Special Release - The Weather Improved Last Week, Though Investors Remain Gloomy
While the weather outside improved last week, investor sentiment remained gloomy. In addition to the “known knowns” weighing on sentiment – including China’s COVID policy and war in Ukraine – investors have been waiting for signs that inflation pressures are weakening. Unfortunately, the latest Consumer Price Index (CPI) report released on June 10th dashed those hopes for the time being, hitting a new 40-year high with an 8.6% year-over-year increase.i The Federal Reserve (The Fed) responded on June 15th with their largest rate increase in almost 30 years, by 0.75%, as they continue to aggressively tighten monetary policy.
While inflation remains stubbornly high, the outlook for economic growth is declining in inflation-adjusted terms. Many economic data points are weaker than expectations, including once strong segments such as housing. The slowdown in economic momentum increases the probability that The Fed tightens too much, and the economy enters a recession. Since those probabilities are rising, investor sentiment remains extremely low, below levels last seen in March 2020 and during the depths of the Great Financial Crisis in 2007-2009.
The positive side of the ledger continues to be strong corporate balance sheets, a well-capitalized banking system, and a stable employment picture. Jobless claims are a key indicator to watch, as the labor market has so far been resilient. The impact of what has already occurred in financial markets cannot be ignored; a good portion of “bad news” is already discounted. Hawkish talk by members of The Fed and higher long-term interest rates have already curtailed aggregate demand. While the impact is not immediate, the effects will be seen over time. Finally, an increasing probability of recession does not make it a foregone conclusion.
The negatives are firmly outweighing the positives right now. We are stuck in a period of market discontent, with uncertainty and volatility winning the day. That will likely persist until there is some more light at the end of the tunnel for a few of the issues mentioned above.
We are firm believers in “less is more” in these environments. As we have seen with some of the recent rallies, positive news is often priced in just as quickly as negative news. At some (unknowable) point the positives will flip the market sentiment and sustain a rally, and you don’t want to be out of the market for that event. How should we position the portfolio for this period?
- Trim some of the equity exposure during rallies and make selective purchases, with a bias towards more value-oriented categories. In general, we have been net sellers of equities this year, and will continue that practice opportunistically.
- Reinvest equity sale proceeds and matured bonds into the best yield environment we have seen in many years.
- Tax loss sales where appropriate to offset future capital gains.
- Hold extra cash for future buying opportunities.
As always, your relationship team is happy to discuss any questions or concerns you may have, and to talk about your specific circumstances directly.
Meet Glenn Robinson, CFA | Chief Investment Officer. »
iU.S. Bureau of Labor Statistics: https://www.bls.gov/opub/ted/2022/consumer-prices-up-8-6-percent-over-year-ended-may-2022.htm#:~:text=From%20May%202021%20to%20May,the%20period%20ending%20December%201981.
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