Category: CIO Commentary

So Many Moving Parts

2022 is a year most investors will be glad to put in the rearview mirror. Capital markets were unkind, almost all of them. Rather than try and dig into all the reasons why, we’ll summarize by saying that anything that could create inflation did – money printing, war, supply chain bottlenecks, slow response from the Fed, etc. – and the subsequent rise in rates derailed stocks, bonds, and just about everything else. If one could have known in advance just how high rates might go, then 2022 might not have been such a surprise, and maybe it could have been navigated better. With correlations high, it still would not have been easy, but maybe a bit easier.

This is an excerpt from a longer commentary. Please Download the PDF to read the entire 4th Quarter 2022 CIO Commentary.

It’s still (mostly) all about inflation

We won’t spend this entire letter on inflation, as we may seem to have done for several quarters now, but we will give you a brief update. Inflation remains the biggest driver of financial markets, for good or ill. At their Jackson Hole meeting in late August and again in late September, various Fed members spoke strongly about the need to contain inflation, capped off by Jerome Powell’s clear message that the Fed will raise rates until inflation falls, and keep them there until it’s back toward the 2% target rate. His remarks were shorter, his focus narrower, and his message more direct – we will bring price inflation back down to 2%: “A failure to restore price stability would cause more pain than restoring it will cause.” The market took this to mean that short rates are going up more than most had anticipated and may stay there for longer too. Longer run, 2 to 2.5% short rates may be appropriate once inflation comes back down toward target, but not now.

This is an excerpt from a longer commentary. Please Download the PDF to read the entire 3rd Quarter 2022 CIO Commentary.

The times are getting tougher

Pretty much the whole world has been wrong about how high inflation would go – including us. As investors’ views have changed, they have sold fixed income securities, pushing prices down and driving the Bloomberg Barclays US Aggregate to its worst quarter in 40 years at -5.93% in Q1 2022, followed by -4.69% in Q2. This -10.35% year-to-date loss is the worst first half of the year ever for the index. Results this poor don’t tend to occur when investors anticipate and are properly positioned for what lies ahead.

We believe the single most important investment question today is whether the Fed will – or won’t – get ahead of inflation. Typically, the Fed must balance the dual mandate of full employment and low inflation. Because inflation has been low for most of the past 40 years, the Fed has historically been able to respond quickly to economic or market events by easing rates. With inflation today above 8.5%, that calculus has changed: We expect that until inflation comes under control, the Fed will be talking tough and raising short rates, even if stock and bond prices are falling and even if the economy appears to be slowing. Until the Fed proves their mettle in taming inflation, they have lost the option of easing rates. We believe that only once the Fed has shown they can get inflation under control will they regain the ability to provide liquidity when markets require. This suggests a more difficult and volatile market backdrop in the short term, with the end of this term dictated by the path of inflation.

This is an excerpt from a longer commentary. Please Download the PDF to read the entire 2Q2022 CIO Commentary.

So Many Questions, So Few Answers

Rarely has the investing environment been as murky as it is today. We are making history – but in all the wrong ways.  War in Europe for the first time in 75 years.  Inflation hitting a 40-year high.  US politics as divisive as they’ve been since the Vietnam War (some would say Civil). The emergence of China as a global economic powerhouse creating a new and uncertain geopolitical calculus. The first pandemic in 100+ years, easing haltingly into an endemic. The US reaches record-level peacetime debt-to-GDP.  And, as if all that weren’t enough, we may be nearing a planetary tipping point with carbon intensity.

As we noted in our last letter, doing nothing in response to new information is an active decision. We take the same counsel that we give our clients: In times of uncertainty, be disciplined in adhering to policy and process. Rather than being reactive, lower your center of gravity and exercise patience as you prepare to be opportunistic.

Below, we share our thinking on some of the more dramatic current events and their possible investment implications. We also summarize portfolio adjustments we have made to date to strengthen our – and your – positioning in the face of such unpredictability.

What Will Matter Most in 2022

Anticipating the most impactful events of each coming year is a Wall Street tradition, and one we can hardly pass up either. Every year significant things happen in the world that meaningfully impact the markets, and hence, your portfolio, whether or not you choose to specifically address these potential disruptions. For example, some believe that 2022 could see China invade Taiwan or Russia start a pan-European war. We do not expect either scenario (although Russia may indeed invade Ukraine) and so we are not currently positioning our portfolio for either possibility. Even though we are “doing nothing” about these issues, we would call that an important decision in and of itself. We are aware of the potential scenarios, but do not share a belief in their likelihood. Others will take different views and may position their portfolios either to avoid what they believe will be bad outcomes, or even attempt to benefit from such outcomes. Those who have positioned to avoid bad outcomes sometimes enable markets to end up rallying on, for example, “bad” economic numbers that are actually “less bad” than they expected, and vice versa. Ultimately, the market is a forward-looking discounting machine.