Many of you have recently received Proxy statements/documents asking to vote on various issues for corporations for which we own shares in our portfolios. In the past, we have been receiving these and voting on your behalf. Recently, AXOS Advisor Services changed the proxy service they use, and with that change, the proxy statements inadvertently started going out to each of you individually. We are in the process of getting this corrected, and in the meantime, there is nothing you need to do should you receive more of these before the service is corrected. Don’t hesitate to call or email us if you have any questions.
Markets and the FED
The Fed did exactly as they implied they would by raising the Fed Funds Rate by 50 basis points last week. More importantly, Fed Chairman Jerome Powell stated the Fed is not considering raising more than 50 basis points per meeting for the foreseeable future, however, it would most likely raise rates by this amount each meeting until inflation falls to two percent. During his press conference, it was quite amazing to hear the Fed consistently claim we have a weak economy. Yet, Powell said one motivation for hiking rates was the “imbalance” of the labor markets. That is, the US has too many job openings relative to employable individuals, therefore an incredibly tight labor market.
The Fed sees this as a problem, as America simply has too many jobs to fill. This is a characterization of a strong economy. And yet, the Fed now wants to try and throw water on the economy. When he was asked about inflation being related to supply chain constraints, he essentially implied he believed it was due to factors such as the war in Ukraine and COVID restrictions in China, and it could be alleviated by slowing down the economy instead and essentially crimping demand. We previously reiterated the immense amount of bond purchases the Fed was continuing to do last year, which we thought was no longer necessary yet they continued doing so. This has finally ended, which has allowed the “top” to come off interest rates. We have now been aggressively allocating to long-term bonds with roughly 80% of our planned allocation now in place as of Friday. Looking at the last twenty years of long-term US interest rates, it becomes clear rates have risen quickly, however, we are still not at “concerning” or “economically stifling” levels as rates were nearly twice as high in 2000. Why is there so much concern about rates?
The larger fear has now become, will the Fed throw the US into a recession? While we agree it’s possible on paper to see GDP contract, we continue to see signs of strength in the economy as well as no major concerns for an imminent recession. We are contrarians by allocating to long-term bonds. Just as we issued inflation concerns in 2020 when nearly every analyst was citing deflation was coming, we now believe the long end of the yield curve will be relatively stable moving forward. We believe this will allow for stable bond returns in the months ahead as well as elevated yields relative to other durations. Also, we view it as a hedge for any further geopolitical disruptions. The longer end of the curve will perform better if investors begin to shift to a safety trade within US bonds.
May 6th, last Friday, marked an unusual action by us; an action we have not taken since March 2020 when the markets were in a panic free-fall, and we felt the long-term opportunity was too great for clients to wait any longer. We decided to re-balance portfolios earlier than initially planned. Due to tax complications, we only balanced our qualified retirement accounts. We will balance the rest of the after-tax accounts at the end of the month. Typically, we only balance portfolios once a month. With the fallout in technology businesses, we felt Friday was too good of an opportunity to not begin our overweighting on these businesses we believe pose significant long-term value for clients. For most clients, we overweighted companies like Alphabet (formerly Google), PayPal, Meta (formerly Facebook), Zoom, and Vizio. We re-bought shares of DocuSign, Spotify, Amazon, Peloton, and Zillow. PayPal, a business we previously said would be fairly valued in the future for $200 per share, was being bought for clients at just over $81 per share. For more growth-oriented clients, we allocated to Pinterest, Upwork, Sonos, Uber, and Etsy to name just a few. Of course, we’re allocating to more than just these technology businesses, however, we see the greatest long-term opportunity among these names. This keeps rapidly changing from price fluctuations, but we’re also keeping an eye on Adobe, Netflix, SS&C, TeleDoc, and many more.
We continue to be astounded by most of these businesses and what investors were willing to value them just eighteen months ago, and in some cases, five months ago! We had been concerned for some time with the excessive valuations, which is no longer the case. The pendulum is indeed swinging in the opposite direction. And just like we used Braveheart to illustrate potential short-term pain, we could not be more excited for what we see as incredible long-term values for clients. We have no idea what markets will do in the months ahead, but we believe client portfolios will greatly benefit in the years ahead. The risk/reward balance has shifted in favor of investors. If these stocks continue to fall, we will continue weighting them heavier in client portfolios. We agree that normally these businesses deserve to trade at premiums due to their high growth and defensible businesses. However, as value investors, we believe it makes investors assume too much risk. This premium has now almost been entirely wiped out and now makes them incredibly attractive investments for the years ahead. If these specific stocks fall further, they only become more attractive.
Most importantly, it is crucial to remember that it is incredibly normal for markets to experience pullbacks, especially during a recovery stage of the economy. We continue to believe we’re in a recovery and not nearing an imminent recession. And as such, we see the tech sector as one of the most attractive areas of value for clients. The sporadic psychology of the markets has become ever apparent, and individuals seem to remember a recent recession while constantly believing we’re on the precipice of the next. We witnessed this all through 2010 up until 2019. It was not until the fourth quarter of 2019 that we agreed and began heeding caution. Looking at history, the Fed hiked interest rates in 2016 over three years before the next recession. After the dot-com crash, the Fed hiked rates in mid-2004, four years before the next recession. We’re unaware where the thought comes that a Fed hike leads to an imminent recession. We continue to see signs of a normal recovery, and we intend to try and take advantage of any dips in the meantime. As always, we will keep you posted and are here to answer any questions you may have.
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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