ECONOMIC IMPACT. Focus the past several weeks shifted from war worries/ inflation to recession worries and rightly so since the Federal Reserve has continued to signal an aggressive stance on rate hikes. More importantly, commodity stocks and commodities are showing signs on finally reflecting recession risks as they begin to retreat. Many are now sounding the alarm, capitulating, that in order to stop inflation and reverse it the Fed must destroy demand through aggressive rate hikes and quantitative tightening ie printing less money effecting increasing rates even further. As we move through the Summer, recession and especially corporate earnings revisions downward will be front and center. As recession risks rise long-term interest rate may peak (if not already done so).
INVESTMENT IMPACT. The stark differences in value stock outperformance vs growth in part driven by inflation and interest rates may begin to normalize as we move through the summer. If one looks at the Russel Growth (IWO) vs value (IWN) indexes that performance difference can be seen over the past year. Much of the growth component correction has been driven by technology and to a lessor extent health care/ biotech. Now that fears have shifted to economic growth, value stocks may not outperform as much as both inflation wanes and LT interest rates peak or fall. Historically, now would be the time to revisit technology as part of our growth models, however, we do not believe the outlook for a growth rebound is very bright through the next several years nor are prospects of interest rate reductions within a year either. Thus, we continue to focus on health care, although recognizing the above, we added 2 medical device names more consumer driven vs insurance reimbursement driven that have fallen more than 50% recently.
On Friday a major health care facility operator fell 20% inflection of guidance being cut tied to labor inflation, which was long overdue, and spark selling in the sector and model underperformance. We expect this selling to be short lived given out outlook on inflation and growth waning as we move through the year.
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 4/31/22.
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