Our "Bumpier but Bullish" theme for 2022 continues to play out as markets gyrate within normal correction territory. Though this volatility may make investors feel "queasy," it is likely the result of the fact that we have not had a normal 10-15% correction since 2019! It is important to keep in mind that a normal bull market experiences three to four 10-15% corrections every twelve months, the last two years being an enjoyable exception. In terms of historical market volatility, it is a return to "business as usual." However, with every market correction comes a wall of worry, and we thought we would shed some light on the overriding concerns that are in the spotlight.

Rising Interest Rates and Inflation
The global economy has been growing at a pace not seen in thirty years – a whopping 6% annual growth rate! Much of this has to do with very accommodating central banks and vaccines that are switching economies back to the "on" position. This is great news for financial markets and is the primary reason that the last two years have provided significant rates of return. Economics 101 teaches us that when economies grow fast, demand outpaces supply and the prices of goods and services exhibit upward pressure, otherwise known as inflation. We are witnessing inflation rates that haven’t been experienced for decades, and we would argue are not simply a result of the pandemic – but of momentous economic growth. As investors, we must stay aware that rising prices are simply a byproduct of a strong economy and that the stock market is, historically, the best way to beat inflation. We are still in the early stages of a new and very strong business cycle that has many of the same characteristics we have seen in prior periods. In each of these prior, early, and strong periods, global central banks have had to reverse course, from monetary generosity to monetary tightening – which is now happening. This has the positive effect of moderating inflation through managing the economy’s growth rate. It’s a tough task, but one we feel that central banks and our Federal Reserve will be successful in achieving. In our opinion, based on current data, investors’ concerns about this policy change are overblown – we are simply transitioning into Phase II of the business cycle. Global economies and corporate profits are robust. Financial markets can sustain rising interest rates at this point in this cycle, but one should expect that volatility will return to the norm – as we are now witnessing.

Phase II of the Business Cycle – The Transition
As we enter Phase II of the business cycle, we must be aware that stock prices will no longer trade on central bank generosity, as they did over the past two years. Instead, equity prices will trade based on each security’s fundamental merits and earnings growth. As financial markets transition to this new reality, it is important that we manage your portfolio accordingly with a greater emphasis on quality earnings and reasonable price-to-earnings ratios. You may have noticed that we have been making these changes over the past few months. For those investors who believe that the market will soon return to the speculative nature of 2020-21 and the dramatic rise of overvalued SPACs, IPOs, and "highflyer" stocks, we think they will be sadly disappointed. The speculative stocks have been "crushed" over the past few months, which is another positive sign that markets are now on a healthy footing as we transition to Phase II of this great, robust global economy.

Ukraine
We would not try to be so bold as to predict the outcome of the escalating situation in Ukraine. However, we do know a few things: it isn’t clear what the outcome will be, and investors who make rash decisions based on pure speculation are likely to be in error. What we can do and have done as it relates to this conflict is move your portfolio towards sectors that have and may continue to benefit from it. The most obvious is the energy sector, which we have been adding to, as well as companies that are far removed from the conflict. In addition, we are now a bit less invested in equities as a whole to reduce risk. We hope that this situation is resolved through diplomacy and we will be keeping a close eye as it progresses.

We continue to be optimistic in our "Bumpier but Bullish" 2022 outlook, and beyond recent concerns, feel that stocks can deliver 8-12% returns for the full year making this correction an opportunity for those who are not invested. Within this outlook, as you know, we are also acutely aware that we are dealing with the "known" as well as the "unknown." Therefore, we continue to apply our Active Risk Management, which includes the flexibility to reduce your stock exposure, the careful management of your exposure to different economic sectors, along with the use of carefully placed stop-loss orders. This process is not intended to mitigate normal market corrections – its intent is to mitigate catastrophic loss, which in the past has served us well.

We hope you find this update helpful in a sea of uncertain news and volatile markets. If you have experienced any changes in your financial situation or have questions, please feel free to let us know.

From all of us on the team, we thank you for your vote of confidence in our work!

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