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Quarterly Letter to Clients
Indices at quarter-end (March 31, 2022):
Dow Jones Industrials: 34,678.35 1Q'22 -4.57% YTD -4.57%
Standard & Poor's 500: 4,530.41 1Q'22 -4.95% YTD -4.95%
The market doesn’t like war; it doesn’t like rising interest rates; and it doesn’t like inflation; there are times when this business is a lot more fun than it is right now.
The bible tells us to put away a store of grain to protect against the famine that will surely come. In this business the “store of grain” means cash, and the “famine” means a falling market. Much of the time holding cash is a mistake, but there are times like this, when you are glad to be holding that store of grain. I have relatively high cash balances across the board, which will allow for some bargain hunting and, hopefully, may insulate us (at least a little) against any decline.
Coming off of a solid year in ’21, it was as if a bell had rung; right out of the gate 2022 started heading down. A bounce in March left the averages down less than 5% at quarter-end, not pleasant, but not too uncomfortable.
Lots of things to worry about; gasoline doubled and inflation quadrupled, putting pressure on the economy. Continuing supply-chain issues added to the problems. Interest rates, even after doubling, are still at very low absolute levels, especially considering the current rate of inflation. Bonds reacted, as one would expect, by declining, precipitously by fixed-income standards. There’s an old joke in bond circles: someone asks “Which falls faster, a pound of bricks or a pound of paper?” The responder asks if it is 30-year paper (the “30-year paper” being long bonds).
The Fed has taken a tentative first step to combat inflation by raising interest rates…by a whopping one-quarter of one percent. Way too little, and way too late in my view. At least they have left the door open for larger rate hikes at future meetings.
If you read the papers or watch the news, you know all of this already.
You also know about the elephant in the room, the Russian invasion of the Ukraine. The human toll is horrendous, so very sad and so pointless.
The business toll is also enormous. Pretty much since the end of WWII the world has become more and more interconnected, and the general consensus (or hope) was that the interdependence of nations would ensure that armed conflicts would be held to a minimum. After all, if we are doing business with someone, we don’t want to be dropping bombs in their backyard.
The war in the Ukraine has made us reconsider that interdependence; it has forced us to address supply issues initially caused by the pandemic, now exacerbated by the conflict; and to worry that many essential products are only sourced from nations that we may not view as particularly reliable or friendly. We may well be moving to a more isolationist stance, reversing a trend of two generations duration.
While all of this sounds so dire, it doesn't feel that way here in the real world. The economy remains heated; we are at full employment, there are plenty of jobs available, and apparently not enough workers to fill them. And stocks haven’t been all that bad, all things considered. The market does love profits, and profits have been robust lately, lending support. Money remains plentiful, as the Fed has not done very much to pull back the cash it pumped out over the last two years. (They may start soon, though--the real work, and the real pain may come when they begin reducing the money supply. That is how you curb inflation, after all.)
Still, it is the war in the Ukraine that is the major factor at the moment, and near the end of the quarter it was reported that talks were "constructive.' If the conflict were to end, the market would likely take a jump, perhaps temporary in nature. It would be a relief to revert to the simpler worries of rates and inflation. All of this leaves me in a rather tentative mood, expecting a declining, or at least choppy, market, hoping for the cessation of hostilities, and praying that the powers that be are able to rein in inflation.
I like it when the markets go up, and I have to grin and bear it when they are going down. While I don't expect it any time soon, I am mentally prepared for the possibility of a sharp decline. Remember that in all of our history, through wars, inflations, depression and recessions, our stock market has always recovered and moved on to new highs.
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