As we pause to reflect on the sacrifices of so many for our great country this Memorial Day weekend, we wanted to take a moment to provide our thoughts and perspectives on the recent volatility across the capital markets landscape.

Reality is beginning to set in as Fed sanctioned risk taking is clearly coming to an end.  Persistent, rather than transient, inflation and commensurate rising interest rates are the catalysts, but this storm has been brewing for years.  Cheap money and global deficit spending on an unprecedented scale set the stage for rampant speculation leading to numerous asset price bubbles.  It is also our belief that the stimulus spending during the covid pandemic led to further asset price inflation pulling consumer and commercial demand forward from future years.  As a result, the real hangover is just beginning. 

Fortunately, as we mentioned in prior letters, our signals were flashing caution signs for over a year now.  It began with erosion in secondary (and speculative) tech names in early 2021.  As we entered 2022 that erosion accelerated dramatically.  Many speculative names are in free-fall.  In fact, major growth indices are down well over 30% year to date.  What is concerning is that while major damage has occurred in the “outer rings of the target” we are now seeing accelerating selling pressure in the bullseye.   Specifically, weakness is closing in on the “waterfront lots” such as Apple, Google, Amazon, Tesla etc.  This is normal and to be expected.  But it also tells us that growth is likely to be out of favor for years, not months.  So, while one might be tempted to buy these “cheap stocks”, as Ed Noonan liked to say, “Cheap stocks have a knack for getting cheaper.”  In other words, be patient. 

There is reason for optimism, however.  Like all character (or leadership) changes, new ideas have been emerging.   As one might expect, defensive and value-oriented themes have come to the forefront.  Consumer staples, energy, healthcare, and utilities have performed particularly well and are likely to remain in favor so long as volatility persists. As the speculative juices are being squeezed out of the market these are the areas that we are likely to remain overweight.   

The likelihood is that as the Fed continues to navigate its tightening policy, the markets will remain volatile.  As Warren Buffet likes to quip, “When the tide goes out you find out who has been skinny dipping.”  We feel confident that by “de-risking” portfolios we can weather this storm. 

While these periods can be emotional and uncomfortable, we’ve been here before.  So long as your investment objectives, time horizons and risk tolerances haven’t changed, stay the course and you will be rewarded.  It is fitting that as we celebrate our 50^th anniversary, we are navigating another crucial inflection point that requires careful experience and know-how.  There is comfort in relying on a process and methodology that has thrived through 50 years of market ups and downs. 

Have a great weekend,
Your friends at Contravisory