Welcome to another edition of “Ethel’s Diamond Post.” When I was a little girl, my mother would watch the soap opera “As The World Turns” every day. She loved the show because a new headline would keep her captivated on the television every day until the end. Since the beginning of the year, I feel the economy has been similar to watching an episode of “As The World Turns,” for no matter the news, the stock market continues to throw a different baby into the bathwater regardless of the water’s temperature. Did you know that approximately $6 trillion of paper wealth has vanished from the stock and bond market since January 2022?
Over the past few years, growth stocks have dominated the markets, but the selloff escalated the downturn in the first quarter for value companies. After a brief reprieve in March, stocks tumbled further in April, with declines that took the market’s subpar performance back to 2000. The April weaknesses increased the negative performance from the first quarter of 2022, the first down quarter for the equity market in two years. Today, the capital markets open much higher but missing the mark on regaining all the losses that vanished this week. The S&P 500 has delivered the sixth straight week of losses, which we have not seen since 2011. VZD Capital Management, LLC, utilizes this “dead cat count bounce” to retreat from companies with high beta numbers, negative earnings, low institutional ownership, and distorted balance sheets.
To remain forward-thinking in our rebalancing initiatives, we must stay steadfast in monitoring the different variances of the Omnicorn, interest rates, the housing market, and unemployment numbers. General correlations no longer seem to adhere to past strategies that worked in the past. The present catalysts have no sympathy for the investment community due to higher interest rates, runaway inflation, supply chain challenges, Russia’s invasion of Ukraine, and China’s COVID-19 lockdown. While Wall Street attempts to digest and factor in the uncertainty, the rollercoaster ride continues to gain speed as inflation accelerates with the sudden lack of baby formula. We expect to witness increased volatility as we move further into 2022.
When the stock market tumbles, the fixed-income market generally picks up steam. The S&P 500 fell -8.72 percent in April, and the universal benchmark is down 17.5 percent thus far from 2022. The NASDAQ is down 27.3 percent, a significant downturn since the housing bubble. Today’s market’s bounce embraced the consumer discretionary sector, companies that make products wanted but not essential. Such companies tend to perform well in a bull market but generally lag during a bear market. Despite inflationary rates, consumers want to travel either by airplane, train, or automobile. During the pandemic, they were forced to work from home and balance work, family, and careers which took a toll on their mental and physical well-being. Everyone needs a vacation, a break from the daily routines to rejuvenate by a road trip or vacation to a faraway place. Yet, due to the increase in gas prices, so do airline ticket prices and every aspect of traveling. We look for airline companies, hotels, motels, and summer entertainment places to fair well throughout the summer months and beyond.
The housing market is still posting solid numbers, but as mortgage rates surge higher (as interest rates move higher) will be an interesting industry to monitor. U.S. mortgage rates jumped again this week, extending a steep climb that is shutting out the would-be homebuyers out of the market. The average 30-year loan was at 5.3 percent, up from 5.27 percent last week and the highest level since July 2009. We could see many upside-down homeowners if recent buyers do not stay within their new homes for three to six years. Strong demand and low inventories have resulted in prices that rose dramatically.
Jerome Powell, Chairmen of the Federal Reserve, shifted the focus from full employment to price stability as he began aggressively hiking interest rates in March to slow down inflation. Inflation has been problematic for the Feds while the job market recovery has been strong. The Consumer Price Index (CPI) rose by 8.5 percent year to date to March 2022, the most significant annual increase since the early 1980s and a 6.5 percent core basis, excluding food and energy prices. Inflation will likely remain elevated well into 2022 and hopefully will slow down before 2023. In 2022, the fixed-income market did not escape the carnage caused by the downturn in the capital markets. Value-oriented stocks have seen modest gains and a year-to-date loss significantly less than the S&P 500 companies. Things are treacherous in the bond market this year, too. Short duration strategies could be the fair play right now.
VZD believes that the U.S. economy, Wall Street, and Corporate America will continue to recover as we progress beyond the pandemic. We have seen the U.S. treating the coronavirus as an endemic versus a pandemic and not as disruptive to our daily lives. We see the Russian invasion of Ukraine, which is the primary driver of the stock price tsunami in the last few weeks, should have no impact on the earnings. However, since we are still in the early stages of this event, we will need to monitor how widespread this situation becomes. Central banks worldwide are walking a tight rope as they anticipate aggressive interest rate hikes to decrease inflation while not moving too fast to avoid triggering a recession.
So, where do we go from here to take a defensive approach for the market ahead? We look for solid fundamentals and robust evaluations, so the “old dead cat bounce” could occur unexpectedly depending on the level of uncertainty improving before year-end. Of course, we do not have a crystal ball, but our outlook for the GDP is between 3 or 4 percent growth. We believe in being transparent. We look at the long-term horizon and do not let the short-term knee jerks derail the investment goals and objectives. We increased cash positions to employ more in the energy, utilities, commodities, aerospace and defense, and consumer staples sectors. We prefer companies with solid free cash flow or distributing cash to shareholders. Dividend stocks benefit from inflation, given the earnings are steadfast. Many dividend yields are higher than the 10-year Treasury yield.
The good news came today when the U.S. Labor Department showed inflation slowed a bit in April, down 8.3 percent from 8.5 percent in March. We saw this sign as the “glass is half full versus half-empty,” so we were calling our clients to provide customized roadmaps to protect our clients from these unsettling times. If you have questions or concerns, please feel free to contact us, for we realize that emotions can run high after digesting so much information.
Many people became couch potatoes, but first-time stock pickers fueled by stimulus cash, social media endorsements, and internet applications dove headlong into retail investing. Many of these influencers have no formal training or credentials to be a financial advisor and no background in professional investing, leading them to pick stocks based on popular opinions and chat room discussions. So, if you are not a client of VZD, please make sure your financial professional is licensed and listed on the Securities and Exchange Commission’s website – www.sec.gov.
As our logo states, our clients come first, and we are thankful for the continued trust and confidence you have placed in us. We are moving to Lenexa the second week of July and look forward to a future meet and greet coming soon for our valued clients, family, and friends. If you know of others who might benefit from our small boutique firm where each client becomes a member of our extended family, please know we welcome your referrals.
Ethel and Nikisha