Published January 26, 2022
The watchwords this year will be volatility and liquidity. We’ve been used to easy money. Now we’re seeing a reversal of that. But that will create opportunities.
The watchwords this year will be volatility and liquidity. We’ve been used to easy money. Now we’re seeing a reversal of that. But that will create opportunities.
Less than a month into 2022, the stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market has already experienced sharper dips and steeper rallies than we saw through all of last year. Will the next 11 months put the Coney Island Cyclone to shame? And how should you prepare your portfolio to handle such increased volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in.? In this episode, Chief Investment Officer Jim Lowell sat down with a panel of Adviser Investments’ in-house market watchers to discuss all that and more, including:
Despite the drawdowns, we think there are reasons to be optimistic about investing in 2022. Hear the insights from our analyst panel to understand why. Click to listen now!
In this The Adviser You Can Talk To Podcast, we discuss risks and opportunities we see when it comes to investing in and through 2022. Hello, this is Jim Lowell, and I’m the chief investment officer at Adviser Investments, and I’m here with another The Adviser You Can Talk To Podcast. Today, I’m joined by several members of our outstanding investment, research and portfolio management teams. Each of their impressive bios is easily accessed at www.adviserinvestments.com.
Today, we’re going to drill down into the areas of expertise and discuss specific risks and opportunities they see as we head through 2022. Speaking of heading into 2022, Dan Wiener, chairman of Adviser Investments, and I offered our bird’s-eye view of investing in and through this new year in a recent podcast. Again, be sure to check it out at adviserinvestments.com. Here and now, I’m going to orchestrate many moving parts, spokes to our overall investment outlooks wheel.
But before I begin to go around our research team’s horn, let me make a few comments about the current market tempest we’ve been navigating through. The markets continue to show what I’d characterize as the bursting bubble of a devil-may-care investor attitude and its intended optimisms unchecked, unbridled, in some instances even unhinged momentum. Take Monday, Jan. 24’s wild market swings that may or may not prove to be par for February’s course as event-driven news, like Russia, inflation and rate-hike talk—think of the Fed—earnings and economic reports create day-to-day volatility if not outright tumult.
There’s nothing new about markets having risen past price perfection, returning to earth in some manner and fashion, sometimes correcting, sometimes crash landing. What may not be new but still difficult to qualify and quantify—and hence is literally not yet known—is the ways in which program trading using market-based index ETFs could swing whole markets at a moment’s notice. This latter factor is something I’ve noted time and again over the past several years. What happens when the volume and velocity of money moving into markets on momentum becomes a receding tide?
On Monday the 24, just looking at the NASDAQ’s price behavior, you could feel a receding current. Until, at day’s end, the outflow turned into a tsunami of buying. There’s nothing to suggest this pattern doesn’t persist for at least some length of time on its way to more normal days, weeks—more normal times. What could help near-term markets normalize, rather than get more volatile? Well, receding concerns over Russia. U.S. policy is currently fairly confused, compounding a sense of a Ukraine powder keg. Clearer understanding of what the Fed intends to do and when.
Chair Powell and his team will have recurring chances to calm nervous waters and schedule press conferences, hearings and speeches. Greater visibility into what earnings and guidance have to say about the road ahead. The U.S. consumer not buckling in terms of spending, savings and sentiment. But by the way, it’s almost an unwritten rule that says right about now, headlines will decry the fact that U.S. consumers are weakening based on signs of spending less. But to our view, it’s almost always the case that spending less is simply the result of holiday-spending aftermath.
Economic data supporting ongoing rebounding economies could help, medical data supporting themes of economic rebound could help. Program-trading systems, hedge funds, etc., that use those aforementioned index-based instruments may be tempered by any of the above. Or, of course, the opposite could occur, and any of the above could continue to fan the near-term flames of day-to-day volatility. But just as inflation is not only a negative—it reflects growth—so volatility is not only a negative. It creates discounted opportunities for disciplined long-term investors like us.
On that volatile note, let me turn to one of our most senior advisers and portfolio manager, our dividend and income stock portfolio, Steve Johnson. Steve joined Adviser Investments in 2017 upon its acquisition of Braver Wealth Management. Steve started his investment career with Morgan Stanley Dean Witter, spent 14 years at Charles Schwab overseeing individual clients’ planning, portfolio design, allocation strategies. He is deeply experienced. His judgment is of very high esteem within our investment research team.
Steve, we believe in disciplined diversification, and today’s podcast is evidence of practicing what we preach. Thanks again in advance to Liz, Jen, Adam and you for providing your diversified views on the stock and bond markets we invest in. But as we do every week with the investment committee, and again for our whole firm every Thursday morning, can you give us a summary view of what you think the biggest investment—and for that matter, income challenges—may be, and the opportunities we see in 2022?
Well, thank you for that introduction, Jim, and you encapsulated it perfectly there. Investors have a host of challenges. I think the one that you mentioned that we’ve seen already this year quite dramatically has been just this level of speculation that has come out of the market. Last year, it was quite easy for investors—whether it be SPACs, the Special Purpose Acquisition Companies, crypto, NFTs, so-called meme stocks like GameStop and AMC—it was very easy for investors.
In fact, we didn’t even have a correction last year, anything like a 10% decline. It was rather smooth sailing. If you think about it, since the pandemic, we have had just this onslaught of both stimulus from the federal government as well as the Federal Reserve stepped in. Well, two of those items might be going away, as you mentioned. In fact, this week, we’re going to hear from the Federal Reserve. With the Federal Reserve, the time of easy money may start to go away.
Now, we’re not predicting that interest rates are going through the roof. It seems laughable almost that we’re going to talk about interest rates going up by 25 basis points or a half a percent, and the fact that the 10-year Treasury is here at 1.75% to 1.8%, but still it is making investors nervous. That easy money last year and the easy gains that were made in those stocks have dissipated quite rapidly. In fact, even though the indexes have held up quite well, and last year we saw great gains, and even though this year the S&P is down roughly close to 10% now as we talk, there has been a lot of damage done.
The opportunities are going to come because, as we’ve seen, there are over 175 names right now in the S&P 500 that have experienced a bear market, which is a decline of more than 20%. Actually, 70% of the NASDAQ, Jim, is experiencing a bear market right now. That’s quite a lot of damage that’s been done. At some point, some of those names in high-quality technology will look attractive again. As you mentioned, the economy is going through this challenge because we did have all of the issues surrounding the pandemic, but now we’re coming out of that.
With that, obviously, supply chains, labor issues—hopefully, we’re starting to see them resolve themselves. And with that, perhaps, the issue with inflation that investors and consumers have been dealing with. Because clearly, we have seen inflation in the things that we need and deflation in the things that we want. As we’ve seen, that has really impacted a lot of investors and consumers. With this sell-off, I think the watchword this year is going to be volatility and it’s also going to be liquidity. We’ve been used to a lack of volatility and we’ve been used to easy money, and, perhaps, now we’re seeing a reversal of that.
It will create opportunities. The speed, as you mentioned, which has been exacerbated by this program trading—it makes investors very nervous. What we would advise, as we always have, is do not panic, because in this type of market, you can really get whipsawed. At this juncture, when markets are trading this quickly, investors can do some real damage to their portfolios by overtrading and overthinking it. This is a time, as you mentioned, to be very diversified and not be making huge bets as we go forward.
Steve, thanks very much, and thanks for talking about risks and opportunities. It reminds me that one opportunity I should mention is that Steve records a market minute segment every Friday, which helps give you a sense of where we’ve been and where we may be heading given the market activity of the week we experience. His colleague, Liz Laprade, also does a weekly market minute, typically at the beginning of the week, both available at adviserinvestments.com.
From that sober, rational, fundamental assessment from one of our senior wise men in the investment research team, let me move to the Wild West side of our marketplace. Steve, you mentioned it—bring in Liz Laprade to talk about the crypto craze. Liz Laprade’s a senior research analyst who assists with conducting quantitative and qualitative analysis of mutual funds and portfolio managers. She performs due diligence on the funds and managers Adviser Investments currently invests with and researches potential future investment opportunities for client portfolios. Liz, Steve just gave us a macro view of the stock and bond worlds that are core to our investments and our investment strategies.
Well, I know your analytical expertise ranges from ferreting out excellent fund managers to deep dives and individual stocks with Adam Johnson in our newly launched American Ingenuity portfolio. Among your other areas of expertise, you’re our resident expert in that otherworldly realm of cryptocurrency. Can you describe, for example, what bitcoin is? What the current state of play on bitcoin is? Whether or not it even qualifies as an investment? And, of course, why cryptocurrency may in fact evolve beyond bitcoin to become a normal kind of currency down the road?
Okay. Let me start with the definition. Bitcoin, at its simplest definition, is a digital currency that you can only trade on an online crypto exchange. It is also decentralized, meaning if I want to buy bitcoin and someone wants to sell it to me, we do that directly among each other. There’s no financial middleman or central bank there. All the transactions are recorded on a digital ledger called the blockchain.
Bitcoin and other cryptocurrencies gained traction in 2020 because all of a sudden, we all had to find a way to interact, and in this case pay, without being physically present. We saw the price of bitcoin balloon in 2020. What was different this time, I would say, from when we saw it boom and bust back in 2017, was that in 2020, it wasn’t just driven by retail investors buying in; it was also financial institutions, funds and companies hopping on the bandwagon.
Of course, the renewed popularity there definitely turned the SEC’s head because financial security laws today don’t quite work on digital currencies or the way they transact. Worries about regulation stepping in and restricting the trade flow or utility of cryptocurrency started to take the air out of the price inflation that we saw back in 2021. Let’s fast-forward to today. We have now seen bitcoin sell off by about 50% over the last three months, which is crazy.
A big part of that is definitely bitcoin getting swept up in the broader market sell-off that you and then Steve referenced earlier. But another big piece of it is still really regulation. SEC Chairman Gary Gensler hasn’t really shown any signs that he’s going to further support crypto being a more broadly offered asset here. For example, he still hasn’t gone through with approving any of the applications for spot-price bitcoin ETFs.
We also now have an impending report coming from the Biden administration that is basically going to lay out what are the risks and what are the opportunities for cryptocurrencies in the U.S. financial system. That could mean a lot for the future of crypto here in the U.S. I think it’s going to be really important to see what that report tells us. As far as how I would classify bitcoin today, I would call it an investment. Right? It is an investment in that I can put money into it and hope that I have a positive return at some point in the future. But it’s a speculative investment. I’ve been saying it all along: I just would not put more into cryptocurrency than I would be willing to lose right now.
It comes at a pretty price point even though that price point currently is almost 50% below its more recent peak. Volatility is no stranger to that particular approach to the speculative side of the market. Thanks, Liz. Let me turn to Adam. Adam Johnson, portfolio manager of our new Adviser Investments American Ingenuity strategy. He targets dynamic U.S. companies across multiple industries, including energy, health care, technology—all with three defining attributes: Compelling story, supportive data, definable catalyst for growth. Adam, cryptocurrency is one thing, but American Ingenuity is another. I know that the portfolio is created by you for aggressive growth, a long-term investor’s portfolio, but what exactly is it and who do you think it’s best suited for?
First of all, thank you, Jim, for the introduction. Thanks for making me part of the team. Thanks for just creating a wonderful platform here at Adviser Investments. I’m excited to bring the American Ingenuity strategy to Adviser, because for me it’s so much more than just a portfolio. For me, American Ingenuity is a north star. It’s a way of approaching investing, it’s a way of approaching, well, dare I say, life. That may be a little bold, but it’s the people and companies driving us forward.
That’s why I say it’s more than just an investment strategy. It’s thinking about where are we going to be as a society, as mothers and fathers and brothers and people, co-workers interacting with one another? Where are we going to be in two, three, four, five years from now? You think about how we communicate and how different it is now versus just three, four, five years ago. Group text messages, right? What a concept.
We’re introduced to Uber 10 years ago, and now it’s become a verb. What if there’s a company that effectively enables Uber or a company like Uber to go to the skies and take people around in electric-powered vertical takeoff and landings? That’s pretty exciting. Imagine if that’s how you shuttle to the airport. When I talk about American Ingenuity, again being a north star, the people and companies driving us forward, these are the types of things I’m talking about.
Imagine your doctor looks at the data on your iWatch and then compares that not only to your baseline of data, your pulse, your blood pressure, your blood oxygen level. Not only is your doctor comparing that in real time to your historical baseline but to millions of other people, so that if you are a Type 2 diabetic or a Type 1 diabetic who needs constant monitoring, you’re constantly being monitored and you have that peace of mind. That’s not something that we were capable of before the Internet of Things.
Again, all these changes are happening in real time. Facebook. I remember when one of my best friends from going up left advertising and called me and said, “I’m going to this new company called Facebook.” I said, “Oh yeah, I’ve heard of that. What is it?” He goes, “Well, it’s a social platform where you can share pictures and tell people what you’re doing.” I said, “Yeah, why would you ever want to do that?” He went on to great fame and fortune as their head of advertising. That was only 10 or 11 years ago.
Think how quickly the cycles are changing, how we are all evolving. What I’m trying to do with the American Ingenuity strategy is identify companies early on so that we can participate in this. When you ask, “Who is American Ingenuity appropriate for?” Well, I think, actually, it can be appropriate for any investor at any age. It’s just a question of sizing. Because these are younger companies, typically, and some of them are even pre-revenue, there is more risk.
Just as with any strategy, you wouldn’t put all your eggs in one basket, you wouldn’t put all your money into American Ingenuity, but you might find that it’s an appropriate—what I call sleeve—in your overall wealth management. You put, say, X% into Steve’s dividend income growth strategy, you put X% into Liz’s crypto way of looking at the world, you put X% into the homes that you own, X% into cash and you put X% into American Ingenuity.
I think that’s the way to approach it, and I think that’s also where the wealth managers here at Adviser—I’m new to the firm, but I’ve just been so impressed by how thoughtful they are in terms of having that conversation with people and figuring out the right allocation for American Ingenuity in a person’s portfolio. I love this stuff, Jim. I could probably talk about it all day, so I should leave it at that. But I’m so excited to be here, and thank you for the opportunity.
Adam, we welcome you. Of course, we’d love to hear you talk about it all day, but you do talk about it increasingly on media platforms like Fox Business news, so we’ll be sure to post those market moments when you can lend us your wisdom about what may or may not turn out to be the blue-chip companies of tomorrow. I love the sense of American Ingenuity being a great complement for dividend and income portfolios, particularly the one that Charlie Toole and Steve Johnson run.
Steve, I’ll get to you in a moment. But I want to bring us all the way back to the reality of safety in a risky marketplace. To do that, I’m going to bring in Jen Yousif. Jen’s a research and fixed income analyst—think bonds. She conducts quantitative and qualitative analysis on mutual funds, performs due diligence on the funds and managers we invest in, and researches potential future investment opportunities for client portfolios with particular regard to the fixed income universe.
Jen, most investors’ appetites for safe, income-producing, stable stores of value increase as they get older. Let’s bring some belt-and-suspender investing into today’s podcast mix and talk about the benefits of investing in bonds. Before we get to the question of what’s an income investor to do and should bonds play a role in even a growth-oriented investor’s portfolio, maybe let’s start with a thing that bond investors hate most: Surprises. What surprised you most about 2021’s bond market, and what surprised you about it so far this year?
For 2021, I would say two things surprised me, the first being inflation. I was prepared to see it drift higher, but I have to admit, I did not see headline CPI hitting 7%. My view looking forward is that this will come down, not necessarily to the Fed’s 2% target, but I definitely think we will see inflation land lower than where it currently sits. The second thing that surprised me, I would say, is performance.
Bonds had a really bad start to the year last year. In Q1, the Agg was down almost 3.4%, but it was up the last three quarters. If you don’t drill down like that, you wouldn’t necessarily have known that because it wasn’t enough to claw its way back into positive territory to end the year, and that was really frustrating. But for this year, I would be surprised to see the Fed change course without forewarning investors.
I think they have been very clear and upfront with their intentions. I also hate to say it, but I’d be shocked if bond performance ekes out a positive year this year. I think it’ll be tough with the current trajectory of the Fed’s policy. 2018 was the last time the Fed really meaningfully raised rates and that ended up being a negative year for bonds. The economy’s in a different place now. We’ll just have to see how it all plays out.
Thanks, Jen. In terms of what an income investor is supposed to think about, namely the yield that many of them rely upon, we remain in a low yield, but a potentially higher-yielding environment as we cross into 2022. What’s your advice for income investors? What’s your advice with regard to bonds overall, in terms of their role in virtually any investor’s portfolio?
Yields are low. They’ve been low for a while, but there are two ways you can reach for more yield. You can either extend your duration, meaning you’re going out further in maturity, or you can go down in credit quality. Of course, each of those options comes with its own set of risks. But besides that income that bonds provide, they also provide downside protection in your portfolio, and I do think that that is still a really important role. Especially depending upon your risk tolerance, that really helped to smooth out that ride. Remember that a bad day in the stock market can be a bad year for bonds.
Thanks, Jen. Steve, with broad market growth stocks, cryptocurrency and bonds now all having been accounted for, as a portfolio manager of our dividend and income strategy, let me tee up your thoughts on investing in battleship-balance-sheet dividend growth stocks. Shouldn’t they always be a part of an all-weather long-term investor’s portfolio?
Well, Jim, the answer to that for me is—and Charlie would say—”Of course, yes.” We always believe in dividend growth. What’s interesting, Jim, is we’re entering a period… As you know, last year, as we discussed, it really didn’t matter. People were not trading on fundamentals whatsoever. Because of that, some of those dividend-paying names did not do as well. But this market volatility that we’re experiencing has created a great opportunity. Because, as you mentioned, the keyword is the balance sheet and the battleship-type balance sheets.
Because in periods of volatility, what investors search for is high quality and cash flow. The companies that we invest in—all of them have those characteristics. They tend to be less volatile in this kind of market environment, and because areas like health care, which were avoided last year—it’s created some opportunity there. Even with the technology sell-off that we’ve experienced here, there are quite a few names that actually pay a dividend or are increasing their dividend, and that can be part of any investor’s platform or plan.
As Adam mentioned, we’re in this environment where things are happening so gosh darn quickly that this year might be one of those years where you take a barbell, where you’ve got real, high-quality, lower-volatility names, things like consumer staples, health care utilities, things that can weather any kind of economic environment even if we do sense a slowdown in the second half of the year with more growth-oriented portfolios.
That barbell, which has been very successful over the last couple years—that actually might be quite intriguing as we experience this sell-off, because again, we might be in an environment where investors are looking for those high-quality, dividend-paying names, things that can withstand volatility. Yet on the other side, the tremendous sell-off that we’re seeing in growth—that’s also creating an opportunity for the other side of the portfolio. It might be one of those years where—it may seem incongruous, but it’s not—where these two strategies actually work well together.
It actually sounds like it could help me sleep a little bit better at night. Thanks, Steve. As I said at the outset, we believe in disciplined diversification, and so my thanks to Liz, Jen, Steve and Adam for providing their diversified views on the stock and bond markets as well as the crypto craze. Let me, in conclusion, bring it back to a 30,000-foot view. What do we think of the biggest investment and income challenges and opportunities this year?
Well, overall, we continue to think that medical data matters at least as much as fundamental and macroeconomic data. We hope the most important criterion for framing assessments, regarding the markets we invest in, is coming more from economic and earnings data as we wind our way through 2022. Domestic and geopolitics will likely remain as contentious as they always have been. Inflation and the Fed, stimulus and infrastructure, China and Russia behaving better or worse—all potential thorns in the near-term market’s side.
The initial rounds of selling in 2022 suggest that perhaps the expectations will be adjusted to more rational levels. Overall, we think there are more reasons to be less pessimistic, more reasons to be more optimistic in 2022, but that doesn’t mean we’ll ever let our risk-aware guards down or shy away from taking advantage of near-term downturns to pursue wealth-building opportunities for our long-term investing clients. We know that staying focused on your objectives is always hardest in the near term.
Never more so than when the near term is confused, chaotic, confounding. But in 30 years, we’ve never known world nor market peace,. Never known either to be easygoing. I suspect over the span of the next 30 years, man’s inhumanity to man and its market implications will follow a helical pattern, like going up and down a spiral staircase of gains and losses. Nevertheless, or more to the point, in 30 years, we’ve never known investing for the long term to be anything but the best move we can make with our money.
Never better than when there are slings and arrows to contend with and selling looks like the only game in town. As it’s always turned out, selling into such selling has really turned out to be the fool’s errand, while staying the course and strategically rebalancing and/or buying has been the smart money move. Finally, in what remain uncertain times, one thing remains certain: We haven’t changed our investment discipline based on what others fear, nor will we.
Instead, for more than 25 years, we’ve invested based on the facts we know. No matter how volatile the next 25 hours, 25 days or 25 years may be, we look forward to helping you secure your financial future. Look to our podcast as one way in which we are always not just on your side, but by your side every step of the way. On that note, this has been Jim Lowell and key members of our Adviser Investments research and management teams. Many thanks to each of today’s participants and all who listened in to another The Adviser You Can Talk To Podcast.
If you enjoyed this conversation, please subscribe and review our show. You can check us out at adviserinvestments.com/podcasts. Your feedback really is always welcome. If you have any questions or topics that you’d like us to explore, please email us at firstname.lastname@example.org. Thank you for listening.
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