Three Minute Digest for March 9, 2022
RUSSIA
The Russian invasion of Ukraine continues to dominate the news. Russia has overwhelming military might versus Ukraine and time is on their side. An interesting aspect is that while Russia may have military dominance over Ukraine, they are having more difficulty than expected and their perception as a standing army military superpower has been deflated. Their nuclear strength is another matter. There is however a Ukrainian Resistance Movement that will trouble the Russians for the foreseeable future.
FED POLICY
The next Fed policy decision will take place following their March 15th & 16th meeting as inflation shows little signs of easing. The markets had been concerned and have reacted negatively to a potential 0.50% interest rate hike. Federal Reserve Chairman Jerome Powell indicated in his congressional testimony last week that considering current events, the hike may be a more traditional 0.25% move. This caused the market to rally at the time but without follow-through as the markets have returned to weakness.
OIL
The price of oil continues to rise reaching $130 per barrel. The price of oil is a key element to both the Russia / Ukraine war and the ongoing battle with inflation. We view inflation as the single biggest threat to the markets.
In last week’s Affinity Digest, we ended with “Our next Digest will look at the effects of inflation and international events on the markets and our Affinity Capital portfolios. A sneak peek: While we are typically hard on ourselves, we are pleased with how our portfolios have held up during this market correction.”
As of yesterday’s market close, the year-to-date return of the Dow Jones Industrial Average is negative 8.45%, the S&P 500 is negative 10.61% and the Nasdaq Composite is negative 15.92%. For 2022, on average, our Affinity Capital Portfolios are lower between 5.00% and 5.50% year to date.
Of the five top performing sectors of 2022, our portfolios are overweight in four of these five sectors. Of the bottom six sectors we have weightings in two of them plus the tech sector which we have on average a 5.00% weighting. We sold one of our tech sector securities back in January but averaged into another tech position on weakness although they have continued to weaken. One thing we have learned is to never bet against American tech in the long-term although another 3.00% to 5.00% drop in the Nasdaq Composite could signal “the other shoe dropping”, whereby we would analyze whether to add on continued weakness or to step aside until the smoke clears and we have more clarity on the markets.
In January we also sold most if not all positions focused on international securities, small growth stocks and particularly convertible bonds which at that point had served us very well in 2020 and 2021.
We have several bond positions that are designed for a rising interest rate environment. In a very disjointed bond market, even these securities are showing weakness although when adding the dividends they pay us, are generally in good shape.
We see a great deal of research concerning the prospects in emerging markets but frankly, we are not seeing the opportunities as of yet. We exited our emerging market position in the third quarter of last year, an opportune time.
We are weighted in numerous sectors that traditionally hold up during inflationary times, with positions in energy, financials, materials, real estate, and industrials. Materials are surprisingly weak but our confidence in the sector remains.
As always, please feel free to call with any questions. Thank you for the opportunity to serve you!
If you have not done so already, please schedule your Portfolio Review.