A challenging April finally is in the books, and, on top of that, here comes the Fed in May. The monetary spigot has been wide open for too long, and the last couple of COVID relief checks probably were gratuitous in most cases, all of that to go along with numerous supply chain disruptions. So, too many dollars chasing too few goods. In other words, classic inflation at an uncomfortably high rate and the sense, as we moved through April, that solving the problem will require more than a quick Fed fix with only a modest rise in interest rates.
All that said, April and actually the first four months of 2022 are the price we pay for those long-term 9-10% per year investment returns from the stock market. Here’s a brief 2022 stock market scorecard:
April YTD
Russell 1000 Value Index -5.64% -6.34%
Russell 1000 Growth Index -12.08 -20.03
NASDAQ Composite Index -13.26 -21.16
The Value style of investing – the style to which we subscribe – clearly has been the place to be in April and all of 2022. Granted, many of the numbers on our computer screens have not been green, and that doesn’t make us very happy. But, around here, a +20% year is the only thing that makes us smile more than good relative performance during a rough patch for the stock market. If the former isn’t in the cards, we’ll sure take the latter, particularly since those periodic market rough patches are unavoidable.
OK, unavoidable, and frankly, not much fun. However, the patient needs a few doses of medicine at this point, and here comes the Fed with that medicine. We are seasoned veterans; we will cope and cope successfully. And, what comes out the other side should be a still-growing economy without the inflationary pressures with which we’re currently contending.
In the run up to the 2020 election, when clients and others were wondering what the aftermath would look like, we wrote “November 3, 2020 – Anything to Do?” That piece contained a number of recommendations, which in fact apply to the current situation. Here are those recommendations:
First and foremost, maintain an asset allocation structure that is appropriate for your circumstances, not one based upon what the Fed or anybody else might do. At the same time, staying well-diversified never has made more sense. As we’ve said many times, these markets basically are unforecastable, so invest in asset classes that respond to different forces and, therefore, do not all move together in price.
Second, to a large extent, index your overall portfolio. The reasons: Indexing outperforms most active management strategies over the long haul, indexing is cheap, indexing is style-pure, i.e., the investor knows exactly what he or she is buying.
Third, regarding your non-indexed individual equities, continue to emphasize the Value style of investing. For some time, we have been warning that the market’s Growth side, particularly NASDAQ Growth, was overvalued significantly versus the market’s Value side. Despite what has happened in 2022, that continues to be the case. Remember, the last time there was such a Growth vs. Value disparity (2000), the excesses were wrung out over a period of years, not months. More specifically, it took two full years for the NASDAQ Composite to hit bottom, and 13 years (!) for the Composite to surpass the 2000 peak. Some NASDAQ Growth/Tech exposure is warranted, but not a great deal. Emphasize Value.
Fourth, make sure you have a position in gold. The outlook for the barbarous relic is promising, and gold is a good diversifier. No one should get carried away, though. Five to 10% of your assets makes sense…20-30% does not.
Finally, keep a good slug of cash on hand, and keep it as conservatively invested as possible. Around here, we refer to that slug as one’s Rainy Day Fund, usually the smaller of 10% of investable assets and $50,000. The number of known unknowns (Donald Rumsfeld’s words) appears to be on the rise.
* * * * * * * * * * * * *
Make no mistake, April was no picnic; but, economic behavior and markets are cyclical, and again, the down part of the cycles are unavoidable. This time, the Fed has some work to do to get the inflation genie into the bottle, but that work, which involves getting interest rates back to some semblance of pre-2020 normality, must be done.
Unusual, challenging times, but aren’t they all?
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