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We are excited to release our October 2022 Chart Pack – our visual quarterly designed to walk investors through our views on:
- What’s happening and why,
- Predictions about what may come next,
- Positioning in our RiverFront portfolios.
In today’s Weekly View, we created a concise synopsis of three selected visuals from the Chart Pack that encapsulate a few key takeaways.
Dollar Strength: A Headwind for Overseas Economies
We think the dollar’s recent strength underscores the attractiveness of US bond yields and the US‘ safe haven* status. However, it can also be a headwind for US corporate earnings…something we are watching closely.
Since global energy commodities are generally priced in dollars, foreign currency weakness (see chart, right) is effectively ‘importing’ inflation overseas, making Europe’s already difficult inflation situation worse.
We continue to favor US assets over international.
History Suggests that US Earnings Can Survive Inflation
We think the most compelling bullish argument is that corporate earnings in the US have so far remained resilient.
The inflation recessions of the 1970s and early 1980s (see red circles on chart, left) saw relatively mild earnings downturns, compared to the much starker drops in earnings in the 2000 and 2008 recessions. If past inflationary periods are a good analog for today, earnings may prove robust.
Market Valuations: Reasonable… if Earnings Can Hold Up
The S&P 500’s valuation is roughly 15.3 x 12-month forward earnings estimates…about 6-7 points cheaper than at the start of the year.
The more attractive valuation may be a mirage if earnings subsequently collapse. However, earnings forecasts have remained robust at around $234 per share, a meaningful increase from last year.
Conclusion:
The lingering inflationary impact of the global shutdown, government stimulus and supply chain disruptions have forced central banks to be more restrictive. The knock-on effects of more restrictive policy have also caused significant currency stresses across non-US markets. The net effects have been reduced growth forecasts and negative performance across all major asset classes in 2022. Going forward, Chairman Powell’s recent commentary, which suggests a faster pace of interest rate hikes and a higher terminal rate than previously thought, should continue to place pressure on the economy as well as stock and bond prices, in our opinion.
We are cautious on equities across all balanced portfolios versus our benchmarks. As a result, in our shorter-horizon portfolios, we are close to our COVID-19-level lows in equities, and our fixed income strategy still favors corporate bonds with shorter maturities. Our longer-horizon portfolios are also below the equity weighting in their benchmarks, but less so. In these portfolios, we have sought out high yield bonds and other alternative yield-oriented securities in an effort to increase expected yields across the portfolio, as well as favoring energy-related and technology companies versus cyclical consumer themes.
The reason we are not at historically high levels of cash is that stocks and bonds have already fallen significantly, making them both attractive to us on a longer-term basis. Given this, we think there is a case for longer-term optimism even as the shorter-term tactical outlook remains fraught with uncertainty.
Risk Discussion: All investments in securities, including the strategies discussed above, include a risk of loss of principal (invested amount) and any profits that have not been realized. Markets fluctuate substantially over time, and have experienced increased volatility in recent years due to global and domestic economic events. Performance of any investment is not guaranteed. In a rising interest rate environment, the value of fixed-income securities generally declines. Diversification does not guarantee a profit or protect against a loss. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. Please see the end of this publication for more disclosures.