- January, and its intense volatility, was a bit of a shock to investors after coming off the strong close 2021 had for the broad markets. The S&P 500 took a 5.3% hit, and more significantly the NASDAQ experienced a 9% sell-off lead by Tech. The Russell 2000, representing small caps, was down nearly 10%. This reflected the markets change in appetite, shifting quickly away from growth companies towards more stable companies with current earnings and cash flow. The catalyst for the volatility was largely caused by commentary from the Fed, seeking to act against significant inflationary pressures, as reflected in huge spikes in CPI, which haven’t been seen for nearly 40 years.
- International Markets fared better than US markets overall, lead by the developed Europe and the relatively stable economies such as the UK and Germany. However, inflation is not just isolated to the U.S. as the European Central Bank & the Bank of England also made changes to their monetary policies and looked to lift rates since the start of the pandemic.
- US Fixed Income performance was within expectations given the Fed’s hawkish stance in attempts to combat inflation. Bond prices slid and we saw the treasury yield curve flatten as yield rose over a quarter of a point for the 10-year and the 2-yearrose as much 45 bpts. This trend extended to the corporate bond market as well with a slightly higher impact lower quality Bonds.
What we Did:
- With few places to hide between a broad market equity sell off and bond prices dropping in response to the Fed, we stuck to our investment disciplines. From a Global Equity perspective, we were well positioned, holding excess cash and lean towards value. We did deploy some of our dry power increasing dividend focused value and added back some of our previously trimmed growth explore at the end of the month. We also felt that semiconductors sold off too much, even though various supply chain issues might cause short term volatility, the long term growing demand makes that thesis an attractive buy.
- While we were not surprised to see small and mid-cap growth continue to be out of favor, as it was at the end of 2021, the extreme sell off these companies experienced in the first few weeks of January was much stronger than expected. We took advantage at the end of the month increasing our allocation to companies we owned and felt confident in over the coming years. As example of this was adding more of The Trade Desk (TTD) and making it one of our top holdings in the growth portfolio. We also initiated new positions in stocks we believed were good companies but had previously been trading at valuations which made them unattractive to us, ROKU for example.
- With growth selling off and rotation towards companies with current earnings and cash flow, we trimmed back exposure to companies that are still in earlier stages of growth and years from profitability, as we expect them to stay out of favor for an extended period. The flip side of the risk-off movement and “flight to quality” was a well positioned Dividend Income portfolio. Few changes needed to be made in our value-oriented strategy as it held up well in January and significantly outperformed the broad markets.
- Regarding fixed income, we continued to focus on lower duration, in efforts to maintain an above average yield, we have not shied too far away from corporate bonds, preferred or high yield. For now, our concern for volatility in the fixed income space is more towards a hawkish Fed and less so with credit quality.
What we are Watching:
- Inflation was a concern heading into the new year, and that concern has been validated by the markets in January. While increase in prices for everyday consumer goods are a concern, what is really a focal point is how the Fed is reacting to intervene in interest rates. The balance between keeping these very high CPI numbers + the cooling down of the economy + easily spooked markets, is just about what everyone will be watching.
- Supply chain issues, which have undoubtedly added fuel to the inflation fires burning around us, will likely continue to have a negative impact on multiple facets of the market. We will be keeping a close eye on earnings over the next month. A series of poor earnings could continue this year’s sell off, while stronger than expected number could provide the support the market seems to be in dire need of.
- Lastly, we will continue to be watching the political landscape both domestic and abroad. As COVID fears have dissipated (despite the virus still being very present!), the focus has shifted more towards geopolitical issues – mainly Russia and it’s neighbor Ukraine.