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The Brave Report: Market Commentary for Q1 2024

Click here for .pdf version or this report: The Brave Report-2024Q1

I guess markets only go up….  The markets have continued to surge to start the year, adding to the gains we saw to close out 2024.  Equity valuations seem a bit stretched but economic data has also surprised to the upside creating an environment where the Fed is comfortable keeping rates higher for longer.  This higher rate environment would normally be a negative for stocks, but investors continue to focus on the resilience of the economy rather than the elevated rates.

We are probably due for a pause or consolidation period for stocks but it seems that any dips, even small ones, are quickly bought up as investors look to put excess cash to work and chase returns they may have missed out on over the past twelve months.  Without a major change in the economic outlook or some more certainty from the Fed, I do think the upside in the markets could be a bit muted from current levels but if we do see a pullback of any kind a lot of cash will come off the sidelines.

Market Overview

The markets continued their rally to start the new year, maintaining the momentum we saw to close out 2023.  The S&P 500 finished the first quarter right around all-time highs, gaining 10.1% since the start of the year.  The NASDAQ was not far behind, increasing by 8.5% and the DOW industrials added a respectable 5.6%.  After bottoming in late October, markets have been on a straight line up.  This has seen the S&P 500 add 28% over that brief timeframe. While many of the gains can be attributed to a handful of high-flying tech stocks, the rally has been sustained by other participants joining the fun.

On the fixed income side, we saw rates steadily climb throughout the quarter.  The yield on the 10-year treasury rose from 3.86% at the end of 2023, to close the first quarter right around 4.25%. While a sharp drop in rates to close out the year helped to add fuel to the equity markets, during the first quarter, markets were able to shrug off the steady climb in rates.  We have continued to receive clues from the Fed that rate cut expectations were a bit overzealous and this has driven the recent rise in rates.

As has been the case for the past few years, speculation around the Fed’s next steps has been the driving factor around short-term moves in the stock market. However, what we have seen in recent weeks is that as expectations about the number of rate cuts this year have dropped, the resilience and strength of the overall economy has increased.  A year ago, fears of a recession were percolating through the markets, but that fear has dissipated. It seems the economy has handled the higher rate environment much better than many had feared.  I am not saying that we are completely out of the woods yet, but the strength of the economy has given the Fed much more flexibility.

On the economic front, we have seen inflation drop. Albeit it is still above long-term targets, and the speed of the drop has slowed if not stalled.  Jobs numbers continue to impress and have shown little impact from the elevated rate environment.  While this is very positive for the economy, it has reduced the need to cut rates more quickly.  This data point will continue to be important to watch because we don’t want the Fed to wait until it is too late to start cutting rates back to more traditional levels. We have also seen manufacturing data improve, which shows a deeper strength in the economy and that economic growth has some support in a broader range of sectors.

While economic data has been mostly positive, I do not think we are in an environment to go all in on equities.  First and foremost, the market has already run higher rapidly.  We have hardly seen any pause in the upward momentum and there are definitely some areas of the market that seem overbought.  Valuations across many sectors are becoming very stretched and unless we see some blowout earnings over the next few quarters, I think the market upside will be capped into year-end.  I am not saying the market won’t go up anymore, but the pace of the rise will need to slow or the entire market will be highly overvalued.  For the longer-term health of the bull market, some consolidation or even a small pullback would be very healthy as investors let data and risks catch up with current valuations.

Outside of stretched valuations, there are also a number of risks that could weigh on markets moving forward.  We have already discussed the ongoing uncertainty around the path of the Fed.  This will continue to weigh on markets until we have a firmer pathway.

Geopolitical risk has also increased over the past few months.  Wars in Ukraine and the Middle East must be factored in, especially when investing abroad.  So far, the economic impacts of these conflicts have remained pretty isolated, but the escalation of these conflicts could have larger implications in the markets and must be monitored.

Lastly, it cannot be ignored that we are in an election year and domestic issues are moving to the forefront.  Debates over taxes, immigration and government spending will be ever-present.  As we get closer to November and the potential outcomes of the election become clearer, we will need to factor in the economic impacts of the various scenarios.  This is not just limited to the presidential election but also those in Congress.

Strategy Commentary

With these variables all factored in I am very comfortable being patient with any new money.  I am not in a rush to put much new cash to work right now. In the same vein, I am also not reducing any equity exposure either. I think we will see some consolidation or a pullback sometime in the next quarter. At that point I will look to round out any allocations with new cash. However, until that point, I am comfortable earning 5% on my cash using short-term treasuries or money market funds.

On the domestic side, I continue to maintain my overweight to technology and communication services.  However, if both sectors continue to run, I may take the opportunity to trim some of the exposure.  Both sectors are up over 40% in the last 12 months so some profit-taking may be warranted.  Other sectors, such as industrials and materials have begun to catch up a bit over the last three months and will warrant keeping an eye on, especially if we continue to see strong economic data.  Small caps continue to be intriguing as well.  Their valuations are quite low when compared to the large-cap names that have run so much in the past year.  At some point they will have to play some catch up so I will look to add more domestic small caps if the opportunity presents itself.

I am still quite cautious on the international side.  Geopolitical risks still remain, and any escalation of conflicts could ripple through these markets.  Japan has been one bright spot internationally over the past year but like domestic markets, has run quickly to all-time highs so we are not at a great entry point.  Economic growth numbers have also lagged in international markets, so I don’t see much opportunity in the short term.

With rates climbing back up a bit in the past few months, I continue to favor locking in 5+% in short-term treasuries until we see some more confirmation from the Fed that they will cut rates.  With the run equities have been on, I am also comfortable sitting in short-term treasuries with new money while we wait for a better entry point into equity markets.

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The Brave Report: Market Commentary for Q4 2023

Click here for the .pdf version of this report: The Brave Report-2023Q4

Well, that escalated quickly…. Markets surged rapidly to close out the year, posting back-to-back positive months to finish the year near all-time highs.  The S&P logged its best quarter since 2020, helping to erase many of the losses from last year.  Improving inflation data, dropping rates and optimism around the Fed all contributed to a more bullish stance.  Performance was very top-heavy as the larger tech companies contributed disproportionately to the quarterly gains. These bellwethers were able to avoid a slowdown in earnings within an elevated rate environment and were rewarded for it.  We will need to see an expansion in the number of companies leading the markets if this rally is to continue in 2024.

Market Overview

After a brief pause during the 3rd quarter, the markets surged again in the 4th quarter to cap off a stellar year.  Even in the face of geopolitical unrest around the world and uncertainty around inflation and rates, all three major indices surged to close out the year.  The S&P rose 11.2%. The DOW rose 12.4% and the NASDAQ jumped 13.6%. This allowed the S&P 500 to end the year up more than 24%. This represents a nice bounce back after the drawdown we saw in 2022.  There continues to be uncertainty around the Fed’s next moves, but markets have been pricing in a very optimistic scenario and a softish landing.

On the fixed income side, we saw a massive drop in rates across the entire yield curve as inflation data came in better than expected.  After peaking around 5% in mid-October, the yield on the 10-year treasury dropped more than a percent to end the quarter below 4%. This rapid drop in rates helped to add fuel to the equity markets. The bond market is now pricing in an end to rate increases and is predicting a reversal to rate cutting sometime later this year.  These decisions will be data-dependent but the current trend in inflation seems to support at least a pause in rate increases.

With cooling inflation and a relatively optimistic tone from the Fed, equity markets were able to surge to close out the year.  While the Indices had a great quarter (and year), it is important to look a little deeper at the numbers and what led to such great gains.  What we find is that most of the market’s gains can be attributed to just a small handful of stocks.  Some have dubbed these the “Magnificent 7”. They include Apple, Alphabet, Microsoft, Amazon, Meta, Tesla and Nvidia. These 7 large tech names now make up more than 30% of the market cap of the S&P 500 and saw their valuations surge in 2023.  While the S&P 500 notched a strong gain of 24% for the year, these 7 stocks returned an average of 111% over the same time frame.  Additionally, if we compare the equal-weight S&P 500 with the normal market-weighted average, we saw the biggest margin between the two since 1998.

All these companies have been able to continue to put out stellar earnings numbers and have benefited from the surge in AI-related business.  However, the disproportionate performance between these companies and the rest of the market has painted an inaccurate picture of where the overall market stands.  If the markets are going to continue to outperform in 2024, we will not just need to see these 7 companies perform well, but at some point, the rest of the market will need to contribute.

The main theme we have been discussing over the last year is inflation and how the Fed can bring down inflation without destroying the economy.  So far, they have succeeded in doing so.  I do think the markets are a little optimistic about when the Fed will start cutting rates.  Inflation has come down, but the jobs market continues to remain strong.  For the Fed to start cutting rates, Jobs data will need to weaken a bit or show signs of weakening.  Until that point, I think the Fed will be hesitant to start a rate-cutting cycle.  They will eventually cut rates but the timing of it will be more delayed than many think unless we see some real weakness in the economy.

The hardest thing in the markets these days has been handicapping the Feds’ next move.  I will credit them with staying data-driven and understanding that some of the rate hikes they have done have not yet filtered into the economy.  The economy has been more resilient to the rate hikes than I think most originally anticipated but I fear that this optimism has allowed the markets to get a little ahead of themselves.  I would not be surprised to see a period of consolidation as we wait to get some earnings data which will tell us how much the increased rates are weighing on company performance and guidance.

The other major theme driving the markets this year, especially on the technology side, has been the AI revolution that has seemed to move into the mainstream quite rapidly. I think we are still in the early innings of this movement, but we will start to see how companies can take AI from a fun word to discuss on a conference call to a resource that moves the needle from a company earnings standpoint.  The early winners will be those companies that provide the infrastructure that powers AI.  We have already seen that with the performance of NVIDIA.  The next stage will be companies that can leverage the power of AI to drive business results.

The other big variable I will be watching this year is the election. I am not a huge believer that a President has a large impact on the month-to-month performance of the stock market but historically the market has performed well during the election cycle. The S&P 500 has returned an average of 11.28% during election years and has been positive 83% of the time since the S&P 500 was created. Incumbents like to be able to run on a strong economy and members of Congress don’t want to pass anything that could throw uncertainty into the markets. They will focus more on pro-growth stimulus efforts which can help prop up the economy in the short term.  As the election dynamics become more clear, we will start to see the markets handicap the various outcomes.

Strategy Commentary

With inflation data improving in October and November I cautiously added to some of my equity positions.  This is in no way a full overweight to equity, but I selectively increased some of my equity weightings.  I missed out on some of the runup to close the year but with data improving I felt more comfortable adding to some positions.  I continue to be cautiously optimistic going into 2024 but do expect some consolidation and profit-taking in the short term.  I think we need to see some more certainty around the Fed’s next move as well as some widening of the breadth of the rally before I go fully overweight equity.  The “Magnificent 7” have run so far so fast that I think we will need some other names to lead the next leg higher.

Domestically, I have continued to maintain my overweight to technology and communication services stocks, while also adding to my consumer discretionary allocation.  I have been overweight technology for quite some time now and expect the trade to continue to outperform as we move from the phase of AI just being a buzzword to it adding significantly to company performance.  I do think the large tech names will continue to perform well but expect some other names to start to catch up. Additionally, if rates continue to decrease, we will see small-cap stocks perform better.  Their valuations are much more reasonable when compared to large-cap companies, but they have been held back by high financing costs and uncertainty about inflation.  If we get any directionality from the Fed, then I think small caps will do some catching up from a valuation standpoint.

Internationally, I am still focusing on large, developed economies.  Geopolitical uncertainties still plague many of the developing markets.  If I were to look at some small emerging companies, I would focus on India and some Latin American names as their economies are less exposed to the current geopolitical conflicts.

On the fixed income side, even though rates have dropped, I still think there are some opportunities at the short end of the curve, especially if you are worried about the Fed raising rates again or delaying their cuts.  Money funds earning more than 5% have also been an attractive place to park money without having to worry about price fluctuations.

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The Brave Report: Market Commentary for Q3 2023

How high will they go?…. Rates continued their historic climb over the past quarter, and it is now expected that rates will remain high throughout 2024. The larger question that remains is when will these elevated rates start to bite the economy.  So far, the economy has remained resilient in the face of these elevated rates, but I fear there will be a point where the holes in the economy are impossible to ignore. By that time the Fed will have backed itself into a corner with little ability to get the economy going again.

There will still be winners in this scenario, but investors will need to be selective in where they park their money. In the meantime, these elevated rates on treasuries should be taken advantage of while we wait for more economic data to filter through.

Market Overview

After a strong first two quarters of the year, markets took a step back in the third quarter. All three major indices lost ground over the last three months with the S&P 500, NASDAQ and Dow down 3.6%, 4.1% and 2.6% respectively. Rapidly rising rates, recession fears and geopolitical uncertainty all weighed on stocks. Investors took some risk off as we saw large inflows into treasuries. However, even with the rising rates, labor markets have remained resilient and while corporate earnings dropped, they still outperformed expectations.  At some point, we will see the impacts of the higher rate environment on the overall economy, but that impact has been muted so far and has only been visible in some areas of the economy.

The fixed-income side of things has been the driving force behind markets in recent months.  We saw continued rapid jumps in rates across the yield curve. The 10-year treasury closed out the quarter with a yield just below 4.7%, its highest level since 2007.  More than just the current level has been the speed of the rise.  As recently as May, the yield was around 3.2%.  On the shorter end of the curve, we have seen the yield stay above 5% on everything from the 1-month to the 2-year treasury.  Because of this, there has been a rapid increase in short-term treasury exposure as investors continue to be comfortable earning 5% while they wait for the equity markets to show some more conviction in their directionality.

Downward pressure on bond prices picked up steam during the third quarter. These rapidly rising rates put pressure on stocks amid fears that inflation is stickier than most thought and that the Fed will be forced to raise rates again before year’s end. The Fed has slowed its pace of increases, but it is now feared that this environment of elevated rates will be around for longer than many expected.  The most recent Fed “dot-plot” illustrated a higher expected rate throughout 2024.

The big issue we are seeing is that this rise in interest rates has yet to fully bite the economy. Economic data has continued to come out stronger than expected.  The consumer has remained resilient in the face of rising rates, and the labor market has remained strong.  Unemployment still sits below 4% and we continue to see job growth.  The Fed watches these labor numbers closely, as one of their mandates is full employment. While job growth has slowed slightly, we have yet to see elevated interest rates have the desired impact on the labor market.

The difficult thing investors are dealing with is that rate increases tend to have a lagging impact on the economy.  Increased rates don’t have a short-term impact but at some point, the scales are tipped and you see these rates start to have a measurable effect on the consumer and the labor market.  The fear is by the time they start hurting the economy, they will already have been raised too far and the Fed will struggle to right the ship. I do think some of this negative economic impact is already priced in but if we see a measurable pullback in consumer spending, the entire economy will be impacted, and we will see some softness in the markets.

The Fed has also been working to bring down inflation. They have been successful in doing so, to a point, but inflation has remained elevated above long-term norms.  Like the labor market, the question remains as to how much damage the Fed will have to do to the economy before inflation drops back toward its target rate.

The Fed is trying to slow the economy to combat inflation but so far, the economy has been resilient to the elevated rate environment in most areas. Corporate results last quarter were stronger than expected and while earnings did retract slightly, they still outperformed expectations.  What we have seen in the corporate world is that there has been some weakened demand in some areas but larger companies, especially on the tech side, have continued to produce record cash flows.  These companies represent such a large percentage of the overall corporate earnings picture that they have been able to mask some of the holes in the economy. This bifurcated economy has made it difficult to get a full picture of how well companies are doing and I think it would be naïve to think that elevated rates won’t have an impact at some point, especially on companies that need to raise debt or rely on revolving lines of credit.  The winners will continue to be those companies that can produce consistent cash flow.

One of the areas where we are starting to see holes and that I fear could be the first place we see some major issues is in the commercial real estate sector, especially when it comes to office space.  Increased vacancies combined with increased financing costs will make the current model difficult to sustain.  The problem is that issues with these large commercial loans could spill over to the banking sector as they hold and repackage much of this debt.  While I don’t think this will ripple through all sectors of the economy it is something I will be watching closely going out into next year.

Strategy Commentary

Over the past quarter, I have continued to maintain a neutral to cautious positioning across most allocations.  Rising rates along with the other uncertainties that I have discussed have presented a market environment where the risk is to the downside.  I have refrained from adding to my equity positions besides some basic rebalancing.  I am currently comfortable increasing exposure to treasuries, mostly on the short end of the curve until we see some stabilization of rates.  While I have not been buying much equity, some of the recent pullbacks have brought a few names and sectors back into a “buy” range. I will be quick to add to some of these positions should economic and corporate data warrant.  As discussed, there are still some areas of the economy that are holding up, even with higher rates.  These will be the winners if we do see a softer landing for the economy because they provide equity exposure with reduced risk.

Domestically, I am maintaining increased exposure to large technology and communication services stocks.  Growth and technology names tend to be more sensitive to rising interest rates, but we saw during the most recent earnings period that these names have held up better in the current economic environment.  I am still avoiding the more speculative names and focusing primarily on those large tech names that have strong balance sheets and robust cash flow.  These “growth” names are now seen as a safety trade and a good place to park money during times of uncertainty.

Similarly, on the international side, I am also focused on large, developed names.  Geo-political uncertainty, both in Ukraine and the Middle East has led to an environment where any increased international exposure should be done cautiously.  I continue to like the longer-term story in India but am in no rush to add exposure.  Should the geo-political landscape improve, I will again look to increase exposure here.

On the fixed income side, I have continued to add exposure, especially on the shorter end of the curve. Rates have continued to rise rapidly over the past quarter and this has provided the opportunity to park excess cash in these high-yielding treasuries.  I have also started to look at some higher-quality municipal exposure for taxable accounts.  The current after-tax yields are becoming difficult to ignore. When we get to a point where it looks like rates are peaking, I will start to move out on the curve to get a larger benefit from dropping rates. Going into year-end, I will also be looking to tax loss harvest in any of my existing long-dated exposure as the prices have dropped quickly in the rising rate environment and can help provide a tax balance to the equity gains from the first half of the year.

Click here for .pdf version of this report: The Brave Report-2023Q3

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The Brave Report: Market Commentary for Q2 2023

Click here for .pdf version of this report: The Brave Report-2023Q2

What recession?  Markets continue to grind higher as investors price in a soft landing for the economy and only perhaps a mild recession. This performance has been primarily driven by a rush to the large tech names that got beaten up last year. This is partially because these companies have been able to maintain their profitability, but they are also being viewed as a safe place to park assets in case data turns negative. I do think markets have been a bit overly optimistic so I would not be surprised by some profit-taking at some point.  However, if the economy weakens more than expected then we could see a rush into short-dated treasuries.

Market Overview

During the second quarter, the markets added to their first-quarter gains. Although, there continued to be a large performance gap between the major indices. The Dow industrials gained an additional 3.4% and the S&P gained 8.3%. The NASDAQ continued to be the big outperformer on the year, adding 12.8% bringing its year-to-date return to around 31%. The NASDAQ was the big underperformer last year but that has reversed as investors have flocked into some of the big tech names.  Even with the gains we have seen I continue to see the large tech names outperforming as they seem to be the safety trade while other uncertainties exist in the markets.

On the fixed income side, rates continued to rise after being range-bound for much of the quarter. The Fed has hinted that future rate hikes may be needed, and this has put more upward pressure on rates.  After trading around 3.5% for much of the quarter, the rate on the 10-year jumped to end the month of June at a yield just above 3.8%.  Rates across the curve have continued to rise with the short end of the curve breaking above 5%. The spread between the 10-year yield and the 1-year has now reached a level that we haven’t seen since the early 1980s. Historically, this inverted yield curve normally predicts an impending recession, but we will still have to wait and see if the Fed can orchestrate a soft landing for the economy while reigning in inflation.

Inflation pressures, rising rates and the prospect of a recession have still been the driving factors in this market. The question remains of how high the Fed will need to raise rates to get inflation back to their long-term target rate and if they can accomplish it while limiting the damage to the overall economy.

So far economic data has come in mixed.  We have seen some downward pressure on inflation, but we also continue to see strong jobs data coming out which indicates that the economy is still quite strong and can handle more rate increases.  The Fed has hinted as much.  Their expectation is for a few more hikes but at a much slower pace.  We have definitely seen weakening in certain parts of the economy but overall, the economy has remained resilient.

As we enter earnings season, we will start to get a much better picture of how the economy is performing under the surface.  I predict there will be some definite winners and losers.  I also think companies will continue to express a much more cautious outlook in their guidance as economic uncertainties for the next few quarters will make it difficult to project future growth and profitability. I also predict we will start to see the impacts of increased financing costs negatively impacting earnings and adding to the uncertainty, especially for smaller companies.  Larger companies will be able to weather these increases much easier.

From an investment standpoint, we have seen money flood into the large tech names so far this year.  The top seven or so names have been responsible for a majority of the gains in the NASDAQ and the S&P so far this year and I see this trend continuing.  Rather than run to just treasuries or cash for safety, investors are using large technology names as the safety trade while they wait out future economic data.  These companies have continued to grow and be highly profitable.  They were also some of the names that were beaten up the most last year so had a lot of upside potential going into the year.

I still remain cautiously optimistic as we play the waiting game on more economic data. I do think the markets are currently pricing in a very soft landing and might be a little overly optimistic.  The reason I remain cautious is that if we start to see economic data deteriorate or the Fed is forced to raise rates more aggressively then we could see a selloff in risk assets and a rush into safety.  This rush to safety would be in the form of buying short-dated treasuries along with the large tech names.  With the 2-year paying around 5%, it is not a bad place to park some excess cash while we get more clarity on the direction of the economy.

While I think large tech will continue to outperform, if you have made some money in the large tech trade so far this year, it would be appropriate to trim some of this exposure as it probably represents too large of an overweight.

Strategy Commentary

I continue to maintain a relatively neutral stance across the entire allocation.  As I mentioned earlier, I think the markets are currently pricing in a very soft landing for the economy.   If this continues to play out then I am comfortable maintaining my current exposure. However, if the Fed is forced to raise rates again or we see some pronounced slowing of the economy then I will look to raise some cash and wait things out in short-dated treasuries.  I do think we will see some continued volatility as new economic data comes out but we will need to see true directionality from the economy to make any large-scale changes.

Domestically, I am maintaining increased exposure to large technology, communication services and consumer discretionary.  I have also made some slight shifts away from some more defensive value exposure and back to large-cap growth. If the soft landing doesn’t play out as expected I do think some technology names will sell off, but I also think the larger profitable ones will receive inflows as part of a flight to safety.

Internationally, I missed out on some opportunities in the first quarter so have increased exposure slightly over the past few months.  Most of this increase has been in developed large-cap exposure.  The conflict in Ukraine and the potential ripple effects from the war still prevent me from increasing my exposure much more.  I also continue to keep an eye on emerging markets names but my focus has shifted slightly away from China and I am much more closely watching other economies, such as India.

On the fixed income side, I continue to add to the short end of the curve.  The yields on short-dated treasuries continue to rise and I have been rolling maturing treasuries along with excess cash into new ones. If the markets are wrong and we do not see a soft landing then treasuries will be the place to weather the storm.

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The Brave Report: Market Commentary for Q1 2023

Click here for the .pdf version of this report: The Brave Report-2023Q1

Over the past few months, I have paused the publication of the Brave Report in an attempt to fine-tune the proper frequency and format for the report moving forward.  I have spoken with clients and the consensus seems to be that the format works well but publishing on a quarterly basis (rather than monthly) along with one-off pieces when specific events arise is the preferred frequency.  If at any time between publications you have a question about a specific topic and how it impacts the markets, feel free to reach out directly.

Banking crisis, inflation and recession… These are the buzzwords for the past quarter.  Inflation and the fear of recession have been looming over the markets for well over a year now.  Rates have risen drastically to keep inflation in check and many fear that the only way to get it back to “normal” levels is to slow the economy into a recession.  Markets are now trying to handicap how deep and long-lasting any economic damage will be.  Throw on top of this the failure of a few banks and the fears of a repeat of 2008 come streaming back.  However, even with all of this negativity, the markets were able to rally throughout the 1st quarter. They had been sold off pretty heavily last year so they definitely had some room to jump but this resilience in the face of a lot of uncertainty should be looked at as a positive.  For the remainder of the year, I expect this push and pull to continue. Range-bound volatility will be the norm until we can get some more clarity on the strength or weakness of the economy.

Market Overview

Following what was the worst year in the markets since the financial crisis, the markets bounced back in the first quarter of 2023. The bounce, however, was not market-wide as there was a large dispersion between the three indices. During the quarter, the S&P 500 rallied 7% and the NASDAQ rose just shy of 17%. The Dow Industrial Average only advanced slightly, gaining around 0.3%.  This was a reversal of how things ended last year when the tech-heavy NASDAQ was the big underperformer. During the quarter we saw a rush into larger, profitable technology names as cost-cutting within the sector made headlines. These names emerged as the ones that are expected to be able to withstand the elevated rate environment and any subsequent economic downturn. They were also some of the names most beaten up over the previous 12 months.

On the fixed income side of the equation we are still seeing an inverted yield curve, with rates on the short end of the curve remaining elevated above their long-dated counterparts.  We did see rates come down a bit during the month of March as the Fed laid out its projections for future rate hikes and inflation continued to drop. However, if we look back a year, the rate on the 10-year is still 1.25% higher than a year ago.  The Fed, has signaled an end to their rate increases but there are still a lot of moving parts in the equation.  If inflation remains at elevated levels, we could see rates stay high for quite some time. On the opposite side, if economic data starts to signal an imminent recession, we could see rates soften.

SVB

The recent failure of Silicone Valley Bank, along with some other smaller institutions has brought memories of 2008 back to the forefront.  Before I dive into it, I want to make clear that what we have seen in the banking sector over the past month is very different than what we experienced in 2008.  The regulatory environment is much different, and our banking system is much better capitalized than it was back then.  With that said, there will be some long-lasting impacts from this recent turmoil.

First, what happened to SVB?  SVB was a unique player in the banking industry, catering primarily to venture capital firms and venture capital-backed companies and founders.  SVB was able to leverage these relationships to be a one-stop shop for the venture community.  These types of deposits were not very “sticky” as companies would routinely need access to their capital as they spent money to operate their companies.  They also had one of the largest non-FDIC insured deposit bases amongst any bank in the country, meaning that the potential for losses, if depositors couldn’t get their money out, would be substantial.

Along with other regional banks, they would offer higher than average rates on their banking deposits to help attract new capital.  In order to offer these higher rates, they had to increase the risk they took while investing these deposits, often investing deposits in longer-duration assets and  a mortgage-backed portfolio.  The problem with investing in these longer-duration assets is that as rates rose the portfolio lost money unless they could hold the positions to maturity.  As redemptions were called in, the bank was forced to sell some of these long-dated assets at a steep loss.  This raised concerns about the financial stability of the firm and when they attempted to raise capital through a stock sale, depositors panicked and started to withdraw assets at record rates.  The government had to step in and freeze redemptions to prevent a further run on the bank and within a few days the bank was no more.

From what we know so far this looks like a product of poor corporate management and not something that is systematically wrong with the banking sector. Thankfully for most depositors, the government was able to step in and insure all depositors, at no cost to taxpayers.  The good news is that this helped to prevent further contagion throughout the banking industry which would have been devastating for the industry moving forward. On the flip side, by the government stepping in they have removed a moral hazard from the banking sector.  If banks and depositors think that the government will just step in during a future crisis, then they are less likely to have proper risk controls in place to protect depositors.

There will be some other long-lasting impacts moving forward. As we saw during the days following the collapse, depositors flooded to the larger money center banks. This will lead to the big banks getting bigger and create a landscape where the smaller regional banks will struggle to attract new capital. Furthermore, the smaller regional banks could become more risk-averse in their investments and thus lose the benefit of offering depositors higher rates.  Profit at these smaller banks will take a hit and the large banks will reap the benefits.

Inflation and Rates

The big market-driving story over the past year has been elevated levels of inflation and the subsequent rise in rates to help combat this inflation.  The big question that investors have been asking is can the Fed thread the needle of taming inflation without causing a widespread recession?  It is a tough task because the impacts of rate increases tend to be lagging so we don’t fully know what impact these rate increases have had on the economy yet.  Pundits, large investors and economists have come out of the woodwork to state their case on what should be done and the dispersion of opinions has been all over the map. Some have said that markets will drop another 20% while others are calling for the start of a new bull market. This has made it very difficult to make investment decisions and even with the jump in some sectors since the start of the year, the markets are still fighting for directionality.

In times like this, when there is a lot of uncertainty, I like to simplify things, and understand what we do know and what we can control:

  • Inflation has been too high for a while but has been trending down over the past 6 months.
  • Prior to the pandemic, inflation was below long-term averages since the financial crisis so some of the jump in inflation could be some reversion to the mean.
  • Rates have been raised to levels we haven’t seen in over a decade, but the Fed has signaled that these rate increases will end soon.
  • The full impacts of elevated rates on inflation and the economy are still not known as there is a lag on this impact.
  • The yield curve is inverted offering investors a way to hide out in shorter-duration assets until the market shows some directionality.
  • The economy and employment market have shown signs of slowing but there are still just under 10 million job openings.
  • Earnings growth is expected to be right around flat if not a little negative but there are still some companies growing rapidly and little impacted by elevated rates.

 

So, what do we do with this information? I think it is important to first point out that I expect these uncertainties to persist for quite some time. There is too much dispersion of opinion within the investment community for real directionality to happen.  We will see continued volatility in both directions but large bounces in the markets will be sold and large drops will be bought creating a range-bound market, albeit with a relatively wide range.  This volatility will continue until we see some consistent data on the inflation and earnings front. I also expect this earnings season to help us understand who is winning in the current environment and in what sectors the signs of recession are starting to show themselves. Earnings guidance will be muted as is often the case during times of uncertainty, but a lot of this is already priced into many names.

For the long-term investor with few short-term capital needs, now is the time to make sure your allocation hasn’t shifted too far out of balance. There has been a dispersion between sectors, company size and style. This can lead to a portfolio being out of balance.

If you are investing in individual names, I would focus on those with consistent profitability and strong balance sheets.  Timing the market during these times of uncertainty can be difficult but adding to quality names when they are priced at a large discount to where they were a year ago can be a good way to add value to your portfolio.  However, I would recommend dollar-cost averaging into any new positions as I think this uncertainty will be around for quite some time, providing ongoing entry points.

I would also look to take advantage of the high rates on the short end of the yield curve.  The spread between the dividend yield on the S&P 500 and the 10-year treasury is larger than it has been in more than a decade, meaning the premium you are paying for dividend yield is not very attractive compared to bonds. Owning the treasuries or bonds directly is a much better option than owning a bond fund as this helps to eliminate price risk if you can hold the bonds to maturity, which is a lot easier with an inverted curve.

Strategy Commentary

I continue to maintain a neutral stance across portfolios.  I expect to see continued volatility for the rest of the year as the markets grapple with higher rates and the prospect of a recession.  Some of the economic slowdown is already priced into markets.  One of the driving factors for the rest of the year is going to be determining if anything more of the economic slowdown needs to be priced in. As discussed, I expect the market to be volatile within a wide range until we get some more certainty on how much the interest rate hikes will impact economic growth.  I am content maintaining a neutral stance until some of these questions get answered. I will look to add to some equity positions if we see a further pullback or we start to see signs that the recession fears are overblown.

Domestically, I am still advocating for a bar-belled approach with exposure to technology and communication services on one end and defensives on the other.  We saw technology pop in the first quarter and the defensives lag, but if we see the market turn more negative, the opposite will be true.  Within these sectors, especially on the technology side, I am still focusing on high-quality, profitable names rather than chasing the more volatile high beta names.  I do think stock picking will outperform for the rest of the year as some names are able to withstand the economic slowdown better than others. Finding these winners can help to drive outperformance in portfolios.

Internationally, the eurozone has performed well so far this year.  I have been neutral on the region so I definitely missed out on some of its outperformance.  I continue to maintain a neutral stance on most developed markets.  The threat of a spillover from the Ukraine conflict still adds additional tail risk to these markets and I am willing to sacrifice the potential outperformance to miss this risk.  The same can be said for emerging markets.  I have selectively added over the past year but these additions have been short-lived.  Uncertainties around China make it tough to invest with much conviction in the region.

On the fixed income side, I continue to reduce the duration of our positions and have been adding short-dated treasuries to most portfolios, especially in instances where we have excess cash. This is a great place to hide out until we have some more conviction in the equity markets. I have also been shifting some assets from bond ETFs to owning the actual securities. Owning the actual bonds or treasuries and holding to maturity eliminates some of the price risk and since we are buying mostly on the short end of the curve, we are not giving up too much liquidity.

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The Brave Report: Market Commentary for October 2022

Click here for .pdf version of this report: The Brave Report-October 2022

Let’s all take a deep breath…. Over the last few months (and pretty much since the start of the year) it has been very painful to look at our account balances.  Without a strong rally into year-end, we are shaping up to have one of the worst years in the markets that we have seen in quite some time. However, it is important to point out that this is on the heels of three straight great years. The downward pressures on the markets and the economy are real and until we start to see some downward movement in inflation, these pressures will continue. When this dust finally settles, I think there will be some great opportunities since valuations of very profitable companies have been compressed, but we are not there yet.

Market Overview

Over the month of September, all major indices dropped sharply.  The S&P 500 lost 9.3% the Dow dropped by 8.8% and the NASDAQ was down over 10%.  While the quarter had started strong with the markets up in July and August, this September drop led to another losing quarter. The S&P and the Dow ended the third quarter down 5.2% and 6.6% respectively.  The NASDAQ only dropped 4.1% marking a reversal from previous quarters when the NASDAQ underperformed.  This leaves the three major indices in bear market territory heading into the fourth quarter. If S&P were to close the year where it is today it would mark the worst year since the financial crisis and the third worst year since 1974. Albeit this is coming after a run of three great years when the S&P was up 28%, 16% and 26% going back to 2019.

While the equity markets made a large move to the downside, the more pronounced moves have been on the fixed-income side.  Rates continued the climb that started at the beginning of August and jumped sharply across the board. The 10-year treasury peaked just shy of 4%, its highest level since 2010.  It has now risen almost 150 basis points since early August.  On the shorter end of the curve, we saw the 2-year treasury jump above 4% for the first time since 2007.  The markets have priced in continued aggressive action from the Fed but at the same time have made the fixed-income space a lot more attractive from an investment standpoint. With a lot of uncertainty expected in the coming months, getting paid more than 4% for the next 1-3 years seems appetizing and increasing fixed-income allocations may help investors weather the storm. Additionally, if the Fed softens its stance, we could also capture some positive price movement as rates drop.

 

All major indices are in bear market territory, inflation continues to come in hot and rates seem to rise every day. Equities are dropping along with bond prices, muting traditional diversification benefits. You also can’t just hide in cash because that cash is losing money to inflation. Everywhere you look, there is bad news, and every financial pundit out there is beating the drum of recession. So, the world must be ending soon?

In times like these, perspective is very important. Especially for the long-term investor.  Let me rephrase that last paragraph:  Over the past two and a half years the world has been gripped by a global pandemic that has closed borders, kept people from going to work and killed millions of people. Russia invaded another sovereign country, cutting off supplies of oil and gas to large portions of Europe and driving energy prices through the roof. And, our relationship with our biggest global economic and military competitor, China, has continued to deteriorate. Yet, as of the end of the 3rd quarter, the S&P 500 is still up more than 20% over the last 3 years, and up more than 60% from the pandemic lows.  Over the last 10 years, the S&P 500 has more than tripled. Perspective matters.

Now, I am not saying this to downplay what is going on in the economy today.  The issues are very real.  Inflation is a major problem.  The Fed response has been flawed. There are parts of the economy that are probably already in a recession and that could spill over to the rest of the economy. Because of this, the markets have reacted sharply to the downside.  Whether they have reacted correctly is what is still to be determined. These types of determinations play out over the long run, not the short. The patient investor can capitalize on that.

The stock market is a forward-looking indicator, which means it will normally move in anticipation of data and then correct itself if it was wrong.  This happens in both directions.  We saw it overreact to the upside last year as the consensus was that inflation would be transitory.  As inflation persisted, the Fed and the market realized they had been wrong so needed to correct.  The ripple effects of this have exposed or caused other cracks in the economy, exacerbating the situation. So, where are we today and what needs to happen to stabilize or reverse the markets?

The big elephant in the room that seems to be driving most of this is inflation.  The Fed along with other international central banks let inflation get out of control. While I think their initial assessment that inflation would be transitory was correct, too many external shocks forced inflation higher and made it stickier. China’s continued commitment to its COVID Zero policy forced disruptions to supply chains.  Companies can’t just shift production and distribution on a dime.  With products in short supply, prices can only go up.  On top of this, the Russian invasion of Ukraine then sent energy and other chemical prices through the roof.  These increases trickle through the entire economy and caused a wide rise in prices across many industries.

With inflation now running hot for quite some time, the Fed is left in a precarious position to put the genie back in the bottle. So far, their answer has been to raise interest rates faster than at any time in history and have signaled that this will continue. Their job is not an easy one.  They are raising rates in an attempt to put small cracks in the economy and slow it down, but not enough cracks that it breaks. In other words, they are trying to slow the economy enough to weaken the historically strong job market and bring down inflation without doing enough damage that the economy falls into a deep prolonged recession.

Outside analysts and investors are falling into three groups as they try to predict how this is going to play out and how successful the Fed will be:

The first group continues to beat the drum that the Fed isn’t acting fast enough and needs to continue to aggressively raise rates to bring inflation down, either in one big increase (the rip the band-aid crowd) or continued aggressive increases over the next year. They feel that if the Fed fails to bring inflation under control it will create larger negative economic impacts. With economic and labor data continuing to come out strong there is the thinking that the economy can withstand a more aggressive Fed. The risk to this is that the Fed goes too far too fast and sends the economy into a recession that could have been avoided.

The second group thinks that the Fed is moving too fast and that the impacts of the last few rate hikes haven’t worked their way into the economy yet. An increase in rates doesn’t have an immediate impact on the economy and it takes time to understand its impact.  This group also thinks that natural economic forces will work to bring inflation into check. They think that while this inflation wasn’t transitory, as the Fed had described it last year, it will still fall off due to the alleviation of some of the outside factors that are causing it. This process is taking longer than initially anticipated but it will still happen.

The last group is the smallest group. They think the Fed will be able to thread the needle and bring down inflation without weakening the economy too much. They won’t raise rates too fast and will be able to slow their hikes as the natural economic forces also help to bring down inflation. This is the soft landing.

With this many schools of thought, it is no wonder that we have seen the markets sell-off. Markets hate this kind of uncertainty. I also don’t envy the Fed in this situation.  While quite a bit of blame is being put on the Fed for contributing to this problem, that blame doesn’t help them navigate out of it. Inflation data is backward-looking, and their rate increases take time to trickle into the economy. So, they are using backward-looking data to make decisions that won’t impact the economy for months to come and then have to make another decision before the impact of their first decision has been felt. All while external shocks, that are out of their control, seem to pop up each day. This is no easy task.

With all of these uncertainties, what are we watching to determine when markets are going to stabilize? Outside of just looking at top-line inflation data, I am looking for any signs that these non-Fed-related forces are softening inflation on their own. This would help to inform what path the Fed might take. It would be a signal that they don’t need to bring inflation down on their own.

On the large scale, this would mean some sort of resolution or path to resolution in Ukraine or the reduction of COVID restrictions in China. On a smaller scale, this would mean signs that supply chain issues are abating. We already have seen some small signs that this is happening. There have been some recent reports that the backlog of cargo ships on the west coast has drastically fallen, with some ships starting to come over with empty containers.  This would show a decrease in demand and an alleviation of some of the supply glut. Another example of this is that companies (like Nike last week) are starting to report large backlogs of inventory.  This means that they will need to cut prices to clear this inventory. This would put downward pressure on inflation heading into the holiday season.

The upcoming earnings season will be very informative as it will give us a glimpse into what is going on under the economy’s surface. This will give us a clearer picture of the current demand picture and if companies are still dealing with supply chain issues. We will also be able to see how the current rate increases have impacted earnings so far.  The markets will focus a lot on company guidance, and this could cause a headwind for stocks. With so many uncertainties I expect guidance to be cautious across the board, which is normally not good for stocks.

The paradox we are currently in around earnings is that if company data and guidance show that the economy is slowing, it could signal that the Fed can slow their rate hikes, and this could cause markets to go up. On the flip side, if earnings and guidance come out much better than expected, it could be a sign that the economy can handle a more aggressive Fed and this, albeit counterintuitive to what should happen in a normal market, could send stocks down.

Lastly, for the markets to really reverse we will need to see a change in sentiment across the market. The market is very oversold in some areas and sentiment is very negative.  This is normally a contrarian indicator and a sign we are near a bottom but so far this has only caused a few oversold one or two-day bounces that traders seem to be selling into.  Until one of these bounces can be seen as a buying opportunity then we will be range bound to the upside.

I am still optimistic over the long run and cautiously optimistic over the medium term. If you are a long-term investor with no short-term capital needs, then you just have to take a deep breath and stay the course.  But, on the short term I think this volatility will continue for the next 6-12 months or until we start to see sentiment change in a meaningful way.  If inflation data starts to drop, this perspective will change but for the time being, I am going to be patient and look to add to some fixed-income positions on the short side of the curve and to equity positions only when the right opportunity presents itself. I do not think there is a rush to chase the relief rallies when they happen, yet.

Strategy Commentary

As discussed, I expect volatility to continue for the foreseeable future.  I continue to caution against any large-scale changes to portfolios in this environment.  It is important to continue to monitor your overall allocations to make sure they are in line with your long-term risk tolerance.  As we approach year-end there may be some opportunities to harvest some losses but in doing so it is important to not let your portfolio drift too much. There will be opportunities coming out of this so I will be using this time to identify quality names and sectors that will benefit as inflation subsides and rates steady.

On the domestic side, a lot of damage has already been done, especially in the technology, communication services and consumer discretionary sectors. However, when inflation starts to wane and rates stabilize or drop, these will be the sectors to rally.  I would not try to chase the high-flying names in these sectors but look to the quality names if I am going to add. The defensive sectors have been helping to weather the storm and should continue to do so. Energy continues to be the only sector in positive territory for the year and this should continue as OPEC continues to cut production and the Ukraine conflict persists.  These defensive names are a good place to hide until the storm is over, but these sectors will underperform if the markets turn around. With any clients looking to put new money into equity I am recommending a bar belled approach with some defensives but also some names that could benefit from a recovery.

On the international side, I have been trimming positions and am moving toward being underweight in these areas.  The Ukraine crisis could cause an energy crunch in Europe as we move through the winter and this will create a drag on all Eurozone economies. The strengthening dollar will also cause a headwind for developed and developing countries around the world.  These economies are also dealing with inflation, but the strong dollar is causing even more pressure.  For now, I am reducing exposure.

On the fixed income side, my perspective has completely changed.  I have been underweight fixed income for a few years now and have increased cash allocations as a replacement. With rates rising rapidly I have been becoming more bullish over the last few months and have been adding to positions.  A majority of this exposure has been on the short end of the curve.  I am also recommending clients park some of their excess cash in short-dated treasuries to try to at least keep up with inflation and ride through the volatility. Rates may still rise more but I think we are closer to the top of the range than the bottom which creates an attractive buying opportunity over the next few months.

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The Brave Report: Market Commentary for May 2022

Click here for .pdf version of this report:The Brave Report-May 2022

Patience, patience, patience… The markets have not been a fun place to be over the past month.  Inflation headwinds and uncertainty about the Fed continue to drag markets lower.  What started as selling in the high multiple stocks a few months ago has rolled over to even include the profitable places of the market and buyers have yet to step in and buy the dip.  In times of this kind of volatility, it is important to remain patient and refrain from making long-term investment decisions based on short-term volatility.  When the dust finally settles there will be opportunities, it is just a matter of dealing with the pain while we wait for those opportunities.

Market Overview

It was a very difficult month for all of the major averages.  The Dow only lost around 5% but the S&P 500 and NASDAQ lost 8.8% and 13% respectively.  This marked one of the worst months we have seen in years. It was the worst month for the S&P 500 since March 2020 and the worst month for the NASDAQ since October 2008. While the selling was more pronounced in the technology, consumer discretionary and communications services sectors, very few areas of the markets were spared.  Consumer staples was the only sector in the green for the month.

The fixed income side also saw some major movement over the past month with rates continuing to spike.  The yield on the 10-year Treasury moved rapidly from around 2.3% to just shy of 3%.  This continued to put downward pressure on bond prices across the board.  The core US Aggregate Bond Index lost almost 4% during the month. We have not seen this type of movement across the fixed income space in years.

The last month has undoubtedly been a difficult time for most investors.  As long-term investors, we understand that volatility is going to happen and that pullbacks are going to occur. These pullbacks are not only healthy for markets but can create the foundation for upward momentum.  The pullback we have seen to start the year and that accelerated over the last month has seemed a bit more painful than most.  This is due to a few factors.

First, with the bull market we have been in for the last decade, these types of pullbacks have been a bit rarer and in recent years the “the markets only go up,” mentality has brought new investors into the fold that aren’t used to corrections.

Second, the day-to-day volatility and the speed of some of the selling has been quite high. Multi-percentage point intraday swings have become the norm.  This makes it very difficult to enter and exit long-term positions, even on the margins.

Lastly, this pullback has left very few places to hide.  We have seen stocks sell off rapidly while bond prices have also plunged, muting many of the benefits of a diversified portfolio.  Additionally, with inflation so high, sitting in cash has also been a losing proposition.  Unless you are an experienced short-term trader, who is comfortable shorting the market, you have just had to take it on the chin and remember that long-term performance is what is important.

I understand that those are not encouraging words, but they are the reality of where the markets currently are, and I expect this kind of choppiness to continue throughout the rest of the year. Inflation is the big elephant in the room and until we get some more clarity around the various forces influencing it, the market is left to decide how high and for how long inflation will continue to rise.

The major factor that investors are trying to handicap is how aggressive the Fed will need to get to keep inflation under control and what damage this will do to the economy.  Will it just slow things a bit or will we experience a recession? Right now, the markets are pricing in around ten quarter-point rate hikes. This would bring rates up to just above where they were in late 2019 and in line with longer-term averages.  The difficult part in handicapping how aggressive the Fed will need to be is that there are several external forces that are impacting inflation and their outcomes are uncertain and often intertwined.

Going through the pandemic there have been numerous supply chain disruptions that put some initial pressure on inflation. The growth of the economy during this time also added to upward pressure on prices.  The thought by many, even those at the Fed, was that this upward pressure would be transitory and as we came out of the pandemic, these supply chain issues would lessen, and inflation would return to historic norms.  However, this did not happen to the extent we expected and then we were hit with two unexpected external shocks.

Just as it looked like we were getting COVID under control in the US and Europe and our economies were opening up, China started to experience widespread surges in cases.  Their “Zero COVID” policy pushed them to lock cities down and put widespread restrictions in place. This sent an additional shock through global supply chains and added additional upward pressure on inflation. They continue to struggle to administer an effective vaccine and until they can get things under control, this pressure will persist.

At around the same time as this, Russia began its invasion of Ukraine.  The fear of war was enough to rattle markets, but it also added upward pressure to inflation.  Energy and food prices surged, especially in Europe. While domestically we do not rely on that part of the world for food or other imports, the global food chain and energy supply is reliant on that region.

With all of this going on, there are also those who think that inflation is just a result of the post-pandemic recovery and the growth associated with it.  Their feeling continues to be that the forces impact inflation will self-correct and that while inflation wasn’t as transitory as initially thought, it will return to historic norms sooner rather than later.

So, what is the Fed to do?  They are trying to walk a tightrope between keeping inflation under control while not causing a recession. All of this, while Russia and China are shaking the tightrope.  That’s what makes the outcome so difficult handicap. When this happens the default setting for investors is to just move to the sidelines and that is what they have done over the past month.

As long-term investors, we are taught to use times of fear and uncertainty to our advantage.  We should use these corrections as opportunities to buy quality while it is on sale.  I think this is again one of those opportunities, but I would be very patient in doing so.  We are not in an all-in, buy the dip moment, but in a time when we should slowly add to positions when the opportunity presents itself.  There will be numerous opportunities to add to positions over the coming months so do not rush.

As we look out over the rest of the year, we will see continued choppiness and volatility as we sort through inflation data.  As I mentioned, ten rate hikes are currently priced into the markets.  I don’t think we will see all ten and if there is any indication that we won’t, then I think we can declare a bottom in this current pullback.  It will be very important to watch the situations in China and Russia.  Any positive developments in those situations will be one indication that the Fed may not have to get as aggressive as the markets currently think.  It will also be important to continue to watch key inflation data.  The markets have and will continue to react swiftly to any data that goes against expectations.  This has driven markets lower so far this year with inflation data coming in hotter than expected but the opposite can happen if we see a surprise in the other direction.

Strategy Commentary

I continue to stress patience when it comes to my portfolio allocation and new investments.  Of course, I wish I had raised more cash in March but with the speed and severity of the pullback over the past month, it is very hard to have great conviction in either direction.  When bonds and stocks become correlated to the downside, you are left to make no-win allocation decisions.  In these environments, it is important to revisit your timeframe and risk tolerance.  If your timeframe is shorter in nature, I would look to raise cash on any strength.  If it is longer, there will be an opportunity to put some cash to work over the next few months, but I am in no rush.

On the domestic side, there have been few sectors to hide in and I think that even within some sectors there are major winners and major losers. For example, I discussed earlier this year that within technology there are two types of stocks, story stocks and profitable stocks.  Even though some of the large tech names have rolled over in the past month, I will still be looking to add to these profitable companies as long-term plays. This upgrade in quality is not limited to technology but can be found across the board.  I still have refrained from chasing energy stocks as they have outperformed and am currently comfortable having a relatively sector-neutral allocation while looking to upgrade quality when the opportunity presents over the next few months.

The international markets have not been spared, especially with Europe’s reliance on Russia for oil and gas. I started adding a little to developed international positions at the beginning of the year but scaled this back when Russia invaded.  The Ukraine situation will be a continued drag on European economies for some time.  The same can be said for emerging markets so I am fine staying neutral

I continue to hold increased cash positions as a replacement for some of my fixed income allocation.  With both stock prices and bond prices dropping over the past month, the diversification benefits of fixed income have been muted.  With continued upward pressure on rates, I do not expect to add any fixed-income positions in the short term.  There will be a point where rates overshoot to the upside and we should be able to start adding back to fixed income at that point.

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The Brave Report: Market Commentary for February 2022

Click here for .pdf version of this report: The Brave Report-Feb 2022

Can we start over? After a seemingly straight line move higher off the March 2020, pandemic lows, markets finally hit a bit of a roadblock to start the year. The markets moved straight down throughout the month only to get a small reprieve in the last few days. This marked one of the worst starts to a year in history, especially for the tech-heavy NASDAQ. The strongest selling was in the high multiple tech stocks but outside of the energy sector, there were very few sectors spared.  Volatility soared throughout the month, and we saw some aggressive intraday moves that brought back memories of the financial crisis and the dot-com years.  While I think we will continue to see increased volatility moving forward, especially in the high multiple names, barring any major surprises I expect much of the indiscriminate selling to be over. I do not think we will get a quick V-shaped bounce back as we have seen in recent corrections. However, we could have a great opportunity over the next few months to increase the quality of portfolios by adding to highly profitable companies that are now trading at a discount. As is often the case though, patience will be key.

Market Overview

The markets just completed one of their worst Januarys on record with the NASDAQ falling almost 9%.  The Dow and the S&P faired a bit better but still lost 3.4% and 5.2% respectively.  If it hadn’t been for the sharp bounce in the indices on the final two trading days of the month, the NASDAQ would have experienced its worst single month since the 1980s.  Bloated valuations in certain areas of the market, high inflation and a change in tone from the Fed all capitulated to force investors to reassess their allocations and cause volatility to spike.  The sharp intraday swings created an environment that few traders and investors could stay ahead of. Indiscriminate, program selling, especially in the last hours of trading on a number of days shook investor confidence and brought all the perma-bear pundits out of the woodwork to spook investors even more.

On the fixed-income side, rates continued to rise as the Fed laid out the plan to start to raise rates and taper their asset purchase program.  The rate on the 10-year treasury spiked quickly to start the month, rising from a yield of 1.5% to 1.8% in the first week of the month only to stabilize and trade in the 1.8% range for the remainder of the month.  Along with the spike, we also saw the yield curve flatten, especially on the short end of the curve.  The rate complex will be important to watch in the coming weeks as investors try to handicap how aggressive the Fed is going to be and assess what impact this could have on the overall economy.

As we unpack the performance of the last month there were a series of risks that all seemed to capitulate to send the markets into a tailspin.  With inflation numbers continuing to come in hot, the Fed signaled it will be looking to raise rates faster than anticipated just a few months ago while also simultaneously tapering its asset purchase program.  This seemed to be the major catalyst that started the selling, especially in technology names and what I like to call “story stocks.”  These are the stocks that have little to no revenue and have yet to become profitable.  Their runup since the pandemic has been based on the prospects of growth well into the future.  In a rising rate environment, the high multiple stocks will always suffer the worst.  Once selling started there, it seemed to spill across most areas of the market as investors began to take profit in the names that have propped the major averages up over the past few months. This catalyzed the rush to the exits.

Whenever we see pullbacks or corrections like this, we also see the parade of perma-bears or other pundits shout that the market is crashing, or a bubble is bursting.  I think takes like this are lazy and unhelpful.  While I agree there were many areas of the market that deserved some selling, and we were due for some profit-taking, that does not mean the whole market is going to be cut in half, as perma-bear, Jeremy Grantham, announced a few weeks ago.  There are too many great companies earning amazing profits and growing rapidly.

If we peel back the layers of the market, we can see that a lot of damage has already been done that isn’t reflected in the major indices. Starting as far back as last February, many of the “Story Stocks” started selling off.  Yes, this selling intensified over the past month but much of the needed repricing in these names was going on under the surface for a while. At one point last month, more than 40% of the stocks trading on the Nasdaq were more than 50% off of their high. This is a massive repricing and something that is much needed if the overall market is going to continue higher.  The markets perform much better and are less susceptible to crashes when they are led by real, profitable companies and not by high-flying momentum names.

In terms of interest rates, the Fed has now all but assured that they will raise the Fed funds rate in March and start to taper their asset purchases. They continue to hold the line that any future rate hikes will be data-dependent, but the market is pricing in 4-8 hikes over the next two years.  While this may seem like a lot it is important to remember that we are starting from a 0% interest rate. It is also important to put the current rate into historical perspective.  The chart below shows the Fed funds rate since World War Two.  Even if the high end of projections plays out, we are still well below long-term normal.  Additionally, if supply chain issues and inflation start to normalize on their own, we will see these aggressive rate hike projections get walked back.

Source: Macrotrends.net

The prospect of rate hikes has been blamed for a lot of the selling in high multiple names.  I have discussed this in past commentaries and feel that the negative valuation impact is a bit overdone, especially for larger profitable names.  We are not talking about raising the rate from 0% to 5% all at once.  At the high end of projections, we are talking about getting the Fed funds rate up to around 2% over two years. Even with these expectations, the rate on the 10-year treasury still remains below 2%. To put that into perspective, prior to 2011, the rate on the 10-year had never been below 2%.

While most of the focus has been on the Fed raising rates.  I think a larger economic impact will be felt by them tapering their asset purchase program.  They have committed to starting this in March but there are still a lot of unknowns in terms of execution and how fast they will look to shrink their balance sheet, if at all.

With all the recent commentary about the negatives of rising rates, historically the markets have performed fine in rising rate environments. Returning the Fed funds rate back to a more historically normal level can also have several positive impacts. First, and most importantly in the short run, increasing rates will help to get rising inflation under control.  While I believe much of the upward pressure on inflation is due to the supply chain issues brought on by Covid, raising rates will be able to mute any continued increases and get inflation back to more historically normal levels.  The big variable here will be if the Fed can successfully get inflation under control without causing the economy to slow too much.  GDP rose by 4.5% last quarter, which was well above expectations, so this gives the Fed a good starting point. This growth rate is expected to slow so it will still be a difficult needle to thread.

Another positive of getting rates back to a more normal level is it provides the Fed with future ammunition should there be another shock to the world financial landscape.  With rates at 0%, there isn’t much the Fed can do to help prop up the economy besides being the buyer of last resort. By increasing rates and decreasing their asset purchases it provides them with a greater cushion should they need to step in to help again.

So now that we have seen this increase in volatility and a transition in market leadership, where do we go from here? It is very clear that certain parts of the market got overvalued over the past year but that does not mean all stocks that have performed well are overvalued. As the dust settles over the next few months we will start to see more dispersion amongst individual names and sectors.   Whenever we see selling like we have over the past month it always presents opportunities for the disciplined long-term investor. While my overall long-term allocations aren’t going to change very much, I will be looking for opportunities in a few areas to round out this allocation:

  • Profitable Growth: This will be my main focus as I look to add to any portfolios.  There are dozens of names that sold off hard with the rest of the market that are performing extremely well and are minimally impacted by rising interest rates. Look for companies that continue to grow rapidly and churn out great free cash flow.  These types of companies straddle a number of sectors but tend to be concentrated in large technology.  The one concern here is that many of these names are already highly owned and make up a large part of many of the equity indices. It is important to keep this in mind so your overall asset allocation does not get out of whack.
  • Defensive/ Value:There has already been a large rotation away from growth and into more defensive, value names.  Due to growth’s outperformance in recent years and the prospect of rising rates, this is not surprising.  I will look to add to these positions in any of my portfolios that are still underweight value.  Additionally, if the recent volatility has given you pause this is not a bad place to look for opportunities or at least park your money while we wait out the volatility.
  • Story Stocks:I know I have discussed that many of these names ran up far too quickly, got very overvalued and were due for a haircut. That does not mean they are all still overvalued.  We have seen some of these names give back 50, 60 or even 80% of their value from their all-time highs and that could create some great long-term opportunities if you are selective and have the stomach to deal with the volatility.  I would only be adding in small bits around the edges but with some of these names that have sold off so much, it could be time to plug your nose and nibble. As you try to identify potential names in this area you should look to understand a few characteristics of the companies:
    • Why did the stock run-up in the first place? Was it based on their actual business potential or was it just a popular stock?
    • Do they have a clear path to profitability or is their valuation based on hopes and dreams?
    • Do they have some sort of moat around their business or competitive advantage against any incumbents?
  • International: The last area I will look to add to (and have already) is developed international.  At this point, it looks like the US Fed will be one of the early movers to raise rates and cut off the liquidity spigot. With a slower pace of rate adjustment in Europe expected, there should be some opportunities for outperformance. We have also seen Europe underperform the US in recent years so valuations aren’t nearly as high.  If you were underweight international coming in, it is now time to start bringing that allocation back up.

While these will be some areas I will look to add to, it is important to reiterate that I am not rushing out to buy on every dip or pullback. I think we are now entering a stretch of elevated volatility that will be around for a few months.  I do not expect to see a quick V-shaped recovery like we have seen in corrections over the past few years.  There will be some names that do snap back quickly but I think patience will be greatly rewarded. It is important to fully understand the risk-reward tradeoff in all of these buckets (especially in the story stocks) and make sure you don’t do anything that will take your portfolio outside of your risk profile.

Strategy Commentary

Over the month, I trimmed some equity exposure slightly to have some extra cash available. These trims were very small and were often to try to harvest some losses to have available for future rebalancing. Most of this trimming was in my small-cap exposure. I am not rushing out to buy this dip quite yet.  I want to see a more solid bottoming happen before sounding the all-clear.  As I have mentioned, I do not think the whole market just bounces straight back up and I think we will have the opportunity to add strategically over the next few months.

I continue to maintain my overweight to technology but have been working to update the quality of this exposure as I expect there to be a strong bifurcation between the high-multiple “Story Stocks” and the highly profitable stocks that continue to put out stellar numbers.  From a sector standpoint, I really missed out on adding to Energy last year.  With oil prices continuing to rise I may look for an entry point. The sector has moved up quite a bit over the past year and I hate to chase a trade this late in its move but unless there is a major policy shift the upward pressure on oil prices should continue.

Internationally, I began to add to some developed markets equity, primarily in Europe.  While these markets are also dealing with inflation and will eventually look to raise rates, I think they will be a little slower than the US in doing so.  These markets also are a little cheaper than the US from a valuation standpoint so offer more attractive defensive characteristics during a time of rising rates.

I continue to hold increased cash positions as a replacement for some of my fixed income allocation.  With both stock prices and bond prices dropping over the past month, the diversification benefits of fixed income have been muted.  With continued upward pressure on rates, I do not expect to add any fixed-income positions in the short-term.

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The Brave Report: Market Commentary for December 2021

Click here for .pdf version of this report: The Brave Report-December 2021

Is Santa Claus coming to town? The first three weeks of November saw markets grind higher adding to their gains from October and notching new all-time highs.  This performance was thrown into disarray in the final week of the month (which has continued into December) as the Fed hinted at speeding up its reduction of asset purchases and the appearance of the new Omicron COVID variant rattled markets.  These new uncertainties were all the markets needed to quickly sell-off, especially in the high multiple technology names. Volatility spiked rapidly as investors moved to the sidelines while they wait for more details around this new variant.

Market Overview

After notching all-time highs midway through the month, the three major indices sold off hard to close things out. The Dow was the biggest laggard, albeit because it didn’t pop as much earlier in the month, finishing the month down more than 3%.  The NASDAQ and the S&P 500 both finished the month around the flatline but just in the last week of the month, the NASDAQ lost more than 4.5% from its intra-month high. This selling continued as we entered December. A rush to safety, due to inflation worries and the Omicron variant have brought volatility racing back to the markets and we will have to wait and see if a Santa Clause rally is still in the cards.

On the fixed-income side, we saw quite a rollercoaster during the month of November.  Rates spiked as inflation data came in hot and the Fed hinted at speeding up its tapering efforts.  This spike, however, was short-lived. The emergence of the Omicron variant sent investors rushing to safety and driving rates back down.  After hitting a yield of 1.69%, its highest level since May, the yield on the 10-year plunged as low as 1.41% over 3 days. This was accompanied by some flattening across the entire yield curve.  With more data expected about inflation and the new variant over the next few weeks, we will see if this sudden drop sticks or if it is simply a temporary knee-jerk reaction.

As we move forward into December the uncertainties around the new variant and how the Fed is going to handle inflation still loom over the markets.  Even with these uncertainties, many are still predicting a strong rally into year-end.  The underlying fundamentals of the economy support this but what we often see during times of uncertainty is increased volatility while investors try to get confirmation on the direction of the markets.  While the volatility of the last two weeks caused major swings across the entire market there was some diversion in terms of where the selling was more pronounced.  Technology and high multiple names bore the brunt of the selling while investors rotated into more value-oriented names but if we are going to see a Santa Clause rally this year, we will need to see money flow back into some of the higher quality tech names.

Many of the high multiple names that sold off were in need of a repricing at some point as many had flown far too high, too fast. These new uncertainties were all investors needed to rapidly reprice these names.  The initial selling started when the Fed hinted at speeding up their reduction of their asset purchase program.  This sent rates higher which has been a sign to markets to sell off the high multiple names.  However, rates quickly pulled back again as the emergence of the Omicron variant sent investors to the sidelines.  This just accelerated selling in these high multiple names as investors took profits.  As is often the case in these rapid selloffs, many other names with much more reasonable valuations get caught up in the carnage. What we have seen with these selloffs over the past two years is that these dips have been a great opportunity to get back into some high-quality names at a steep discount to just a few weeks ago.

While I think volatility will persist for the next few weeks, getting some clarity around the Omicron variant will be key to releasing some of the tension in the markets.  We have been investing in a pandemic economy for almost two years now and we have gone through the emergence of a new variant, Delta, before so we already have a playbook for how different areas of the markets will react.  The question that remains is will this new variant follow previous COVID spikes or will this thrust us into a whole new chapter of the pandemic?

Early indications are that this new variant is more infectious but seems to come with lighter, less severe symptoms.  We also have no data yet as to how effective the current vaccines will be against the new variant.  As more data comes out in the next few weeks, we should get a clearer picture of how this variant will impact the economy.

In the most bullish, Goldilocks scenario, this new variant is more infectious but with only the symptoms of a common cold.  Its infectiousness leads to it being the dominant variant around the world, pushing out delta, while also reducing the incidence of severe outcomes, hospitalizations, and death. This leads to increased immunity around the globe and signifies the beginning of the end of the pandemic.  In this case, the global economy continues to fire on all cylinders and the bull run we have seen continues.

On the other side, the doom and gloom scenario is that the infectiousness is much higher while also having very severe symptoms and an increased mortality rate.  Current vaccines are not effective against it and we are forced to implement restrictions until a suitable vaccine booster can be rolled out.  This would lead us back to the playbook we saw at the beginning of the pandemic where the stay-at-home stocks rally and travel and leisure stocks suffer. It also means the pandemic will continue to draw out well into the future, having a negative impact on major parts of our economy. This would force the government to continue to print money to provide stimulus further compounding our inflation issues.

I think the actual outcome will be somewhere in the middle of these two scenarios but until we get some more data investors are just left to speculate. This leaves us in a wait-and-see market with increased volatility.  While I’m waiting, I will also be making a buy list of some names that have been unfairly beaten up during this selling and will look to add to them if this selling continues.  These will include high-quality names that got thrown out with the bathwater but have consistent, growing cash flow and are less impacted by rising rates. I will also be looking at some of the high multiple names that actually have revenue and earnings, and whose fundamentals warrant a higher multiple. I think these will be the names to snap back the quickest if some of these uncertainties dissipate.

I would also be doing a disservice If I didn’t mention the inflation situation.  Recent inflation has been real and (until Omicron) was putting upward pressure on rates.  The Fed seems to be walking a fine line between trying to tighten things to combat inflation while also trying to avoid sending shocks through the markets by tapering too quickly.  If inflation can come down on its own and it does turn out that it was transitory then the negative impacts should be muted or behind us soon.  If the Fed is forced to combat inflation more aggressively and we see the economy start to slow then I do think we could see some continued downward pressure on markets in the first half of next year.

Energy prices, one of the leading causes of inflation recently, have already started to recede and it seems supply chain issues are starting to abate a little as well.  If this can continue then I think we can avoid a more aggressive Fed approach.  But again, we will wait and see.

Strategy Commentary

I have continued to maintain my overall equity allocation, even during the recent volatility.  I have used this pullback to rebalance some positions to a normal allocation and harvest any losses I possibly could. However, with the prolonged bull market we are on, identifying losses has been difficult. While the uncertainties I have mentioned in this report are real, I think over the medium and long term the economic backdrop is strong and should provide legs to the market.  As more data comes out about the new variant and inflation, this stance could change but for now, I view them as short-term blips.

I continue to maintain my overweight to technology.  Volatility has increased in the sector, especially in some of the higher multiple names but the larger tech names continue to provide long-term stability for the sector. I have added to small and mid-cap equities in some portfolios as they have underperformed so were below their normal allocation targets. This is more a rebalancing exercise than a conviction on the positions. If inflation does seem more permanent, I will look to adjust my allocation accordingly but for now, I think inflation will subside during the first half of 2022.

Internationally I continue to maintain my current exposure.  As I mentioned in October, I continue to be astonished by the destruction of valuations in China. Some of this selling has been for good reason but there are still a lot of very high-quality names that continue to get pounded.  While the regulatory overhang will persist for the foreseeable future there will be a point where you might need to just plug your nose and buy some of the high-quality names. If the government can step aside for a bit, these stocks should be rewarded.

With the current inflation number and the potential for rising rates, I have continued to maintain my extra cash allocations as a replacement for some of my fixed income positions.  Even with the drop in rates due to Omicron, the risk of continued upward rate pressure as the Fed reduces its asset purchases only adds conviction to this position.

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The Brave Report: Market Commentary for October 2021

Click here for .pdf version of this report: The Brave Report-October 2021

I thought the market only goes up…..  We finally got a pause in the market’s climb as all major indexes pulled back, registering their worst month since March 2020.  Rising rates, uncertainties over the Fed, a looming debt ceiling crisis and supply chain woes forced investors to de-risk and bank some of their YTD profits.  The fundamentals of the economy still remain strong but after a long run off the pandemic lows, it was finally time for some profit-taking and a reassessment of what is next.  While these uncertainties will continue to lead to some volatility in the markets, we are entering earnings season where we should get some color as to how any of these uncertainties are impacting corporate America.

I do think valuations have been stretched in some areas of the market, so a pause is very healthy. However, even with the overall indices performing well throughout the summer, there are some areas that have already seen some prolonged consolidation and a more substantial pullback. These are the names that should lead the markets higher once investors get more comfortable with the risks that are present.

Market Overview

The markets finally stopped to take a breath. After posting seven straight positive months, markets finally pulled back during the month of September.  All three major indices saw weakness throughout the month with the NASDAQ losing more than 5% with the DOW and the S&P 500 close behind, losing 4.2% and 4.7% respectively. This marked one of the worst months markets have seen since the pandemic. With that said, it basically gives up the gains we saw during the summer and brings us back to where we were in July.

On the fixed-income side, rates were stable for the first three weeks of the month but spiked sharply to close out the month.  The yield on the 10-year Treasury jumped from 1.30% to 1.50 over the course of 3 sessions.  The spike in rates added some fuel to the late month selling in the stock markets but rates still remain well below the high yields of the year that we experienced back in March.  With the Fed signaling a reduction in their asset purchases it is not surprising that we saw rates rise.  It will be important to watch how much of these Fed changes are already priced in or if we will see another spike in rates when they actually implement their rollback of buying.

While this weakness in the markets hasn’t been the norm this year and we have seen CNBC parade all the “the world is ending” crowd across the TV it is important to put this small pullback into perspective.  Even with the weakness over the past month, the S&P 500 still finished September up more than 16% on the year.  With that said, this provides us a chance to assess what caused this pullback and see if any of those risks may carry through for the rest of the year or if they are temporary.

With the run that the market has been on this year, it was inevitable that at some point some increased risk would present itself and we would see some profit-taking.  In this case, a few uncertainties have popped up and rather than see how they played out, a lot of investors just decided to de-risk their portfolios a bit and book some profits while we wait for the next catalyst.  This is normal and healthy for the markets and happens quite often during sustained bull markets.

Now, it is important to point out that I am not trying to downplay any of the risks that are currently present because all of them do have the potential to negatively impact valuations and economic performance.  The big question is to what extent will this impact be felt and how long will they last?

  • Debt Limit:  Unless Congress passes some new legislation, the government will hit its debt limit in the next two weeks. If this happens it could have ripple effects across the entire economy.  Besides its impact on government workers, this would also have a major impact on the creditworthiness of the US. Especially if the government is forced to default on any obligations. At this point, it looks like a temporary deal will be struck but this means the can has just been kicked down the road.  This risk will linger for a few more months until something of substance has hopefully passed.
  • Fed Policy: The Fed announced at their last meeting that they would begin to reduce their levels of asset purchases sometime in the next few months.  This reduction of liquidity in the system puts upward pressure on rates. This move is something that everyone knew would happen at some point so it is not a surprise. For the long-term health of the economy, I think it is a good thing because it shows that this increased intervention is no longer needed.  It signals that the economy is strong enough on its own to not need the Fed backstop anymore.  With that said, the Fed has not fully signaled if/when they will increase interest rates but this is the first step in that direction.
  • Rising Rates: Following the Fed’s announcement we saw a sharp jump in rates and the stock market reacted by selling off high multiple stocks (mostly in the tech space). I have covered the reasoning behind this in previous reports so I won’t do a deep dive into the justification behind this selling.  But, it is important to point out that even with the jump in rates we are still at historically low levels and not even back to the high rates for the year that we saw in the spring.  The selling pressure we see when rates rise seems more like a knee-jerk reaction or something that is more algo driven.  Until we see rates rise to a level that would have a negative impact on company fundamentals then I think this is a buying opportunity in those stocks that have solid balance sheets and trade at reasonable multiples.  I am looking mostly at the big tech names that often get sold off with the high momentum names whenever rates rise.
  • Supply chain issues: Coming through the pandemic we have also seen a lot of bottlenecks in the supply chain across the globe.  This has and will continue to have a negative impact on corporate results in the short term and will be something to monitor closely during upcoming earnings calls.  I think these supply chain issues will be transitory but the longer these bottlenecks exist the deeper the impact becomes and there could be some sectors that see a material impact to their earnings results.

While these risks could all have a negative impact on the markets, the underlying fundamentals of the economy are still quite strong. With the run the markets have been on over the past year-plus, we may need another catalyst before we can take the next leg higher.  As we enter earnings season, we will get some additional color as to how these risks are playing out in the corporate world.  The question will be, are earnings enough of a catalyst to trigger a rally into year-end or will this quarter’s earnings just be a justification of current valuations?  If some of these risks can abate, I think it could be a catalyst, especially with the weakness we have seen over the past month.  However, if any of these risks intensify, I would not be surprised to see continued choppiness, consolidation and profit-taking as investors try to bank what has already been a good year.

Strategy Commentary

I have continued to maintain my equity exposure slightly below full.  I continue to be bullish over the medium and long-term as overall fundamentals remain strong, both for the economy and on the company level.  I think the panic over rising rates is a little overdone at this point and until we see a more substantial rise in rates, I see no reason markets can’t resume their upward march. However, in the short run, I think we will see some continued consolidation and volatility while investors digest earnings over the next month and get a better picture of how aggressive the Fed will be at tightening.  I am comfortable being patient.  I will look to add to my equity positions on any considerable weakness but am in no rush as I think the short-term risk-reward profile looks muted.

Domestically, I have maintained my overweight to technology, and I think the rate induced selloff we have seen is a bit of an overreaction, especially for large tech whose multiples are not that bloated as some would have you think.  I have been hesitant to add to any other specific sectors until we get some more clarity about the Fed’s next move and some more certainty around the pending infrastructure bill.  The small equity additions I have made have been more size and style-based and not sector-specific.  The weakness we have seen has given me a chance to round out any holes in my allocations, but these additions have only been around the margins.

Internationally, I have made very few moves in recent months.  Weakness in China continues to drag on emerging markets and although there continues to be regulatory risk, there becomes a point when valuations become too low that you just have to plug your nose and add to some positions.  There will definitely be some continued volatility but for the long-term investor, these low valuations are difficult to ignore.  If I make any additions, it will only be to the high-quality large-cap names with solid balance sheets.

With rates rising, I have continued to maintain my extra cash allocations as a replacement for some of my fixed income positions.  The risk of continued upward rate pressure as the Fed reduces its asset purchases only adds conviction to this position.