BCA Weekly Commentary 10/07/22: Prepared For Stagflation
ECONOMIC IMPACT. The combination of higher rates, limited fiscal and monetary support and elevated debt may result in a prolonged period of no growth and elevated inflation. Rates may stay elevated to sometime as well, but we reiterate that additional rate hikes may tip the scales to recession in coming quarters. Infact, signs are readily evident it maybe immenent as corporate earnings decelerate at an alarming rate especially in consumer sector. It may take post mid term election for this to show up in economic data to prompt Fed to take foot off hiking.
INVESTMENT IMPACT. Elevated interest rates and no economic growth may not be a good backdrop for growth stocks especially when valuations remain elevated ex smaller companies. Growth multiples may contract further as rates remain elevated. So where do turn to in a zero growth environment with elevated inflation? In our opinion those companies with attractive yields where clients can get paid to wait for better times. Thus, we have almost completely turned over models towards yields vs growth. Specifically, even our growth models yields are well over 3% currently.
We remind investors that going forward expectations for returns for the overall market over the next decade remain low as we expect well below returns vs history. Be that it may we are hopeful our models can improve on that going forward.
Our model portfolio performance has been updated as of the date of this newsletter.
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