Happy Spring. Headline news is as sensational as it has ever been these days. So much has changed just since the fall of last year; a war in Eastern Europe and raging inflation has gripped everyone’s attention. Q1 2022 was not a good quarter for investors, both equity markets and bond markets were down, some with more conservative portfolios actually fared worse than those with predominantly equity portfolios. In times like these it is more important than ever to take a step back, keep things in perspective and think through fundamentals. Not just fundamentals on investment policy, but revisiting your own cashflow analysis, needs for the future, projected net worth – the work that we’ve always done to gain perspective on how we are trending in order to help us make better decisions today.
Every Monday I have the opportunity to plug in to the chief investment strategist for two of the world’s largest asset managers, I never miss. Some of the recent commentary has been very interesting, the world is changing at a very fast pace. The market seems to have digested the war at this point. Markets are a leading indicator and generally move on the anticipation of events but settle down once the events take place. That doesn’t mean market volatility and risk will go away, it just means perhaps it has digested the fact that it has the potential to be a long-term conflict, and while structural economic issues will certainly be impacted, corporate profits are a different story. Global economies are still in a reopening phase and labour markets are tight – these are positive signs for markets.
Having said that: with all the Covid stimulus we saw in 2020, including a 40% increase in M2 money supply, there will be a challenge for governments to reign in inflationary impacts. There is still some question about where inflation will stabilize. It may not have yet peaked but appears fairly certain that it will ease off as we move through the year. The US Fed is talking about the possibility of 50 basis point rate hikes and the market is currently pricing in 9-10 total quarter point rate increases through 2022, but interestingly pricing in rate cuts after the series of increases. The expected short term rate increases are causing the yield curve to invert (you will hear much about this in financial media), which is also leading to some to call for a US recession in 2022. Many strategists suggest this prediction ignores the current robust labour market and economic health. You will also hear talk of stagflation (high inflation and low economic growth) from many economists. While it is always a possibility, it seems unlikely.
So what does all of this matter? We know markets will go up and down over time; at some point we will see the next recession and markets will fall. The S&P 500 on average falls 14% at some point throughout the year every year, and 2-3 times that every 5-7 years. The last major decline was March of 2020 and the drop was about 35%. Market volatility is the price for equity returns over time. Timing these drops is a fool’s game and will likely leave the majority of investors worse off. Each time one exits the market and attempts to re-enter at a better price they have to be right not once but twice. Selling at the right time and buying at the right time – good luck. The key is to establish timelines for various aspects of your portfolio and construct the portfolio accordingly. Equities should be held for long term growth objectives and ideally not sold in loss positions. Shorter term needs should be managed with shorter term assets classes, cash, bonds, and other short-term instruments. The latter will prove challenging in times of inflation and rising interest rates, but that doesn’t mean those assets should be ignored. These are still the fundamentals that should be followed irrespective of what is happening in the world, a diversified portfolio designed with specific objectives in mind.
If it has been some time since a high level cashflow/net worth trendline update for you – maybe now is a good time. In the meantime, here’s to a vibrant healthy spring 😊