Weekly Summary

“Comfortably Numb”

“Comfortably Numb”

We understand that many investors and analysts have become “comfortably numb” to the extent any narrative is constantly repeated, such as elevated inflation concerns, likelihood of a recession, supply chain issues, China lockdowns, repercussions from the war and related Russian sanctions, and a hawkish Fed. Every now and then, certain people are awakened from their “comfortably numb” state when they are “surprised.” Volatility can be expected to increase during such times.

“Bad Moon Rising”

“Bad Moon Rising”

We assume continued volatility across virtually all financial markets for at least as long as the war persists. Also, we continue to forecast higher interest rates as part of a volatile trajectory. We suppose that a well-diversified portfolio of selected high-quality stocks that includes some commodity exposure could be the best strategy for many long-term investors. Our preferred approach is to anticipate and recognize “tradable bottoms” in equity markets so that we might take advantage of attractive entry points to purchase selected equities.

“I Won’t Back Down”

Our general approach remains the same. Many long-term investors could strive to maintain a diversified portfolio of high quality stocks of companies that have strong balance sheets, somewhat predictable cash flows and an ability to maintain strong profit margins.

“Russians”

“Russians”

Our basic approach remains constant. Many long-term investors could strive to maintain a diversified portfolio of high-quality stocks of companies that have strong balance sheets, somewhat predictable cash flows and an ability to maintain strong profit margins. Additionally, these portfolios could include at least some exposure to commodities. We remain cognizant of the war’s unknown risk and possible further downside to markets at any time.

“The Adults are Talking”

We assume under the current circumstances that backward looking means that the Fed will continue to tighten even if it expects inflationary pressures to diminish in the future. This is because inflation might be expected to slow down at some point. But the Fed will be making policy decisions based on actual data, and not on expected data. We postulate that the Fed’s frontloading of the tightening monetary policy could probably take the form of a 50 bps hike in the federal funds rate at the May meeting. Furthermore, we surmise that an announcement and implementation of the beginning of its balance sheet reduction plan might be followed by another 50 bps hike at the June meeting. Powell made it clear that the Fed must act “expeditiously” – promptly – to rein in inflation due to the increasing likelihood of inflation expectations becoming “unanchored” and “entrenched” at “uncomfortably” high levels. We understand that the timing and the nature of how the Russia-Ukraine war and related sanctions (war) will end is “unknowable.” The many outcome possibilities could range from an agreement to end the war on terms acceptable to Ukraine to horrible possibilities of the use of nuclear weapons, chemical and biological warfare, as well as cyberattacks. A March 24 Blomberg headline best describes one of our greatest concerns: “Putin stirs U.S. concern that he feels cornered and may lash out.” Our approach remains the same as last week. Many long-term investors could strive to maintain a diversified portfolio of high quality stocks of companies with strong balance sheets, somewhat predictable cash flows and an ability to maintain strong profit margins.

“Walk of Life”

“Walk of Life”

Our basic approach remains the same as last week. We remain convinced that a diversified portfolio of high quality stocks and commodities is probably most appropriate for most long-term investors in these uncertain times. Our preferred strategy is to try to anticipate and recognize tradable bottoms in equity markets so that equity purchases might be executed during those times. We remain cognizant of the unknown risks of war and possible further downside to markets at any time. But we will try to take advantage of the very large price movements of securities that are caused by uncertainty and volatility. We contemplate that the 10-year yield high point of 2.24% reached this week might be at least a short-term top for that security. We will reassess our stance on the 10-year yield as we continue to analyze incoming data on economies, inflation and the war, as well as and any other data that we might deem relevant.

“Under Pressure”

“Under Pressure”

As long as the war persists, uncertainty and volatility across financial markets will persist in our view. Any “war-ending” scenario would not surprise us. We are still convinced that a well-diversified portfolio of equities and commodities exposure is probably most appropriate for long-term investors in these uncertain times. Stock selectivity should remain the key to relative outperformance. Given the myriad of uncertainties we would continue to search across ALL sectors to find the most-attractively-priced stocks in terms of a risk/reward analysis. We assume that for most long-term investors, high quality stocks with strong balance sheets and restively predictable cash flows would be most appropriate. To dispel any confusion, our search across ALL sectors does not mean necessarily that we would buy in every sector. In general, we would recommend that long term investors attempt to buy their desired stocks on equity market downturns.

“Hard Day on the Planet”

“Hard Day on the Planet”

We remain encouraged by the resiliency of the U.S. economy and we remain hopeful for a somewhat “quick” resolution to the war. However, almost no development or outcome would surprise us at this point. A well-diversified portfolio especially is important at times of great uncertainty, such as now. We would continue to focus on selecting attractively-priced stocks on a risk/reward basis with underlying strong balance sheets and sustainable cash generation. Additionally, we would maintain a relatively broad-based exposure to commodities in a diversified portfolio. Once the Russia-Ukraine war is resolved – and it is resolved in a manner to allow the prior economic trends to resurface – we would be more confident that our pre-war forecasts could be realized in the intermediate-to-long term. These forecasts included a weaker U.S. Dollar (USD), higher interest rates, robust global economic growth, relative outperformance of many international equities relative to U.S. equities, and generally rising but volatile commodity prices. In the meantime, Fed chair Powell’s Wednesday’s testimony left little doubt that the Fed will raise the federal funds rate by 25 bps at its mid-March meeting.

“Hoochie Coochie Man”

“Hoochie Coochie Man”

Hopefully, the Russia-Ukraine hostilities will be relatively short-lived, so that a global economic rebound then could occur in the manner that we foresee. We continue to contemplate a higher interest rate environment, a lower USD for 2022, generally strong but volatile commodity prices, and selective equity markets outperformance in Europe and emerging markets (EM) relative to U.S. equities. We continue to envisage a robust global economy and higher-than-consensus inflation rates. We also suppose continued volatility in financial markets, including equities. The increased uncertainties in regard to economic growth and inflation rates due to the Ukraine invasion has led us to look to ALL sectors for the most attractively-priced stocks on a risk/reward basis with underlying strong balance sheets and sustainable cash generation. We presume that the Fed will raise the federal funds rate by 25 basis points (bps) at its mid-March meeting.

“Back in the U.S.S.R.”

“Back in the U.S.S.R.”

It appears that Russia will either invade Ukraine or retain its troops near Ukraine’s borders for quite some time, perhaps months. Supply disruptions of “key” materials from Russia are possible. Higher inflation and slower global economic growth could result.