An Update From GMFG - 1-13-22

Posted by Greater Midwest Financial Group on Jan 13, 2022 3:39:29 PM

I hope everyone had a happy and healthy holiday season.  After a relatively quiet end of the year in the stock market, we have started out with a volatile first week of 2022.  This does not come as a surprise – for a number of reasons we expect 2022 to be a more volatile year in the stock market as we digest stocks that have risen to all-time highs in the face of Covid, inflation and decelerating growth.  That said, we still believe the market will grind higher over the course of the year. 

To remind everyone, stock market returns have been positive in roughly 75% of calendar years dating back to the 1920s.  In addition, volatility is normal with a pullback of 10% or more approximately every 18 months. I mention both of those things as we have seen massive appreciation in stock prices since coming out of the Covid lows in March 2020, without any major drawdowns in prices and a generally straight up trend line.  Practically every stock and every sector of the market has produced positive returns – we see that changing as we encounter valuation headwinds in the face of higher inflation, the latest Covid outbreak, waning fiscal support and a Federal Reserve that has indicated they will be more aggressive in combating inflation.  In particular, the transitory discussion surrounding inflation is behind us. We have a tightening labor market, wage increases and higher prices that tend to be pretty sticky historically - inflation in some form is here to stay.  

The report from the December Fed meeting that just came out hinted towards that stance.  We feel the economy is in a position to handle higher rates, but the stock market might feel some pain as it digests the tightening cycle.  That is playing out as a I write this – we are seeing long duration, high PE growth stocks get hit the hardest with a rotation towards more high-quality names that generate profits and distribute those to shareholders today.  The Nasdaq hit correction territory this week, down over 10% from its recent all-time high, and over 4% during the first week of January.  The S&P 500 is better, but still negative in 2022 so far.  As the prospect of higher interest rates is now becoming a reality, we see a shifting focus on what stocks people want to own.

So, what does all that noise mean for you and your portfolio?

First off, we had a great 2021 with solid returns.  As a result of that and with the likelihood of choppiness in early 2022 as we are seeing now, we raised a significant amount of cash during the month of December.  The stocks we kept in the portfolio were those that we felt would perform well and hold up in a rising interest rate environment.  So far this year, that has proven effective as things like industrials, financials, and other previously unloved sectors have held up well when compared to technology in particular.  That said, we still find a lot of value in companies like Apple, Microsoft and Amazon and continue to hold them in your portfolios despite the recent pullback.  Other areas of the technology sector we have avoided and will continue to do so while their valuations remain high.

We don’t feel that the rotation or downside has fully subsided in the market yet and as a result have not deployed the cash we raised in December.  When we do, we will focus on quality companies with strong balance sheets, tangible products and that pay dividends.  In addition, we have been underweight to traditional fixed income in nearly all portfolios with rates so low.  As rates continue to rise we will look to add back the core fixed income portions of the portfolio that provide stable income and some downside protection.

So, in closing, we think 2022 will be a bumpy and volatile year in general with a trend towards the upside.  Focusing on companies that have solid balance sheets and are making profits will be important in 2022.  The recent down trend we have seen from the combination of a more aggressive Fed, the Omicron wave hitting around the world at the moment and all-time highs in the stock market will ultimately provide an opportunity for us to redeploy cash at more reasonable prices.  Now is not the time to panic, but stay the course, be patient and be rational.  As always, we don’t take your trust and confidence for granted.  We will continue to be diligent and hard working on your behalf. 

Thank you, stay warm and don’t hesitate to reach out if you have any questions.

Sincerely,

Bobby

Robert J. Phillips, CFP ®

President

Greater Midwest Financial Group, LLC
3222 Rice Street
St. Paul, MN  55126-3047
Phone: (651) 490-9790  Fax: (651) 490-9788

robert.phillips@greater-midwest.com

www.greater-midwest.com


Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with Greater Midwest Financial Group, LLC or Five Star Professional. Investor Disclosures: https://bit.ly/KF-Disclosures.

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Topics: update