ECONOMIC IMPACT. Worries mounted post the Federal Reserve meeting on actions to come to slow the economy to a point it may result in recession. Given the structural problems (inflated asset prices, inflation, debt) of the economy we don't disagree at all with these concerns in fact concur. GDP growth forecasts continue to fall with 1Q22 likely to see significant growth deceleration from 4Q21 (3% at best) which saw 6% plus growth (driven by inventory build which isn't a positive for 1Q22 nor sustainable). Throughout 2021 we warned about these risks while others ignored them. In regards to Covid-19 we have seen a dramatic reduction in cases in the US (some areas 60% below peak levels), as we expected, with the trend expected to continue. The positive effects of waning covid-19 should offset some of the drag created by the Fed, but not all of it and tend to lower the inflationary issues surrounding supply chains. Overall. with GDP growth expectations still over 3% for 2022, expectations for growth remain elevated and will likely disappoint unless the Fed dials back actions.
INVESTMENT IMPACT. The severe revaluation of high growth high valuation companies continued this week culminating in a market bounce on Friday (which we don't deem sustainable). As long as investors expect the Fed to take action on inflation and continue its path this trend should continue. If signs exist that growth is slowing (which has started but not completely) and Fed tempers its actions then high high valuation growth companies can see brighter days for appreciation. The problem with markets is there continues to be bubble like valuations and as these unwind mass stock liquidation occurs not only with these companies, but with all companies particularly with smaller ones. Smaller company valuations continue to be at steep discount (30% plus in our view) vs larger peers which is why we have gravitated to them. Over time this discount will close thus why we recommend being patient as it plays out though 2022. However, in the near term it appears relative valuations are irrelevant until fundamentals prove otherwise and the fear subsides. More importantly, as mentioned, covid-19 cases are beginning to fall which has yet to become front and center news. When it does we expect investors to return to stocks that can sustainably grow in a very slow environment and whos fundamentals may improve as covid-19 wanes. Thus, why we have focused on reasonably priced growth oriented health care companies as investments since procedure volumes interrupted by covid-19 should reaccelerate irrespective of economic growth.
For the week we added to our core health care positions while raising cash with the elimination of 2 value oriented companies. This way we can better hedge for any fall in markets with cash levels at 20-25% across growth portfolios. Further, since we believe market returns in coming years maybe very low (single digits at best) we shifted some assets in a preferred stock ETF which pays a nearly 5% dividend yield for stability/ diversification and given our belief as the economy slows to a crawl inflation will too. Investors should continue expect volatility through 2022. On a last note, the portfolio is a but more concentrated position wise vs historic norms, in part because of selectivity and because growth ideas that are reasonably priced that meet our criteria for risk/reward are increasingly rare. However, this should be temporary as opportunities arise.
Our model portfolio performance has been updated on our website as of 12/31/21.
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