SUMMARY
Markets are fearful about how far monetary tightening may go. We do not see this as a typical inflationary period and believe there is more to the equity bull market than stimulus.
- It was a tumultuous week in markets, with investors on edge, worrying how far central banks will go to stamp out inflation. Since January 3, the S&P 500 index has sunk 8% while the Nasdaq is down 12%.
- The Fed’s signaling its intention to raise interest rates and reduce its balance sheet simultaneously has already resulted in a true, effective tightening of monetary policy in early 2022.
- Yet, we believe this isn’t a typical inflationary period. The torrent of monetary, fiscal stimulus and COVID-driven supply distortions over the past two years caused major supply-demand imbalances and labor market distortions.
- We also believe policymakers have little choice but to accept the one-off rise in consumer prices that resulted from COVID stimulus and temporary – albeit lingering – supply/demand imbalances. And in our view, policymakers will understand that hurting consumer demand won’t solve current challenges.
- What are the considerations for portfolios now? The early 2022 reckoning in stock markets has been concentrated in equities with the highest valuations. As such, we prefer to limit allocations in US growth equities to established, profitable firms. Our largest allocation and largest sector overweights are global dividend growth equities and healthcare, respectively.
- For the immediate outlook, we’re looking outside the US: the valuation for most of the world’s individual shares look nothing like the highest fliers on the Nasdaq. Non-US shares across all regions trade at a mere 13X expected 2022 EPS.
- While not offering a “good yield,” the recent rise in rates means investment grade securities are becoming a potentially compelling low-risk asset for us in portfolio construction.
