Veritable Notes

Published on // April 22, 2022

First Quarter 2022 Market Recap

In the real world, no one has ever been given the ability to see that a particular time is the best time to buy stocks. Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow. Jason Zweig, WSJ columnist.

The first quarter of 2022 was a stark reminder that the market’s steady ascent since March 2020 was bound to get more difficult. Last quarter, we cautioned that “investors need to prepare for an era of monetary policy (in which) markets are likely to be more volatile in response to changing Fed policies.” Tragically, Russia also followed through on its threat to invade Ukraine, which has led to a spike in commodity prices and multiple rounds of sanctions. Combined, these factors led to a volatile downside quarter for both stocks and bonds.

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No amount of sophisticated game theory can predict the short-term impact of geopolitics on markets especially when it involves a high stakes regional war. There are, though, three long-term trends that seem more probable due to the war and the COVID era that preceded it: (1) supply chains will be shorter and more robust in terms of the number of suppliers; (2) European defense spending will be higher; and (3) the weaponization of the US dollar will cause some actors who are ideologically opposed to the West to seek alternatives.

While the trends above are generally inflationary, the question remains…is the current rate of inflation structural or transitory? A recent paper by the Federal Reserve Board of San Francisco attributes 3 percentage points of the current US inflation rate to fiscal stimulus from the CARES Act and the American Rescue Plan. As these programs fade, inflation may moderate without excessive rate increases.

It’s also comforting that earnings data remains positive for the coming year. For instance, despite the war in Ukraine, earnings per share growth for global companies as measured by the MSCI All Country World Index is expected to be +6% in 2022 according to FactSet. Prior to the invasion, the consensus expected 7% growth. As such, we believe the playbook should remain similar to last quarter – have faith in the future but maintain enough dry powder to capitalize on bouts of volatility in both the stock and bond markets.

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The views expressed represent the opinion of Veritable. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Veritable believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Veritable’s view as of the time of these statements.
Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.
Past performance is not indicative of future results. An investor should not assume that the future performance of any specific investment or investment strategy would be profitable or equal to past performance levels. All investment strategies have the potential for volatile returns and loss of capital.

Veritable Notes

Published on // April 20, 2022

Domestic Investment Grade Fixed Income Market Summary – March 2022

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Veritable Notes

Published on // March 11, 2022

Domestic Investment Grade Fixed Income Market Summary – February 2022

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Veritable Notes

Published on // March 08, 2022

Domestic Investment Grade Fixed Income Market Summary – January 2022

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Veritable Notes

Published on // March 08, 2022

Fourth Quarter 2021 Market Recap

The real danger comes from [the Fed] encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking, in effect standing by while bubbles and excesses threaten financial markets. (Paul Volcker)

Let’s just say it…2021 was a great year for the stock market!  Global equities returned 18.5%; the S&P 500 Index averaged a new high every 3.5 trading days; and drawdowns were modest and infrequent.  Unfortunately, it’s not always going to be this easy.  We must acknowledge that the market’s sharp and consistent rise was largely attributable to extraordinary monetary and fiscal stimulus designed to sustain the economy throughout the pandemic.  While the stimulus proved essential in avoiding recession and promoting the fastest recovery in US history, its impact could morph from beneficial to harmful as life returns to normal.  The highest consumer price inflation reading since the 1980s (6.8%) and speculative excesses in various markets are just two examples of the potentially detrimental effects that ongoing stimulus could have.

The Fed recognizes these risks, as evidenced by minutes of their December 2021 meeting, which were released on January 5th.  Those minutes conveyed the need for policy adjustment more intensely and urgently than prior releases, particularly because inflation has proven to be more persistent and widespread than anticipated.  However, there’s a big difference between recognizing the risks and actually navigating a path between being too aggressive (which could lead to an economic slowdown and pullback in the capital markets) and being too accommodative (which could lead to higher inflation).  The Fed itself may not even know the answers to some basic questions such as: Is today’s inflation the result of supply chain issues or its own monetary policy?  How has the size and structure of the work force been changed by the pandemic?  How large should the Fed’s balance sheet be as things return to “normal”?  What real interest rate is consistent with full employment especially when facing the massive investments needed to address climate change?

Perhaps all that can be said is that investors need to prepare for a new era of monetary policy in which surfing the wave of liquidity is unlikely to be the optimal strategy.  Given that markets are likely to be more volatile in response to changing Fed policies, one should consider maintaining some dry powder in case periodic over-reactions present attractive entry points.  Within equities, value-oriented and cyclical issues (including international stocks) trade at substantial valuation discounts to growth stocks and could offer attractive relative returns.  However, no matter what happens, one shouldn’t expect a repeat of 2021 for some time.

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The views expressed represent the opinion of Veritable. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Veritable believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Veritable’s view as of the time of these statements.
Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.
Past performance is not indicative of future results. An investor should not assume that the future performance of any specific investment or investment strategy would be profitable or equal to past performance levels. All investment strategies have the potential for volatile returns and loss of capital.