Thoughts on the First Quarter
Updated: Aug 9, 2022
As many of you may remember, I began the year with a presentation. This presentation was my outlook for 2022 that I wrote mid-November. The very first slide I showed investors had a quote from boxing world champ Iron Mike Tyson. When it came to fight preparation he stated, “Everyone has a plan until they get punched in the mouth.” I used that quote because when it comes to financial predictions, we must include the possibility for a punch to the face. The punch to the face that occurred was of course Vladimir Putin.
When Russia invaded Ukraine, it obviously set off a reaction in the markets. We have seen volatility jump exponentially. Stocks have fallen from their highs in January by nearly 13% as of this writing. Crude oil traded over $123 a barrel and interest rates fell as investors flocked to the safety of United States Treasury bonds.
As I type, the Federal Reserve has just announced (widely expected) that they are raising rates .25%. This is the first interest rate hike since 2018. They also signaled that they think they may raise rates another six or seven times (with the next two being .50 each) thus getting the Fed Funds rate to around 2.5% or higher. The reason the Fed raises rates is to slow down inflation.
As I have stated several times in the past, investing during inflationary times requires some changes and we at Redfish have been adjusting the portfolio holdings to adjust to this. Typically, what the market sees is that certain sectors tend to perform better than other sectors during rising rates. These sectors include technology, financials, basic materials, energy, healthcare, and real estate. On the fixed income side, short duration floating rate securities also tend to outperform.
We must pay attention to interest rates in general. The cost of goods has an adverse effect on a business’s bottom line. Wage inflation also has a major impact on employers and can quickly slow corporate growth. The good news on this front is that companies, in general, are still growing. Granted, with costs increasing, the growth may not be as high as it has been in years past, however, it is growing.
What is promoting growth here in the US? It still comes back to Covid. Covid net hospitalizations have plummeted back to the pre-Omicron levels. The number of cases resulting in deaths has also decreased. What all this means is nationally we are seeing people get out and about and spend money. When people go out and spend, companies do well. People have more money in the banks than they have had in decades. Unemployment is low and employees are commanding higher wages. The average American is doing well, and I think that certain companies and the markets as a whole, will benefit from this positive aspect of the American economy.
Congress seemed to get their act together for a brief moment and passed the budget for 2022 which will run through October 1, 2022. A big part of that was an increase in defense spending. Can’t help but to think the war had just a little to do with that. It increased by 5.6% or $42 billion. Also of note, the infrastructure bill that was passed earlier has been funded as well as an additional $14 billion we are sending to Ukraine.
All of the above changes have created opportunities for the stock portfolio at Redfish Capital that we are taking advantage of. Financial Stocks, technology stocks, basic material stocks and energy now make up the majority of the portfolio’s weightings.
I came across a fantastic quote from Karen Firestorm, the co-founder of Aureus Asset Management. She was asked about investing during these volatile times. She responded,
“If you feel like you’re about to throw up, too bad, that’s part of the job.”
Managing a stock portfolio for client’s can be stressful. Truthfully, this stress typically occurs only a few times a year. Volatility in the capital markets can be feared or they can be embraced. I prefer the latter. The great news is that volatility is generally short lived. That’s why you have heard me state that market moves happen quickly and violently to both the upside as well as the downside. Timing these moves has proven to be a futile exercise. Here at Redfish, you have noticed that we tend to stay invested in the equity portfolio and never go completely to cash. No matter what is happening in the markets, there is the potential to find something we can invest in that will make money. It is finding those investments that is the challenge. We have actively refocused the portfolio over the last several months to reflect what we feel will outperform in the remainder of 2022. We are still sticking to our outlook that I delivered in late 2021 that the first half of the year will be volatile with the second half being the time frame that we think has the potential to deliver strong returns.