In what was in no uncertain terms a very challenging year to be involved in traditional investments such as stocks and bonds, we at Proxy Financial were not immune from the markets which plagued 2022. Those of you who find yourself reading this, may also have seen our in depth 2022 market synapsis, 3Q2022 Commentary here, however I will recap what I believe to be the most significant drivers of performance for both our strategies at Proxy and the markets at large. Inflation, the fear of inflation, and the US Federal Reserve (the fed) were the biggest factors in the resulting bear markets of 2022. You may have been exposed to some of this through mainstream media, but we will go a bit deeper. 2020, and specifically COVID-19, brought the world to a halt – both socially and economically. The waves of stimulus which followed, along with the easing and overall loose monetary policies of virtually all governments and banks, allowed for a sharp recovery of the stock markets, housing markets, and most global economies. The pockets of consumers’ became flush with cash, saving accounts grew more robust than they had been in a decade, and with the world trending back to the (new) normal, people and companies spent. Despite the expected and incidental decreases in laborers (Retirees, turnovers, or those who were better suited on unemployment), the unemployment figures fell to historic lows. Most people who did return to the work force had new opportunities and the hiring booms across many industries allowed them to demand even higher salaries and benefits (notably in the white-collar sectors). Meanwhile, Vaccines were flying off the shelves, COVID was still running rampant, with infection rates skyrocketing, though now with a very low mortality rate, the media pivoted from COVID reporting and the general consensus of the public quickly followed until there were growing sentiments of returning to pre-covid conditions. People began traveling, making expensive home purchases utilizing rock bottom mortgage rates, overpaying for 2016 Honda CRVs, day trading crypto, NFTs, SPACs – life was good! So… what happened…? I don’t need to retell the myth of Icarus or quote the famous idiom for which it brought about, but hubris was involved and society at large ignored the warning signs and the increasing heat. Fast forward to 2022 which gave way to the combined compounding effects of strained supply chains (low availability of goods) with an increasing demand. The unfortunate reality remained that the world economies and general production were shut down almost completely for up until then, creating a very large conflict with the above mentioned supply and demand expectations. The cost of housing begun to correct the other way, with both home prices and rent being driven up by new demand and low inventory. Due to international conditions, the previously cheap gas prices quickly transitioned into the most expensive fuel costs and conditions in over a decade, with massive demand. The US domestic supply was significantly diminished by the necessary shuttering of many refineries. Higher fuel costs do not just effect your commute to work or the drive to the grocery store, but every step from production all the way through shipping and delivery. This was further compounded by our reliance on international goods and production partnerships, many of which fared the same if not worse than the US during the two years leading up to 2022. Additionally, Russia’s war in Ukraine added even more global economic pressures on supply chains, with the resulting sanctions heavily impacting the energy industry. All of these factors, combined with the spike in fuel costs, growing costs of used cars, housing, and food (the farming industry was not exempted and suffered rising costs of seed and fertilizer), directly lead to rapid inflation. Controlled inflation can be good as a necessary component of the economic cycle, but runaway inflation is trouble and needs to be monitored and manipulated in an effort to keep it in check. Needless to say, we were not prepared to tackle all of those conditions and in the summer of 2022, inflation hit a 40 year high at 8.6% YOY. The party that was 2021 was officially over. Enter the Fed. When simplified to its basic functions, the duty of the Federal Reserve is to conduct monetary policy with the goal of promoting and maintaining stability in the US economy. High inflation is a threat to that economic stability, and while there is more than one tool that the Fed could use to deal with the issue of inflation, adjusting the target rate, also known as the Fed fund rate, was the one they decided to utilize most heavily. The objective behind pushing up the Fed fund target is that borrowing money becomes more expensive and more difficult, slowing heightened investing, and allowing the supply chains to recover and bridge the gap between supply and demand. Throughout most of 2022, the Fed leaned hard on this approach, whether that was the best method or not, we saw the target rate leap from 0.25% at the end of 2021 to 4.5% at the close of 2022. Turning up the dial of he Fed Funds target is not meant to have immediate impacts on inflation, rather it takes time for the effects to cycle through the system. We as individuals and business owners have seen this in mortgage rates, credit cards, as well as both business and personal loans. Ultimately, in making money less accessible while the cost of just about everything else is heightened, households have less excess cash to spend, and businesses stop borrowing capital for growth and/or expansion. Profit margins are also likely to shrink, and the slowing economy often triggers layoffs and rising unemployment. The approach the Fed had taken may or may not drive a rescission, but either way inflation and the measures used to control it will have taken its toll on the general economic conditions. Heading into 2023 there remains a tremendous amount of uncertainty for the economy and the markets, but keep in mind that just because inflation may
What Happened: What we Did: What we are Watching: Disclaimer: Investing in financial markets carries risk, including loss of principal. You can lose some or all of the money that is invested. Past performance is no guarantee of future results. The material contained herein is for informational purposes only. This document does not constitute a recommendation of securities, securities portfolio, transactions or investment strategies. The projections were created based on hypothetical information, there is no guarantee that any of them will come true. Proxy Financial is a registered investment adviser. Proxy and its Financial Advisors are not licensed in all states to offer securities and insurance products. This site is not a solicitation of interest in any of these products or service in any state which the registered representative is not properly licenses.
What Happened: · The second quarter of 2022 ended, closing out the first half of the year with nearly all markets down in a significant way, many in a bear market territory. If you are a newer investor who just got into investing during the COVID craze, this is first time you are experiencing such a downturn. If you have been investing during the financial crisis or the “dotcom bubble”, you might recognize this feeling. However, with the S&P 500 down nearly 20%, you have never experienced anything like this first half of the calendar year, unless you were invested in 1970 (Proxy, however, was not even born yet). · With the S&P 500 down so much, was there a better place to be? From a broad market perspective, the answer is “not really”. The NASDAQ index closed the quarter at -29%, mid and small cap growth were down even more. Even Value which had help up the best was -12.87% to -17.24% ranging from large to small cap. Internationally, we were no better off, MSCI EAFE was -19.23% and MSCI EM was -17.57%. · Bonds, the usual safe haven from a poor equity market also failed us in this high inflation, raising rate world we now live. In the US the BARC Aggregate Bond Index was -10.29% & BARC High Yield Index was -14.19%. Outside of the United States was even worse, Non-UDS WGBI was -18.41. A year ago, the 10-year US treasury was at a rate of 1.47%, as of Jun 30, 2022, it was 3.01%. you don’t need a calculator to know that more than doubled. · Real Estate as represented by the FTSE Equity REITs index decreased -19.17%. Even gold ended the 2nd quarter in the red at -1.16%, as second quarter saw it give back 7.28%. The BBG Commodity Index, comprised most of Energy (~30% of index) and Grains (~22% of index) was one of the few bright spots for Alternatives posting a positive 18.5% on the year. · The next logical question is what happened to drive such a broad sell off across equities and fixed income, both domestic and aboard? To sum it up, Global Inflation. Economic measures of inflation have hit 40-year highs (8.6% YOY), caused by loose monetary policy, supply chain issues (both COVID & war related), and a strong demand for good supported by high levels of employment. · In this unique situation, the US Fed and other global central banks are being forced to take a very “hawkish” approach towards tightening monetary policies. Treasury Yield rose as much as 199bps from 1.51% to a high of 3.50%, while the national (30-year fixed-rate mortgage nearly doubled from the low 3% level towards 6%). Over the last three FOMC meetings, the Fed hiked the Fed Fund Rate (FFR) three times in increasing increments of 25bps (March), 50bps (May), and 75bps (June). To illustrate just how much this inflation has caught us all off guard, most markets were pricing in three to four 25bps FFR rate hikes for all of 2022. Perhaps Fed Chair Powell said it best when recently stated “I think we now understand better how little we understand about inflation.” · Some other central banks are acting as well. The Swiss National Bank surprised global markets with a 50bps rate hike the first hike in 15 years, Brazil’s central bank raised its lending rate by 50bps, and the Bank of England raised its rate by 25bps. However, there are still many other global central banks that catching up to do and will have to act fast. What we Did: · As illustrated above, there have been almost no safe places to hide in 2022, however there are actions we took to help limit the downside. Much of the action taken was either at the end of 2021 or very beginning of 2022, as we try to look ahead and be cautiously proactive, not reactive. · Examples of adjustments made are increasing out tactical cash position, increasing our gold exposure and utilizing TIPS in the Proxy Global Equity Portfolio. We also had shifted away more towards value and dividend paying companies, as well as minimizing Emerging Market exposure. Some of these tactical shifts have help to provide downside protect while others have provided any short-term benefits. Exposure to global semiconductor companies has been a detractor as well as an overweight to developed Europe in lieu of emerging markets. The net result of these shifts was positive, resulting in outperformance of about 230 bps YTD. · Some examples of what has worked increasing gold (IAU), Treasury Inflation Protected Securities, also known as TIPS (SCHP), Value/Dividend Companies (SCHD) as well as just simple cash. These 4 tactical shifts made up 18.5% of the portfolio allocation and were only down about 5.6% on average. As mentioned above, the biggest detractor was our Semiconductor (SMH), down -35% which we have increased to 3% of the allocation. While our Semiconductor play has underperformed the broad market YTD, it is a longer-term strategic play. We have also increased our direct exposure to this segment in our growth clients. Global demand for semiconductors remains high and while supply chain issue plague the sector, as they have so many facets of the economy, we see many of the top players in the space to be financially stable the upside in significant. The net result of these shifts was positive resulting in outperformance of about 230 bpts YTD. Global Equity was -17.7 vs the S&P 500 and MSCI ACWI which were both about – 20%. · While were able to make a shift towards value, away from tech and growth companies in our top-down Global portfolios, Proxy Growth strategy, because it is a style-pure portfolio, must remain focused on companies with higher than average long-term growth potential. Growth is, by nature, more volatile, and in the current environment, it has been even more so out of favor on Wall Street. In this current risk-off, high inflation environment we
What Happened: · While March ended the month positive across all major US equity indexes, Q1 was still negative, more accurately representing the tone of 2022 so far. Many uncertainties in the economy and geopolitics shaped the year thus far, resulting in the YTD performance: S&P 500 at -4.6%, the DJIA -4.1%, NASDAQ -8.94% & MSCI EAFE -5.77%. These Q1 ending numbers reflect an improvement from the low point which saw the S&P down -12.5%, as an effect of inflation, raising rates and the Russian invasion of Ukraine, this last point further complicating an already upturned global supply chain. · Credit markets offered no shelter for those looking to escape the woes of the equity markets, as we witnessed short term yields spike, causing a brief inversion to the yield curve. Bonds prices across all sectors have been depressed as reflected by the Barclay Aggregate Bond Index, down over -5.9% on the year. March began the Fed’s campaign to combat inflation by raising the target range by 25 basis points. This hike from the Fed was the first of many, as it has signaled its intentions for six more rate hikes this year with four additional hikes in 2023. · Globally there was no place to hide. Inflation, the Russia-Ukraine war, supply chain limitations, and even resurgence of the infamous lockdowns (this time heavier in China) caused a strange “flight to safety” from market participants. What we Did: · Proxy’s portfolio management team made few changes in the month of March. The tactical adjustments made in the prior months showed to add safety and value to clients of all risk profiles. · The Growth portfolio, keeping true to its investment objective, continues to hold and look for new opportunities in companies with significant future earnings potential. Our overweight towards companies with stronger current earnings helped results, as investors fled from the growth theme. The portfolio’s significant exposure to Mid and Small cap companies has been an even greater detractor. For example, the Russell large cap growth indexes are down just over 9% YTD while Mid and Small growth cap indexes are both down more than 12.5% YTD. With our current overweight towards cash, we continued to seek opportunities with strong companies now trading at discounted prices. While we did not initiate any new positions in March, we deployed some of the cash reserves into companies that are now presenting much more reasonable price entry points. · The Proxy Global Equity strategy, while experiencing less volatility than the broad market, has not expected the global sell off. US equities, International developed and Emerging Markets have all been down on the year. We had adjusted the model with a lean towards value and global dividend paying companies as well as an increased position in gold via IAU. The shift away from EM was made last year, however the overweight towards developed Europe has become a detractor following the impacts of the Russian invasion of Ukraine and the economic disarray this has caused in continental Europe. · Proxy’s Value strategy, a Dividend Income portfolio, holding true to the “flight to safety” theme, ended the quarter with positive returns. Our exposure to energy and precious metals led the way in performance. The addition of TC Pipelines LP (TRP) and Wheaton Precious Metals (WPM) at the start of the year had proven to be a solid value. We had an annualized average yield of 3.6% and continue to seek out quality companies that will help sustain that level of income. What we are Watching: · The Fed and policy makers will have to deal with unprecedented times. The US is close to what’s called “full employment”, the global supply chain is still in a chaotic mess from the pandemic, inflation is partying like it’s the 80’s and a war that’s happening in continental Europe. · As the Fed continues to push rates in response to growing inflation, we will also closely be looking at the direct effects on the credit market as well equity markets. As short-term rates increase, the risk-free rate of return, as represented by US treasuries become more attractive. The continued market volatility, inflation and overall uncertainty may start to shift investors away of riskier investments and towards a more attractive “guaranteed rate”. · Russia’s invasion of Ukraine grinds on not only to the devastation of people of the Ukraine. With no clear end in sight and sanctions on Russia expanding, the Russian economy will be in serious distress. The surrounding European countries, including many of US’s large economic partners, dependent on Russian commodities, are also feeling the sting of this sense war. · As risk managers, we at Proxy will continue to look for opportunities which are often created in times of uncertainty. We will also continue to minimize risk whenever possible during these volatile times.
What Happened: · February markets started off the month with a bit of a bounce back from the hard hit we took during January, but January’s many concerns remained. And volatility persisted. The most defining moment came at the end of the month as Russia invaded Ukraine. U.S. markets in general took a large hit, with the S&P 500 down over 3% for the month and at roughly -8% for the year. · Growth equities continued to see the worst of it, while Value has fared relatively better, assisted by surging energy and commodities related companies. International Markets also took a hit, with the EAFE down roughly 1.8% and Emerging markets suffering worse around -3% for the month. · US bonds prices continued to fall during the month and with the aggregate down ~4% YTD. While treasuries and other high-quality debt has historically been safe place during such global turmoil, the Feds actions to hike rates has keep some downward pressure and the yield curve flat. Both the 5-year & 10-year treasury yields remained just below 2%. Emerging Market debt, largely driven by Russia, plummeted, down nearly 12% as of the end of the month. · The world response to the aggressive and deadly actions of Putin to invade Ukraine sparked significant sanctions against Russia. The anticipation going forward is that if sanctions on Russia continue for extended periods, not only will Russia’s economy continue to spiral downward (along with the Ruble), but much of Europe feel some negative impact as well. What we Did: · Proxy continued to keep focus on the longer term, especially since such geological events tend to have short lived impacts on financial markets. In this case, the current pressures on global supply chains will likely continue to grow the many sanctions and their impact, which can add more pressure to the highest inflation seen in 40 years. We did reduce some of our direct Emerging Market exposure in our Global Equity models. Even prior to Russia’s invasion of the Ukraine, we did not have a very positive outlook on Emerging Market. · Growth continued to be out of favor by the Market, as much of it is characterized by higher risk and promises of future earnings. When the present is nebulous, Wall Street has even less appetite to bet on the future. The Proxy Growth portfolio stuck to its discipline because short term volatility historically is compensated by long term focus. Our diversification into small and midcap growth which had been a detractor prior, seems had found some support and added positive returns. The recently downtrodden Large Cap. companies are now down approximately 12% on year. · Proxy also stayed the course within the value oriented, Dividend Income portfolio. We benefited from adjustments made at the end of 2021, as we leaned into energy and precious metals adding companies such as Newmont Corp and TC Energy Corp. These additions not only added to the outperformance of the S&P in 2022, but also boosted the 12-month yield to 3.7%. · Regarding fixed income, higher quality and lower duration have helped our performance in this difficult period for bonds. Rising rates will affect most any fixed income position, whether through mark-to-market volatility or decreasing face values. We made no changes and will continued to stay away from low credited quality and Emerging Markets. What we are Watching: · Like every person in the free world we keenly observing the war which Putin has brought on the people of Ukraine. Our hearts go out to the people of and in Ukraine. While there is no point in attempting to make sense of the actions of a mad man, we are focused on the spillover effect of the growing number of sanctions against Russia. So far, we don’t see a dire scenario that would warrant adjustment of financial plans and goals. Stay the course of your plan for now. As with anything in life, if matters escalate we will let our clients know. · Supply chain issues, record level inflation, Fed rate hikes and the end of its asset purchasing in March are also top of mind as we watch market volatility continue in this still young 2022. · Aspects of all this uncertainty may give the Fed some pause when it comes to how hawkish they might be with the initial rate hikes and maybe even the total number of increases. A more dovish approach should benefit the market. Overall, the US economy was healthy prior to Putin’s invasion. If spiked energy prices, increased supply chain issues and a hawkish Fed do all culminate into a recessionary environment, it will possibly be short and shallow. We are not overly concerned about a slowing economy because of the healthy employment market.
What Happened: What we Did: What we are Watching:
What Happened: What we Did: What we are Watching: Disclaimer: Investing in financial markets carries risk, including loss of principal. You can lose some or all of the money that is invested. Past performance is no guarantee of future results. The material contained herein is for informational purposes only. This document does not constitute a recommendation of securities, securities portfolio, transactions or investment strategies. The projections were created based on hypothetical information, there is no guarantee that any of them will come true. Proxy Financial is a registered investment adviser. Proxy and its Financial Advisors are not licensed in all states to offer securities and insurance products. This site is not a solicitation of interest in any of these products or service in any state which the registered representative is not properly licenses.
What Happened: What we Did: What we are Watching:
What Happened: What we Did: What we are Watching: Disclaimer: Investing in financial markets carries risk, including loss of principal. You can lose some or all of the money that is invested. Past performance is no guarantee of future results. The material contained herein is for informational purposes only. This document does not constitute a recommendation of securities, securities portfolio, transactions or investment strategies. The projections were created based on hypothetical information, there is no guarantee that any of them will come true. Proxy Financial is a registered investment adviser. Proxy and its Financial Advisors are not licensed in all states to offer securities and insurance products. This site is not a solicitation of interest in any of these products or service in any state which the registered representative is not properly licenses.
What Happened: · For September, the US equity markets had its first negative month of performance since January. Domestic Year-to Date performance has remained strong through the end of the 3rd quarter with major domestic indexes still holding their gains while achieving positive returns of at least + 10%. The S&P 500 has returned + 14% through the end of September. The NASDAQ index, returned a negative -5.3% in September and now stands at + 12% Year-to-Date. The Russell 2000 Index, which measures the performance of smaller sized companies returned -3% in the month of September and has returned +11.6% for the year. · International Equity Markets also were negative in September. The developed countries as measured by the MSCI EAFE Index were down just over 3% in the month, while still finishing out September + 6% on its performance for the year. The MSCI Emerging Markets Index was down – 4% in September, bringing its year-to-date performance to now just under – 3% for 2021. The Brazilian equity markets as measured by the BOVESPA stock Index was pretty much flat coming into the month of September, it also participated in the equity market selloff loosing -6.5% in the month and now sits at -6.75% for 2021 through the end of September. · US Fixed Income was also down in September, as measured by the Bloomberg US Aggregate Total Return Index. September’s performance was – 0.87%, bringing its total return for the year to -1.55% through the end of the third quarter. The yield on the 10 Year US Treasury rose to the 1.5% levels up from 1.3% where it began the month. We know as yields go up bond prices are going down, so we expect fixed income performance to be challenged in this low interest rate environment. In the commodities arena, Oil was one part of the market that experienced a positive month in September appreciating over 9% to now $75 a barrel. For the year Oil has appreciated +54% in 2021. In the precious metals space Gold was down just over 2% in September and now down -6% on the year pricing at $1,775 / oz. Silver was down over 8% in the month of September and now at $22 / oz. sits -16% below where it began the year. What we Did: · Coming off a strong 2020, the growth asset class continued to experienced a rotation to the value class. While this is not unexpected, the wealth management team has stayed true to our discipline, seeking new growth opportunities as valuation return come back down. At the same time, we are looking to make sure there is still significant runway ahead for our portfolio companies to achieve significant capital appreciation. The concern so much momentum is that some of the names in the portfolio may have reached a fair or full valuation. We continue to evaluate not just how our portfolio companies are relatively positioned within their industry versus their competitors, but also that they can continue to achieve outperformance versus other opportunities found within the equity growth mandate. Focused on long term growth, we have found short term volatility can often create great opportunities if you know what you’re looking for. · Core Global Equity portfolio, we continue to stay the course with our global equity allocation. The portfolio has performed positively as we continue to participate in the current bull market cycle. Our continued concern for Chinese equities has helped protect on the downside. Our concern for a mid-cycle pullback has increased which is leading us to proceed with caution as we slightly increased our exposure to assets such as Gold, US Treasuries & Gold, to hedge against a possible market downturn · In our Dividend Income Portfolio strategy, which has been the more conservative of the equity portfolios, we continued to prepare for a market pullback. The portfolio which has an income, cash flow centric focus is positioned well above our targeted yield of 2x the S&P 500. The portfolio is currently yielding approximately 3.5%, while the S&P 500 yields around 1.3%, considering the interest rate environment we feel that this level of income generation is working for our clients. The inclusion of a High Yield fixed income ETF increases the diversification of the asset allocation while also maintaining our income cash flow centric portfolio mandate. What we are Watching: · There were some major global news stories in recent months that have the potential to disrupt the global economy. The United States withdrawal of Afghanistan brings an end to 20 years of war. This could begin to signal a less influential U.S. around the globe. Look for other powerful nations like China and Russia to start to assert their influence abroad in strategic locations. Areas to focus on for example; Taiwan, the Korean Peninsula, South China Sea. Also, countries like Iran or the Ukraine could serve as a hotbed of geo-political tensions, which could certainly change the landscape of the global economy. China’s recent banning of bitcoin and the default of Evergrande, China’s second largest property developer, has raised concerns over the long-term investment outlook for the world’s second largest economy as well. · Company earnings and outlooks sentiment will be a focus as we turn the corner to head into the end of the year. September rattled the bullish investors and now some investors point to a lack of a new catalyst to bring the market higher. Severe weather and supply chain issues will be mentioned often in companies’ earnings call as negative factors that effected the bottom line. Inflation data will be in focus to see if these economic pressures are here to stay or more transitory. Non-Farm Payrolls are still way below pre pandemic levels raising concerns about the labor market. With Federal unemployment benefits rolling off the labor market could gain back some willing workers. The unemployment rate currently sits at 5.2%. · Policy from Washington DC, always another area of focus. We’ll be watching to