Q2 2022 Client Commentary: What a 1st Half!
The first ½ of this year was as ugly as I’ve seen in my investment lifetime. I began in the business in 1985, and this first 6 months was the worst since 1970. Most of the obvious culprits are: runaway inflation caused by too much money supply, the pandemic, and labor shortages. The hawkish “to the death” attitude of the Federal Reserve is certainly a deterrent for equity buyers. Remember the old stock adage: “don’t fight the Fed.” In simplest terms, stocks generally have not done well in rising rate environments. There are certainly other contributing issues, the Russia / Ukraine war places an uncertainty in geopolitics, as well as the energy markets, while the U.S. grapples with the transition to “green” energy sources. All of these factors rolled into one giant nasty ball have made the first 2 quarters of 2022 a less than pleasant environment for investing.
At the same time, neither digital currency, nor silver or gold, have offered any place to hide. Bonds have actually been worse. With the advent of the aforementioned inflationary issues, bonds began a steep and steady decline. I find it very interesting, because with every one of these financial downturns, people are always looking to find the perfect hedge against dollar, stock, and bond declines. Nevertheless, and still remaining true, if you look back to 2008 Great Recession, all asset classes moved down in a perfect 1.0 correlation. My point is sometimes it makes more sense to step back and decide how much money is to be allocated to risk assets that have higher potential for more gains and greater loss. In this same time period, I have bought some property which has been doing okay, and it has the added bonus of giving me a place to live. Therefore, now might be a good time to consider paying down any debt or mortgages.
So, what happens now? The financial markets look like they could be setting up for a recession. Inflation is cooling off demand, and consumers are pulling back a little. This is all normal and natural. A recession would not be the worst thing in the world, it certainly would be better than stagflation or a depression.
None of what we are experiencing is new. Our economies and markets have dealt with it in the past, and they will again. We feel it is better to hold onto your great dividend paying companies at this time, and simply ride this period to completion. The chance to make a 10% return will hold you in better stead in the long term, rather than racing to money markets or bonds, which will most definitely give you a loss when inflation is factored into the mix.
Therefore, here’s to a much better second half. May prosperity and sanity begin to return to all of our lives.
YTD Stats for first 6 months of 2022: S&P 500 – (20.58%), Russell 2000 – (23.93%), Dow Jones – (15.31%), S&P SmallCap 600 – (19.53%), and Global Aggregate Credit 1-5 years (unhedged) – (8.67%).