Key Takeaways:

• A falling market, rising interest rates, inflation, and growth worries are all challenging financial markets
• To fight inflation, the Fed is tightening financial conditions, threatening to cause a recession and spooking markets in the process
• We believe in deploying a truly active approach to position portfolios, utilizing all the tools in your toolbox

The market has been on a wild and often difficult ride during the first half of 2022. The investing backdrop for stocks, bonds, and cash is challenged and caution remains the name of the game. We believe investors should be deploying all the tools in their toolbox, using a disciplined, active approach that can help them stay the course amid these difficult times.

Our Take on the Selloff

There is no doubt that the market environment has become more challenging. Our perspective on the market volatility first starts with our outlook on fundamentals and the economy.

Global economic growth is set to slow, and the Federal Reserve is raising interest rates (aka. tightening financial conditions) into the slowdown. Input costs are rising, adding pressure to corporate margins, and geopolitics have introduced a new source of uncertainty. The Russia-Ukraine war, as well as China’s latest COVID lockdowns, are worsening supply chain issues and making the Fed’s job on corralling inflation harder. These factors create downside risks to the stock market, especially equity valuations, and the market will likely remain under pressure until the Fed backs off.

On the positive side, corporate borrowing costs are low, companies have large cash cushions, and there is room for higher corporate investment spending and productivity gains to support growth. Consumer balance sheets look decent with household net worth remaining healthy, supported by stimulus checks and years of asset price increases. Inventory levels in the housing market are relatively low, and we are unlikely to see an extremely adverse outcome in the housing market. The banking system is robust and well-capitalized, and there are no obvious financial excesses in terms of leverage. Internationally, China has begun to ease policy. Once its current fight with COVID lockdowns pass, China should be in a better position to provide positive global growth momentum.

Finally, investor sentiment has clearly deteriorated. While this may seem negative at a glance—poor investor enthusiasm equaling more selling—sentiment can actually be a contrarian indicator. There certainly is a lot less overt bullishness out there, creating room for optimism to step back in and take its place.

What Can Investors Do?

For the first time in decades, investors are coping with a falling stock market, rising interest rates, and higher inflation, creating challenges for each of stocks, bonds, and cash, respectively. These high-level challenges are real, but it doesn’t mean there’s nothing investors can do. Our advice is two-fold:

First, set realistic expectations. Markets do not travel in straight lines. If anything, it’s the total opposite. Good years are sometimes followed by bad years. Bull markets are offset by bear markets, and sometimes, all these highs and lows even happen in the same calendar year. Going back to 1970, the US stock market averaged a market correction of over 14% per year, and still managed to deliver nearly 9% average return per year!

Source: Morningstar (1970-2022).

Second, utilize an active approach to maximize all the tools in your toolbox. When markets are challenging across the board, managers who passively allocate to stocks and bonds quickly find themselves unable to adapt. Our approach provides flexibility, to adjust along sector, style, size, strategy, to make sure client portfolios are best positioned for the uncertainty ahead.

We're monitoring this changing environment and will continue to provide commentary and updates. In the meantime, please don’t hesitate to reach out if you have questions on how our fundamentally-driven, team-based active approach can add value in today’s quickly moving market environment.

Our research team continues to monitor these topics and more. If you’re interested in hearing more of our monitoring points and views on an array of investing themes, then subscribe to our insights.

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