On Monday, February 7th, Stephen Galli, CFP®, CPWA® hosted a client webinar where he presented a Q1 Stock Portfolio Update and discussed the many implications of the financial markets from the first quarter of 2022. Read the following Nisivoccia Wealth Advisors' market commentary, and watch a full recording as we discuss the information in more detail below.
The US financial markets can change quickly. After almost getting lulled to sleep in 2021, the first month of 2022 has been a wake up call. This January the S&P 500 experienced a correction (well, technically it didn’t experience a correction b/c as of 1/28 it only dropped 9.8% from it’s high which was set on Jan 3 2022 – a correction is defined as a drop of 10% or more…but close enough), and the Russell 2000 (small cap stocks) and the NASDAQ (technology stocks) have dropped over 15% from their all-time highs set in November of 2021. The S&P never experienced more than a 5% decline last year – which is rare. Since the S&P 500 was created in 1957, the index has averaged about one 10% decline and more than three 5% declines every year, according to Dow Jones Market Data.
If you tried to buy on the dips last year, it was almost impossible. Even when the market gave us a 5% off sale, it was almost gone before you could reach for your wallet (and frankly, a 5% discount just isn’t that compelling). While larger drops can be unsettling, they can also be better buying opportunities. A 10% sale is more attractive, and encouragingly this year, there seems to be many willing buyers with plenty of cash to put to work.
But as with all sudden market moves, there are usually clear winners and losers, and this time around technology stocks were on the losing side while energy stocks have been the winner. That is because one of the primary drivers of this market downturn is the upturn we’ve seen in interest rates. The change in expectations around the path of interest rates has been swift. In the summer of last year, the consensus was that there would be no interest rate rises in the US in 2022 and only one at the end of 2023. Now consensus is for at least 4, perhaps 5 rate increases in 2022! Higher rates force a revaluation of assets that trade based on future expected revenues – and high-flying technology stocks (not earning much now but promising to earn much in the distant future) as well as many other speculative assets have seen their Price-to-Earnings (P/E) ratios drop from nose-bleed levels. In the last quarterly update we noted our conviction behind low P/E energy producer Coterra Energy (CTRA), which has defied the market drop and is up over 13% YTD. We remain positive on CTRA due to its strong balance sheet, high margins and above-average free cash flow yield, the type of quality metrics that become more important when the market is volatile. We also remain positive on the Energy sector in general, as several economists we follow are bullish on oil prices, and energy stocks also represent a potential hedge against risks from upside inflation surprises and geopolitical conflict. Total Energies (TTE) is another name we favor, providing the trifecta of energy sector exposure, international equity exposure and a 5%+ dividend.
While we want to overweight companies and sectors that have reasonable valuations, in a world that will be shaped by the concurrent revolutions in digitalization and de-carbonization, we also think investors should be focused on the characteristics of companies – their competitive position, their ability to adapt and the potential for investment opportunities to grow. Also, inflation is now something that we need to watch closely. We typically experience higher inflation when we emerge from a recession. This time around, the recession was very short, and inflation is quite high. We want to own the companies that can better navigate this environment (such as easily passing on higher input costs to their customers) – and one factor that matters most is scale.
We look forward to having more detailed discussions about portfolio strategy, and we encourage you to watch a recording of our webinar where we discuss the Q1 financial market and individual equity portfolios below.
Please do not hesitate to contact us if you have any questions or to discuss a topic further.