For the last few months, we have discussed with you that despite the current economic and corporate profit tailwinds, stock and bond valuations did not leave a lot of room for meaningful gains in 2022.
Our outlook for this year called for an increase in volatility. We also anticipated some capital repositioning out of the high-flying, speculative growth areas that benefited from low rates, into sectors and asset classes that have lower valuations and more defensive characteristics. This is exactly what is happening so far in January:
What makes this recovery different from past ones is inflation. This “shift” from the previous transitory view happened at the November 2021 FOMC meeting as the Fed is now looking to raise rates over the next two years. This is not tightening, but a normalization of a decade long low-rate environment that has led to excessive risk taking in certain parts of the market.
Fed Chair Jerome Powell also remembers December 2018 when the stock market almost hit a bear market. Back then, the market wanted no rate hike in 2019, or, at most, one rate hike and Powell talked about two rate hikes. At the next FOMC meeting on January 4, 2019, he changed his views and announced the Fed would be patient about raising rates further. The Fed ended up lowering rates later that year and the S&P 500 index rallied 31% in 2019. This time around, the next FOMC meeting is this Wednesday, January 26, 2022.
Starting with the allocation changes we made last year, our portfolio positioning reflects this more challenged outlook for stocks and bonds. Stocks can still deliver positive returns, but maybe not to the tune of 26% annualized for the last three years! Given that the long-term return for stocks is closer to 10%, we think moderation is warranted. Similarly, bonds still have a role in portfolios as they help dampen the volatility of stocks and can act as a source of liquidity.
While market declines are unsettling, Sendero portfolios are not solely invested in the S&P 500 index. We intentionally build diversified portfolios for the long-term using strategies that have differentiated roles to help protect in this kind of market as well as participate when markets eventually rebound.
If you have any questions or want to have a conversation about the market or your portfolio, please contact Liz, Ed, Fred, Scott, Tyler, or myself. Your Sendero team is ready to help.
Amaury de Barros Conti