ECONOMIC IMPACT. The consensus of expecting at least slow growth or recession has grown considerably. Although this is more so among institutional investors it seems as fear is greater there. Consumer spending is showing signs of slowing, but not to the level of recession. To us, we are watching commodity prices to confirm recession fears which are still elevated, but are showing signs of as metals prices have fallen double digits over the last month while food prices have not. Energy prices remain very high and that is the key to support market's capitulation on recession if say Oil falls below $90/ barrel as an example. Further long-term interest rates have to begin to fall which they haven't to confirm belief recession is real.
INVESTMENT IMPACT. In retrospect, to other post bubble periods of the past which were marked by massive short covering rallies, the past week was illustrative of that especially on Friday. Liquidity is low and thus on short covering days (people better on stocks falling by selling stocks) buying is exaggerated in those stocks where the short position is highest. Bear markets don't usually end in a bang but end in a whimper meaning they take time to settle for a relatively long period before moving higher. The morningstar.com growth index is down 30% on the year almost 2x the market and on Friday that was where most of the appreciation occurred ie in growth where short positions are highest. Although market valuations are nearing historical P/Es of 15-16X forward earnings and growth stocks for sure have fallen to levels where some maybe attractive, it maybe to soon to say the selling is over. Why? Well we have the rest of year to see rate hikes continue and take hold in slowing both inflation and growth so things remain uncertain as to what forward earnings for the market will actually be to determine if market is "cheap". In addition, the Fed in coming months has announced plans to reduce money printing starting next month and accelerate that into Fall. Further, commodities have yet to correct, reinforcing inflation is still real nor has inflation indicators hint of it abating (although in time they probably will, but so will growth). Lastly, since our base case on the economic growth is ultimately a recession and one that unlike other periods recently, will NOT be marked by the Fed reversing interest rates or money printing, we are doubtful a quick reversal of market indices is in cards.
Given, the above, on Friday we raised cash levels considerably across the board. Our Aggressive Growth model appreciated over 6% on a single day, illustrating many of the points above, for the first time in 4 years doing so at that high level. As growth slows a rotation back to higher growth higher valuation names may occur, but in our view too soon to occur. Nonetheless we trimmed mostly the slower growth names and to lessor extent higher growth core names to add flexibility on that shift if and when it unfolds as we move thru the summer and to recognize the market may remain volatile for quite a while until things are clearer.
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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