Schindler Financial Newsletter Q1 2022
Borscht & Opportunity:
Borscht or “sour soup” in Russian was my wise and generous grandpa Sam’s favorite food. He escaped to New York City as a child from tyranny in Minsk with only the shirt on his back. He would eventually work his way through NYU and co-found a major accounting firm. He was a role model who invested his profits in the stock market. His stockbroker Arthur, who allowed me to visit and observe his daily trading business when I was a kid, always told me to look for value or lower prices in good companies. He stressed patience. My Grandpa Sam donated much of his wealth to hundreds of charities.
Borscht also reminds me of the current blood on the streets in Ukraine. Life is full of irony and opportunity even if the sources of opportunity might make one queasy.
For example, the horror of war might cause the Fed to spread out interest rate hikes over a longer period. Bearish market sentiment has driven the stock prices of some of the big tech companies mentioned below down more than 20%. Valuations are beginning to look reasonable. Some green energy equity indices have come down to earth after a meteoric rise in 2021. Green energy as a potential replacement for oil and gas, including dependence on Russia, is regaining attention.
We do not know when this war will end and how long some market sectors will remain in correction mode. However, value is beginning to appear. While my general opinion is to hold or stay the course, it could soon be time to add positions.
Your Portfolio & the Recent Market Correction:
In our connected world, it is almost impossible to avoid viewing the horrifying and anxiety-provoking images of bloodshed and destruction caused by Russia’s invasion of Ukraine. This war between large exporters of oil, gas, wheat, maize, and rapeseed oil, plus the likely raising of interest rates by the U.S Federal Reserve have combined to generate bearish market sentiment, less appetite for risk, and corrections in some equity market sectors.
On average, market corrections (a 10% drop in stock indices from their most recent highs, but not more than 20%) occur once a year.* The last market correction began on February 19, 2020, due to the advent of COVID. The S&P 500 lost 33.1% before rising off its bottom 33 days later. The S&P 500 surpassed its former high by August, approximately 6 months later. The S&P 500’s current correction has so far lasted 65 days.* At some point, the S&P 500 will snap back.
The iShares S&P 500 Growth Index* (IVW, a large cap growth exchange traded fund whose top 10 holdings include big tech darlings such as Apple, Microsoft, Amazon, Facebook, Google, and Tesla) is in correction territory down approximately 16% from its late December high while the iShares Dividend Growth Index* (DGRO, a large cap value exchange traded fund whose top 10 holdings include Pfizer, Johnson & Johnson, Proctor & Gamble, and JPMorgan Chase) is down approximately 7% from its early January high. Due to the war and consequential natural gas supply disruptions, the Alerian MLP Index (AMLP. an exchange traded fund primarily consisting of stocks of companies in the natural gas industry) is up approximately 33% from March 2021. The S&P 500 is in correction territory and down approximately 11% from its January 2021 high.*
*www.yahoofinance.com and *www.ishares.com
Portfolio Construction, Chicken Kiev, & Diversification for Risk Reduction:
My job is to allocate you in a diverse portfolio accounting for your goals (income, growth, social responsibility, age, etc.) and risk tolerance while tilting towards sectors, capitalization (large versus small cap securities), and diverse types of bonds that I believe will help you reach your goals and objectives. Per the data above, many value funds are out-performing long out-performing growth funds so far in 2022 as investors emphasize stocks of established larger companies with lower valuations and dividends. Investors are also purchasing U.S. treasuries and accumulating cash (safe havens) in an attempt to stabilize portfolios as Ukraine is besieged.
I believe supply chain disruptions that arose during COVID are the main cause of inflation and that inflation might not abate soon if the Russia-Ukraine war rages on for an extended period. Recall, Russia and Ukraine are large exporters of oil, gas, wheat, maize, and rapeseed oil. Additionally, I believe that high employment and a series of interest rate hikes by the U.S. Fed are signs of a healthy economy particularly with the 10-Year Treasury Bond interest rate sitting near 1.72%. The 10-Year’s historical average rate is 5% thus allowing latitude for “cheap” money even with rate hikes.*
Schedule a Meeting:
Please reach out to schedule a meeting with me to review your portfolios, long-term care and life insurance planning, and retirement planning. You can reach me at 917-715-2233 or firstname.lastname@example.org.
© All rights reserved, 2022, by Aaron D. Schindler CFP