As always, I want to thank you all for being such great clients and friends. Let me also thank you all for allowing me to help pursue your financial security and with your hard-earned money. Many of you have been confident with new investments this year and many have helped me and their friends and loved ones by providing referrals.
For that vote of confidence, a special thank you. So far this year, we have seen a dramatic change of leadership in the markets due to the recovery from the pandemic lows of March 2020. The last 2 months has seen interest rates rise almost 40% from about 1.3% on the 10-year treasury to 1.8%. That rise in rates exacerbated a sell off in growth stocks and especially smaller cap growth stocks. The market, controlled more than ever by computer programs called algorithms make moves in accelerated fashions ahead of real market changes. As growth stocks are reacting to the higher rates and have declined from highs, value stocks have risen recently.
My portfolios have been highly concentrated in growth stocks over the last few years as growth has outperformed value as interest rates have been low. The Fed controls short term rates and can influence long term rates through bond purchases or sales. The Fed has discussed if conditions remain as they currently are with very high inflation, that they will raise short term rates. The market is now predicting and acting like rates and policy normalization will happen more quickly than previously expected. Bond owners have sold bonds as small rate changes can cause large losses. When rates rise, growth stocks sell off as investors demand more current returns from their investments, not a promise of future returns. This favors value stocks over growth stocks.
Most folks know that the rate of inflation is higher when compared to this time last year and from pandemic lows. What needs to be answered is whether this period of increased inflation is temporary or not. Demand for goods has been significantly higher than pre pandemic levels due to people being forced to stay home due to Covid and unequaled stimulus from the federal government. The Fed and many observers felt that labor shortages and supply chain bottlenecks would ease over time, but they have not. Not many people thought that this pandemic would last almost 2 years now and that has caused many of these issues. There are some hints that the supply chain bottlenecks are easing but the question is how quickly they become closer to the Feds mandate of 2%.
I have made significant changes in my clients’ portfolios over the past few months to counter the selloff in growth stocks. I have lowered risk by adding stocks that are more value oriented and reopening related and lowered the concentration in growth and especially small cap and mid cap growth stocks. I am very pleased with the new balance in client’s portfolio for the coming months. I believe that most components of inflation may be temporary as seen in the lack of demand for gold and silver which are traditional hedges against inflation but cannot “fight the tape” of what stocks are working and those that are not. I do think that that interest rates should come down or not move higher as quickly as the market expects and growth stocks could do better than value in the future, so I have held positions and added some higher quality growth names at significant discounts to market highs.
Thank you very much.
Past performance is no guarantee of future results. Investing involves risk and the potential to lose principal.
The information provided, including references to market sectors are for general informational and educational purposes only. No comments referenced herein should be construed as a recommendation of any kind or investment advice.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time and cannot be guaranteed. Actual results could differ materially from those anticipated. Please consult your financial advisor before making financial decisions.