ECONOMIC IMPACT. Last week we witness a 50 basis point Fed rate hike as wage costs accelerated by over 11%. This sparked continued worries on further tightening leading ultimately to recession worries worsening. What worries us the most is that inflation in our view is being under reported while the economy already has slowed. Meanwhile, the consumer is starting at a precarious position credit wise as seen below as the Fed only starts to raise rates. Never has a recession loomed with so high consumer credit which can mean that demand of goods may decline significantly once a recession commences. Further it may lengthen the period whereby economic growth is non-existent.
INVESTMENT IMPACT. This week we saw forced liquidation selling tied to mounting worries on inflation and recession. Interest rates rose further as the 10 year Treasury breached 3%. Many funds liquidated position as earnings season concluded and outlooks for growth waned by many companies. In health care, some high valuation companies in the cancer detection space literally crashed sparking liquidations even in health care space which we remain overweight. These types of violent liquation's usually mark short term pauses in selling as prices fall dramatically. Since most companies in model portfolios are unrelated to this segment of health care nor are dependent on economic growth (in fact would benefit if growth slows with inflation which is what we expect) as we continue to hold them. In fact, we added to some of them recently as well as added several new stocks to the growth models. The liquidations mention above and what we deem panic selling in growth stocks as valuations adjust lower may continue for a time. However, it has created DISLOCATIONS in valuations as indiscriminate selling occurs across the growth sector. We deem this a significant opportunity to buy certain companies in the medical device space that have large addressable underpenetrated markets that are market share leaders and in some cases have unique products in the areas that they address. Further, short term price fluctuations may not reflect their long-term fundamentals given the indiscriminate selling in fact many have return to 2019 levels. The use of ETFs or baskets of stocks is also adding to the indiscriminate selling of names mentioned above since they maybe part of an ETF that is being sold regardless of specific company fundamentals.
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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