Since we last reported to you, the financial markets have continued a period of volatility resulting in a pullback of over 20%. We understand the angst this can cause clients and offer the following thoughts as we move into the second half of 2022.
- First, the markets are trading, almost exclusively, on the inflation and interest rate outlook. Fed Chair Jerome Powell has a substantial task ahead of him, requiring him to hike rates to tame inflation, just as we potentially enter a cyclical economic slowdown.
- Given this, Greenwood Gearhart is laser-focused on the data, monitoring the labor market, housing market, and periodic inflation prints. There are already signs that the aggressive stance of the Fed is beginning to yield results which, in turn, could provide some relieve in the second half of the year.
- Fortunately, we have mostly avoided the “mania” stocks and funds that were the “darlings” of the pandemic. Companies that exclusively rely on cheap financing to drive questionable business models are experiencing substantially more pain than the general market. After a review of the balance sheets of our portfolio positions, we feel confident about the long-term prospects of the vast majority of the companies and funds we hold.
- We feel confident because Greenwood Gearhart has “pre-built” portfolios to weather challenging economic conditions. This is not our first pullback of this magnitude and certainly won’t be the last. By and large, our businesses are operated by capable management teams, in industries with barriers to entry and possessing competitive moats that, importantly, provide pricing power. This “built-in” inflation hedge is extremely important in the face of rising costs.
- Our clients hire us to assume intelligent risk on their behalf. While not immune from temporary market pullbacks, we believe our strategy balances risk and reward in a way that ultimately results in the strengthening of client portfolios as they are hardened by a pandemic, inflation, and rising interest rates. This time is no different.
- As Warren Buffett once famously quipped: "You only find out who is swimming naked when the tide goes out. "What the Oracle of Omaha meant is that you don't really know or appreciate the risks that companies are taking until they are tested by adverse conditions – a corollary to the saying that everyone looks like a genius in a bull market. The post-Covid meme stocks, SPAC boom, and crypto run-up are now distant memories. As the tide goes out, we are fully clothed and positioned for a recovery.
We fully appreciate that this quarter’s portfolio results are not ideal. We are aligned with our clients in that both our personal portfolios and our compensation fluctuates together with you. However, short-term drops of this magnitude are irrational and, as rational investors our long-term perspective and investing experience reminds us that “this too shall pass” with better days on the horizon.
We remain available at any time to review your investments and discuss your portfolio in-depth, either in-person or virtually. If you would like to take us up on this offer, please don’t hesitate to contact us to schedule. Thank you for your continued trust and confidence in our firm.