Market note

While I always try to connect individually with you it feels necessary to send a broad email to share my thoughts on the market and what actions I am taking.

* Since late November, when the inflation debate gained true momentum, markets have become highly emotional. The last three weeks have exacerbated the uncertainty, and while a pullback has been expected, we never emotionally are prepared for a swift decline. Markets have a way of rising like an escalator while falling like an elevator.

* Facebook is the latest example of “get me out at any price”, dropping 26% today after reporting 4th quarter earnings last night which were all in all not bad. Because Facebook represents 2% of the S+P 500 index and 5% of the Nasdaq a dop of that magnitude pulled down the whole market. Netflix, PayPal and other Tech names are large constituents within broad market indices and have increased the overall volatility when pulling back.

* What we are seeing now is a valuation reset given higher inflation and rising interest rates needed to combat said inflation. The debate about how long inflation might last- or how many rate increased will the Fed make in 2022- is fodder for headlines yet impossible to answer. We simply don’t know the answers. Some stocks- Tech namely- reached extended valuations last year and were due for a correction.

* The underlying economy is growing and no recession is in sight so I am viewing this as a healthy correction in order for the market to move higher.

* Trendy investments like Crypto, electric vehicles and “concept” companies with no earnings have been hit hardest and will take time to recover, if ever at all.

* I am zeroing in on companies with good financials, great products/industry disruption who are now 15-25% cheaper. Some we may already own but will add while others have been coveted and are now timely.

* Additionally, I continue to add exposure to those sectors of the market who historically weather inflation and rising rates the best: Financials, Industrials and Energy (remember Energy underperformed for multiple years until popping 20% in January) along with small-cap stocks.

* Cash within your Schwab account is much easier to deploy than cash held elsewhere. I have been slowly adding to attractive stocks when opportunities appear.

 

In summary: over time the market rewards real growth stocks with real earnings. The reset we are seeing is much more typical that the low volatility environment we experienced post the pandemic sell-off of March, 2020. For investors who have a decent time horizon, a pullback such as this serves as an opportunity, so if you have cash you do not need for a year+ please consider sending me some to average into the market.