Investment Conditions & Outlook
As we reported in the fourth quarter of 2021, we expected heightened market volatility coming into 2022. A myriad of negative factors set global stocks up for a difficult start with the S&P 500 hitting correction territory in February. Rising interest rates, high inflation and unimaginable violence and human tragedy in Europe has made the global investment landscape more difficult to navigate.
Intra-day market volatility has been dramatic and led to big market swings. We believe this has resulted in attractive entry points as stocks have been punished more than their fundamentals would imply. We continue to favor U.S. equities over the rest of the world due to growth concerns and Europe’s dependence on Russian energy. We remain bullish on stocks relative bonds and continue to believe in owning a diversified portfolio focusing on companies with stronger balance sheets and higher cash flow.
With inflation continuing its upward push, value stocks have significantly outperformed growth. This is due to the longer duration of cash flows in growth stocks as higher rates reduce the present value of those cash flows. Value tends to have a shorter duration with many companies returning investor capital earlier in the investment life-cycle through dividends. The lower rate regime has been very beneficial for growth stocks, and we see the road ahead to be different resulting in our portfolios to be underweight growth focused stocks.
The first quarter has been more difficult for bond investors as we started the new year with a sharp increase in yields on continued rate hike expectations. Our core bond portfolio has held up well during this time period due to our shorter duration and other investment strategies that have been implemented. Recession risks look to be rising as the yield curve remains inverted, but we do not see an imminent contraction in the cards as fundamentals remain strong. Looking forward, we see a potential for rate cuts in a couple of years due to a slowing economy and the idea inflation will be back to long-term averages. We continue to actively manage our fixed income duration and continue to further reduce relative benchmarks.
The Janiczek Team
Economic Conditions and Key Takeways
- Unemployment is back to pre-pandemic levels, and if you want a job, you can probably find one!
- Quarter over quarter GDP growth is the highest it has been in 40 years.
- Both consumer and business balance sheets remain healthy, a positive side effect of COVID.
- Tighter labor market is leading to upward pressure on wages which could negatively impact corporate earnings.
- Global supply chains still working to sort themselves out from Covid’s impact with Russia’s invasion of Ukraine adding fuel to inflation fire.
Equity Performance and Key Takeways
- U.S. stocks experience first quarterly decline since onset of Covid in Q1’20 but outperform rest of world.
- Energy was the only sector that ended the quarter in the green on the back of soaring energy prices.
- Growth oriented stocks were at the center of the pain for U.S. markets amid fears and anticipation of rising interest rates and a cooling economy.
- We continue to favor value stocks as many resource-based stocks are classified as value stocks and have benefited from the increase in inflation and commodity prices.
- Emerging market equites trended lower over the past year and have come under increased pressure over recent weeks due to Russia-Ukraine spillover, but recent turmoil should enhance long-term return potential.
Fixed Income Performance & Key Takeaways
- With the Fed set to taper back bond purchase program and continue to raise short-term rates, long maturity bonds could see more pain.
- Record rise in short term rates led to inversion on 2s10s and 5s30 spreads.
- Yield curve inversion appears to reflect the Fed’s lag in raising rates and reducing asset purchases rather than being a leading economic indicator.
- Continued uptick in inflation could result in more defaults in high yield, though inflation fallout seems to be modest right now and we favor higher quality issuers in the space.
- In the short and near term, higher rates are expected to favor floating rate debt.
Fixed Income Performance
Chart of The Month
The average stock fell a lot more than the index it’s in
In periods of heightened market volatility, the benefit of having a well diversified portfolio of equities with similar characteristics is easy to discern. Diversification, while unpopular during times of higher highs, is a prudent idea that may allow portfolios to weather volatility storms and guard against market lows. There is no such thing as certainty. Different assets perform differently during different time periods, so owning a diverse portfolio is advantageous. Individual securities that have had outstanding recent returns should be scrutinized rather than extrapolated into the future – these same fantastic runs can quickly turn to erase the majority, if not all, of their returns.
Wealth & Tax Management Key Takeaways
Matt Morehead J.D., CEBS, has joined the Janiczek team as Managing Director of Wealth Management. Matt brings 20+ years of experience in the high and ultra-high net worth space. 10 of those years were with Janiczek in the early 2000’s, making him an excellent addition to our team. Matt will lead our continuous development in advanced tax planning analysis and strategies, in addition to his responsibilities as Managing Director of Wealth Management.
It’s tax time… and although we’ve worked closely with clients and their tax advisors, we’re only a phone call or email away if there’s anything we can do to help with tax compliance/tax return compilation.
Interest rates and inflation are continuing to rise, as anticipated. In upcoming semi-annual clarity sessions, we will continue to assist clients in adjusting balance sheets, cash flows, and portfolio and wealth management strategies in response to this changing environment.
Wealth and Tax Management Chart of the Quarter
Market volatility had many investors concerned and emotional as the first quarter of 2022 came to an end. We believe the Investor Behavior Penalty (chart below) is a great reminder of the negative consequences investors may face if they make decisions based on emotions over logic. Over time, this type of behavior can impact Your Wealth. Optimized.
Janiczek Wealth Management – At a Glance
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