After reaching record highs in 2021, investment markets—at home and abroad—have experienced a challenging start to the new year. At the time of publication, the S&P 500 index is down 8.10% year-to-date[1], while the MSCI World Index is off 7.02%.[2]
As we’ve noted previously, periodic bouts of volatility are a fact of life for financial markets and long-term investors. While no one enjoys market turbulence or pullbacks, they are signs of a normal market cycle. In this quarterly letter, we wanted to share our perspectives on these and other developments we are monitoring, along with the steps our team is taking to help clients navigate the market environment. As always, we invite you to reach out to us with any questions you might have.
At Sound View, we continue to focus on the core elements of our strategy
In many ways, difficult market conditions serve as a useful reminder to stay focused on “tried and true” investment philosophies and long-term investment objectives. To that end, we’ve been working to ensure our clients’ portfolios are positioned appropriately. This includes:
- Maintaining a healthy measure of diversification. Just five companies—Apple, Microsoft, Alphabet, Amazon, and Facebook—comprised nearly 25% of the S&P 500’s value during much of 2021.[3] As it relates to the performance of that index, the stocks of a similarly small group of firms—Apple, Microsoft, Alphabet, Nvidia, and Tesla—accounted for roughly a third of the S&P 500’s return last year.[4] In market environments like this, periodic and strategic rebalancing become especially critical.
- Emphasizing quality. Over the last few years, high-quality companies have significantly improved their balance sheets. They have little debt and good free cash flow, pay dividends that are supported by earnings, and have a history of growing payouts at a faster rate than inflation. Quality and value are especially important during challenging market environments.
- Ensuring portfolios have a “bomb shelter” component. This kind of protection allows clients to weather difficult periods in the market without being forced to liquidate what they hold in equities or other long-term investments. If you look back in history to periods when the market has staged a dramatic rebalancing, the key was having the staying power necessary to remain invested.
- Keeping expectations in check. We’ve seen double-digit returns in the stock market in recent years. Moving forward, we expect a more muted return environment. We’d be happy to see a year where we had good single-digit returns and are advising clients to think in similar terms. If history is any guide, it would not be surprising to see equity markets take a bit of a breather following a spate of very strong years.
Key themes, trends and data we are monitoring
While we are taking strategic steps today, we will be closely monitoring inflation, interest rates, and the pace of economic growth in weeks and months ahead and adjusting our strategy as needed. Below is an overview of what we see as the predominant issues and concerns:
The Russian invasion of Ukraine
Following weeks of posturing and rhetoric, Russia launched a full-blown invasion of Ukraine on February 24th. [5] As expected, this news pressured global equity markets lower and energy prices (most notably crude oil) higher. To begin March, U.S. West Texas Intermediate crude traded at $103.41 per barrel—the highest price since July of 2014[6] and a signal that U.S. energy prices may be moving higher in the near term.
While these moments of geopolitical unrest are certainly unnerving, research shows that these types of events are not a reason to deviate from a well-thought-out investment strategy. A recent study looked at how 20 “market shocks” since Pearl Harbor impacted the S&P 500. On average, the S&P 500 saw a -5.0% total drawdown and took just 47 days for the price of the index to recover.[7] As in any conflict, the people of Ukraine will be the most impacted, and our thoughts are with them as they work to navigate this very difficult period. This situation is still evolving rapidly, and we will continue to monitor it very closely in the coming days and weeks ahead.
Inflation
One key question in the marketplace centers on whether the inflation we are seeing is transitory or more persistent? Many remember the rapid run-up in prices that occurred in the 1970s and 1980s, and some are worried we are heading back there—not for a few years, but for an extended period. The fact that the U.S. Consumer Price Index rose 7% in December, its fastest pace since 1982, only adds to such concerns.[8]
At Sound View, the inflation trend is a factor we monitor closely, but the reality is that the vast majority of our clients are well-positioned to withstand a range of inflationary environments. To check this, our team periodically stress tests our client’s financial plans, simulating a range of market environments. This helps remove emotional decision-making from the equation and show in real numbers the impact that inflation is likely to have on a client’s portfolio and long-term financial objectives.
Interest rates
Concerns about rising prices have served to push short- and long-term interest rates higher, with many economists expecting the U.S. Federal Reserve to pursue a tighter monetary policy stance in the months ahead, beginning with the next FOMC meeting in March.
Consequently, we have been cautious with respect to our clients’ fixed-income exposure. On the bond side, we are focusing on short-duration issues, and have been adding in other vehicles such as real estate (when appropriate) to boost income and serve as potential buffers against inflation.
The economy
Last year, the U.S. economy expanded at its fastest pace in nearly four decades,[9] boosted by strong inventory-building in the second half, which may have set the stage for more tepid conditions in the near term.[10] As with equity markets, economies don’t expand forever, and we may be entering a more moderate period of growth for the U.S. economy.
That said, a slowdown could be problematic for some areas of the market, and maybe even catalyze a change in leadership from the large cap growth names that have fared so well for so long. The cycle may shift in favor of value-oriented stocks, especially those of the dividend-paying, high quality companies referred to earlier.
Our team is closely analyzing the balance of growth and value stocks within client portfolios and will be making adjustments as necessary to this positioning going forward.
Closing thoughts
In the coming months, we will continue to closely monitor economic and market developments and keep you apprised of legislative changes that may impact your wealth management and estate planning strategies.
Our team at Sound View has witnessed a lot in the investment markets over the last 30 years. Regardless of what the future holds, we’ll be with you every step of the way.
ABOUT THE AUTHOR: Melissa Bouchillon, CFP®
Melissa co-founded Sound View Wealth Advisors to create an independent, boutique, client-focused firm. She truly cares about her clients and creating a positive impact on their financial lives. Melissa spends a lot of time getting to know her clients’ goals in order to create detailed, customized financial plans that incorporate all aspects, including cash flow management, gifting strategies and estate planning techniques aimed at providing intergenerational help to families to secure their financial futures. This plan then serves as a roadmap to build out customized investment strategies that help protect and preserve her clients’ wealth.
Before Sound View Wealth Advisors, Ms. Bouchillon joined Merrill Lynch in 2004. During her time at Merrill Lynch, she served as a First Vice President-Wealth Management with the Bouchillon, Ham & Dekle Group and Senior Resident Director managing the Skidaway Island Office. She is a Certified Financial Planner™ , a designation awarded by the Certified Financial Planner Board of Standards, Inc.
In addition to her passion for helping her clients, Melissa is on the board of organizations near and dear to her heart, including the Landings Military Relief Fund, Marshes of Skidaway Island and the Savannah Music Festival. She is a wife and mother, an active runner and an avid volunteer.
Disclaimer: The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute personalized legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Information obtained from third party sources are believed to be reliable but not guaranteed. Sound View Wealth Advisors Group, LLC makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
[2] MSCI, Real Time Index Data Search (link)
[3] Barron’s, Big 5 Tech Stocks Now Account for 23% of the S&P 500 (link)
[4] Wall Street Journal, Five Big Tech Stocks Are Driving Markets. That Worries Some Investors. (link)
[5] U.S. News, Russia Invades Ukraine: A Timeline of the Crisis (link)
[6] Reuters, Oil prices surge over 7% as global crude reserve release disappoints (link)
[7] LPL Research, What Mideast Escalation Means for Markets (link)
[8] The Wall Street Journal, U.S. Inflation Hit 7% in December, Fastest Pace Since 1982. (link)
[9] The Economist, Interest Rates May Have To Rise Sharply To Fight Inflation (link)
[10] CNBC, CNBC Fed Survey Forecasts more aggressive Fed tightening (link)