THE RISK MANAGER Advanced Thought Leadership for Your Money®
Q1 2022 Market Update
TRM MARKETS Q1 2022 & GRAPHS
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United States has had approximately 65 million cases of coronavirus. It has injected approximately 527,000,000 vaccines. Additionally, it has experienced approximately 847,000 deaths attributed to the virus. We have lived through a lot over the last two years. The current good news is that the omicron variant is trending down, starting right after Christmas, according to the Centers for Disease Control. I am currently awaiting new figures for the last few weeks, however. We seem to be filling hospitals again. The recent increase has caused renewed supply chain issues since more workers are calling in sick. Since this variant does not have the death rate of previous variants, it is expected to impact worker production for a shorter time. It is important note however that more variants are expected by the Centers for Disease Control. It appears to be a “live with” virus.
INFLATION & RATES
Interest rates will likely rise this year. Fed is citing an improving labor market, higher wages, and supply chain bottlenecks. In December they officially announced plans to accelerate the taper (decrease) of its Treasury bond purchases to about $30 billion per month. This has led many economists to assume that they will conclude their tapering program by the end of March this year. This tapering decline opens the door to rate hikes starting this year. Fed is no longer using the word “transitory” to describe inflation in its messages. This likely means that Fed will be very hawkish (use higher interest rates) on inflation especially if overall unemployment continues declining. In the meantime, for those in retirement living on a fixed income, low interest rates present special problem. We at Fidere Advisors understand this as we address the income issue.
Corporate profits are reported in arrears. 2021 Q3 earnings were very strong with about 81% of S&P 500 companies exceeding earnings expectations and about 70% exceeding revenue expectations. Q2 2021 US corporate profits were up about 10% whereas Q3 2021 corporate profits were up about 3.5%. The gain was not a strong, though it was a gain. So far it appears that companies have been able to defend their profit margins despite higher prices of raw goods and materials. The US dollar has declined by little under 1.5% in value which helped oversee sales of American-made goods. It is important to note that Gross Domestic Product has been climbing since the third quarter of 2020.
GDP rises except for full year 2020 when virus uncertainty was at its worst. This typically provides a tailwind to corporate earnings. However, consensus is that interest rates will rise in 2022 and slowing economic growth along with higher corporate taxes and wages could work together to slow earnings growth. It would not be out of the question to see US S&P 500 return potentials only in the single digits going forward. This sobering possibility leads us to look elsewhere for more robust growth potential.
We believe that our strategies should maintain a common process while assessing broad market considerations of fundamental issues. With that, you may notice we make tactical portfolio adjustments designed to exploit certain valuation anomalies. Right now, we especially like domestic value and certain international prospects going forward. This doesn’t mean that we forgo growth and domestic investing. We simply weight our strategies to take advantage of likely mispricing by the marketplace. This valuation dispersion chart shows the US S&P 500 valuation spread currently versus a 25-year average. As you can see valuations are spread so broadly that there are many lower compared to the average as well as many higher. This indicates that active management and stock picking ability will be of high value going forward. We have likely exited the era of simply buying passive baskets of stocks to create extraordinary gains.
Fidere Advisors sees the value in broad diversification. We may emphasize certain areas but generally it is not to the exclusion of all other areas of the market both foreign and domestic. We feel that this is a prudent methodology when combined with hiring managers that have exhibited successful processes and consistent performance.
Not an offer to transact any securities, and not a financial planning engagement.
Advisory Services through Fidere Advisors, LLC. (dba FIDERE), a Registered Investment Advisor. Information provided has been prepared from sources believed to be reliable but is not guaranteed and does not represent all available data necessary for making financial decisions and is for informational purposes only. FIDERE and its representatives do not offer tax or legal advice through FIDERE. Please consult the appropriate advisor.
THE RISK MANAGER consolidates current information into actionable content designed to help investors navigate risks in the current economic and market environment – from a conservative view. The larger purpose of this work is to optimize financial plans and bring the reader closer reaching long-term life goals.