This Time It's for Real

To our Clients and Friends:

We thought we would update you on our current thoughts on the markets, the economy and the Fed. 

2022 is the year of unintended consequences coming from the government-induced economic shutdowns during COVID and the massive government-sponsored stimulus afterword. This comes from the Fed playbook over the last 10-15 years. The markets and the economy were subject to recession and bear market scares, and our friendly neighborhood Federal Reserve Chairperson came to the rescue with lower rates, bond purchases and overall money printing (aka the “Fed Put”). Like the fountain of youth, the market and economy self-corrected (in what seemed to be mere moments) with all being copacetic. 

Today, we find ourselves and our portfolios in a much different position — a Bear Market.  The relentless pursuit of economic boosterism has finally, inevitably resulted in record-breaking inflation. The Market has pivoted from fear of inflation to recognition of persistent inflation plus a recession and/or stagflation as we mentioned in our last note. However, on the potential upside, this Bear Market could be the new magic potion needed to break the back of recession without the need for the Fed to exercise its Put in the latter half of 2022. Consumer sentiment is increasingly negative with the value of Americans’ 401Ks down double digits and with breathtakingly high gas and grocery prices, and this should push down consumer demand. We see this already in companies like Netflix and Disney offering tempered forward guidance. Declining demand plus recessionary markets may slow the economy sufficiently to halt and then reverse the pace of inflation such that the Fed will need do little more in terms of raising rates or selling bonds from its massive balance sheet. We believe the Fed is cheering for this outcome particularly as the mid-term elections approach.  

On the other hand, if this function does not moderate inflation and stop recession, and markets and economy continue to decline, we think it likely the Fed will act ahead of the polls. As in the past, lowering rates and/or buying bonds will boost the markets, but at the greater risk of inflation and a deeper recession. This would be bad long term even if briefly good for portfolios.

As for stocks and bonds now, in our view we are not at the bottom yet but are getting close.  This may sound odd, but we have yet not had the big wash-out day of true fear (called by some “capitulation”). The selling has been consistent and orderly which is a hinderance in making a market bottom. Last week, valuations were cut back to the bone with many companies trading at 2019/2020 prices. Apple has broken long term support at $150, many commodity companies which are churning out cash are still undervalued (cheap), and most future technology companies are well below their IPO prices though technology as sector still trades at elevated multiples compared with other sectors.

In our portfolios, we continue to hold a larger-than-normal cash balances and so are positioned to take advantage of a market recovery when it comes. Indeed, we took the first, albeit small, step toward this by starting a program of dollar cost averaging into an actively-managed quality US company mutual fund and a high dividend quality US company index fund. Pricing is starting to look compelling in several asset classes but volatility remains elevated and the markets may bump along these (or lower) lows for some time. Accordingly, we are looking for high quality/value names and for steady dividend payers to make it worthwhile to invest and hold.

We remain cautiously optimistic but like that our higher cash balances and reduced exposure to international and emerging markets and traditional fixed income give us a large measure of security to wait and see how the markets and the economy play out.

We appreciate all of you who entrust us with your financial wellbeing. Please call, email or text us anytime.

Warmest regards,

Jeff & Biff

CrossGrain Family Investments, LLC is a federally-Registered Investment Adviser. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Please contact us at 804.217.2561 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions. Additionally, we recommend you compare any account reports from CrossGrainFI with the account statements from your Custodian. Please notify us if you do not receive statements from your Custodian on at least a quarterly basis. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on the SEC website, https://adviserinfo.sec.gov. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.