Distortion
If ever there were a simple explanation of why markets have been so volatile and hostile, we only have to observe the path of interest rates over the last 13 years. At zero, or very low interest rates, the true price discovery of assets can be difficult to ascertain.
Our belief is that the Federal Reserve waited too long to begin normalizing/raising interest rates and thus promoted excess borrowing and speculation. If one adds the behavior of consumers after the pandemic, what is clear to see is that the pent-up demand and the excessive economic stimulation created an inflationary scenario the likes of which we have not seen since the 1970’s.
Growth stocks, those securities trading at a high multiple of earnings, have suffered given the dramatic rise in interest rates which has tempered the outlook of future revenue growth.
On the other hand, companies which provide staples and necessary services have rallied significantly due to the stable nature of their earnings. Should the Federal Reserve slow down the pace of rate hikes, we believe these stocks could get an additional boost from a weaker dollar. The dollar indeed has fallen roughly 4% from its high and we believe it will fall further.
We have begun to tilt portfolios more towards dividend payers in the above sectors given the change in market conditions. Additionally, we have taken advantage of the rise in interest rates and made allocations to bonds with 2-4 year maturities; securing solid income returns, and an opportunity for capital appreciation. This appreciation is most likely if the economy slows down further, and interest rates fall.
Given the consumer strength over the Thanksgiving holiday, and the frenetic spending in restaurants and travel post-pandemic, it seems difficult to observe a contraction. However, the bigger ticket items such as homes, durable goods, and cars are experiencing a slowdown in demand which we believe will continue. Oil however remains a wild card, given the geopolitical uncertainty.
A more recent picture of global activity points to problems in China because of their “Zero Covid” restrictions and the increasing protests with the population angered over those restrictions. Additionally, it is difficult to see what further economic consequences will unfold because of the war in Ukraine.
Fortunately, our investments in multi-strategy funds have held well during these turbulent times and have been able to protect capital, and in some cases, significantly outperform inflation.
The market is concerned about the next few months given the potential for additional interest rate increases, job lay-offs, and political uncertainty both at home and abroad. Much of this uncertainty can be planned for by making sure your portfolio is well diversified. As our Chief Investment Officer, David Schawel says, “We want to be approximately right and not exactly wrong.”
Unfortunately, America is experiencing unusual polarization and extreme behavior on both the left and right side of the aisle. It is important that all of us remain vigilant of bigotry and extremism. We are blessed to live in a country that provides freedom and protection for all under our Constitution. Let us make sure that each of us, in our daily lives, is conscious of how lucky we are to be living in this great country. Ayn Rand said, “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”
We are attempting to create tax neutrality in our accounts wherever possible and harvest any losses due to market conditions and potential tax benefits both now and in the future. Should you have any substantial gains or losses other than the ones in our portfolios, please let us know as soon as possible. Additionally, please advise us of any significant changes in your financial situation.
We wish you a wonderful holiday season and a Happy New Year.
We are grateful to be your trusted advisor. We look forward to serving you in 2023. Thank you again.
With kindest wishes always,
Seymour W. Zises
