April 4, 2022
Dear Valued Client:
Enclosed are your reports for the period ending March 31, 2022. This package will also contain spreadsheets (clients with over $750,000) and various information pieces.
Market Recap of Q1 2022
We had a very calm year in 2021, but volatility is back this year! Inflation has surged to 40-year highs and the Federal Reserve has promised to raise interest rates faster than previously thought. Russia also surprised the world with a full-scale military invasion of Ukraine.
The S&P 500 ended January with the worst monthly return since March 2020 which is when the pandemic hit. The invasion of Ukraine also sent commodity prices surging. This caused markets to drop even more since there were new concerns of more supply chain interruptions and even higher inflation.
In March, the Federal Reserve raised interest rates by just 25 basis points, the first-rate hike in over three years. Since the rate hike was no worse than markets feared, there was a “relief rally” in stocks that produced a solidly positive monthly return for the S&P 500 and carried the major indices to multi-week highs by the end of the quarter.
In sum, the first quarter of 2022 was the most volatile quarter for markets since the depths of the pandemic in 2020. Most indexes were down mid-single digit levels. Our portfolios also had modest declines as you can see in your reports. Client income levels were maintained for individuals in retirement
Q1 Performance Review
All four major equity indices were down in the first quarter. The biggest losses were in the tech heavy Nasdaq. Our exposure in this area was limited as most of our portfolios are over-weight in value stocks. This is due to the dividend income we receive in this low interest rate environment. Value stocks also tend to go down less when the market is in decline and this time was no different.
By market capitalization, large-cap stocks outperformed small-cap stocks in the first quarter. This was to be expected given the geopolitical uncertainty and rising interest rates. From an investment style standpoint, value massively outperformed growth in the first quarter as select value ETFs registered positive returns over the past three months. This benefited our clients in a good way.
On a sector level, only two of the eleven sectors in the S&P 500 finished the first quarter with a positive return. Energy was the clear standout as the sector benefitted from the increase in geopolitical uncertainty. Financial stocks are an area we have some exposure, and this sector relatively outperformed the S&P 500. Financials only had a small loss as the sector has historically benefited from rising interest rates.
Internationally, foreign markets declined in the first quarter. Geopolitical uncertainty hit foreign markets early in the quarter, erasing what was a moderately positive performance until that point. Emerging markets slightly lagged foreign developed markets due to a stronger U.S. dollar and rising geopolitical tensions.
Switching to fixed income markets, bonds registered someof its worst performance in years during the first quarter. Most major bond indices declined in the face of high inflation as the Federal Reserve consistently signaled that it was going to raise interest rates faster than investors had previously expected. We need to be reminded that bonds are mainly used for income (mostly tax-free in our portfolios) and for re-balancing opportunities when markets correct. Your income on your bond funds remained steady even though there were asset value declines. It is critical that you understand this.
2022 Market Outlook
As we start to focus on the rest of the year, markets are facing the most uncertainty since the pandemic, as headwinds from inflation, less-accommodative monetary policy, and geopolitics remain in place.
But while clearly there are risks to portfolios as we start the new quarter, it’s also important to note that the U.S. economy is very strong and unemployment remains historically low, and that reality is helping support asset markets. Additionally, interest rates are rising but remain far below levels where most economists forecast that they will begin to slow the economy. Corporate earnings are still strong as well as share buybacks. Finally, consumer spending, which is one of the main engines of growth for the U.S. economy, is robust, and corporate and personal balance sheets are healthy.
From a valuation point of view, earnings-estimates for the year 2023 are $235 per share for the S&P500(*). With the index trading at approximately 4,500, we have a forward earnings yield of 5.2% with the 10-year treasury at approximately 2.375% and heading higher. Again, we believe the market is slightly over-valued at these levels.
During this mid-term off presidential electing year, we anticipate some market weakness will be needed to set up a long-term buying opportunity. Our advice is to “stay the course” with low expectation levels for this year due to the interest rate hikes that are anticipated. We will proactively advise you when we see good long term entry points. Owners of municipal securities are also advised to be patient during this time and to focus on your income that you continue to receive.
Office Notes
Please remember we will be having client appreciation events on Wednesday, July 20th at Spring Lake Golf Club and Saturday, August 20th at Monmouth Park Racetrack. We are doing these events so we can have more “Face Time” with our clients since we have missed each other due to the pandemic
We have generated a tremendous number of new clients during the new year thanks to your recommendations and our amazing team.
We thank you so much for your business and please call our office if you would like a financial check-up.
Sincerely,
Jack D. Oujo, CPA/PFS, CFP, CSA, MS Taxation
Certified Senior Advisor
Disclosures
- Investment Recommendation Disclosure: The client acknowledges that the representative is relying upon the client information (e.g. risk tolerance, time horizon, and investment objective) for the purposes of providing recommendations to the client. The client agrees to give the representative notice of any significant changes in the client information and to provide the representative with any additional information that the advisor may reasonably request.
- Historical Performance Disclosure: Past performance is not indicative of future results. The investment return and principal value will fluctuate with the market. Investor’s shares when redeemed may be more or less than their original cost.
- General Market/Investment Risk Disclosure: Investments are subject to market risks including the potential loss of principal invested. Yields and prices will fluctuate along with the market and other economic conditions. Securities may be worth less than the original cost when redeemed.
- Information Disclosure: The information contained herein has been obtained from sources considered to be reliable, but Avantax does not guarantee the accuracy or completeness of any statement.
- A portion of municipal bond’s income may be subject to state or local taxes. A portion of a municipal bond’s income may be subject to the federal alternative minimum tax. Investing in municipal securities can be volatile and include such risks as: adverse tax or court rulings, legislative or political changes, market and economic conditions, issuer, industry-specific (including the credit quality of municipal insurers), and other conditions.
- The Avantax affiliated companies exclusively provide financial products and services, and do not provide or supervise tax or accounting services. Advisors may provide tax, accounting or other services through their independent outside businesses, but these services are separate and apart from Avantax.
- Standard & Poor’s is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index
- Asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment losses.
- Dollar-cost averaging does not assure a profit and does not protect against loss in declining markets. Such a plan involves continuous investment in securities regardless of the fluctuation of price levels of such securities. An investor should consider his or her financial ability to continue his or her purchases through periods of low price levels.
(*) Performance and Data numbers are per Morningstar and Earnings Estimates are per Bob Brinker. Client spreadsheets are normally sent four times per year to clients with over $750,000 of investment assets and twice per year for clients at the $500,000 to $749,999 level.
** Represents brokerage, direct to fund and annuity assets under management as of 6/30/2019
