be. 

 

Stay safe and God Bless

 

Christopher R. English.