Q1 2022 – Quarterly Market Update
Athos Capital Advisors
- The Fed is behind the curve and should be inclined to be more aggressive in tightening monetary policy
- Inflation is persistent – not “transitory”
- Interest rates have risen considerably and could continue to trend higher
- US 10 Year Yields have risen to 2.9% and mortgage rates are now above 5%
- Stocks and Bonds are down in tandem this year
- Bonds have had their worst start to the year since 1981
- The S&P 500 is down 12.1% and the Bloomberg US Agg is down 8.6%
- The 60/40 portfolio is down 11.3%
- Investors must position portfolios differently than they have for a long time as a result
- The investment landscape is very different when inflation is persistently high and interest rates are rising quickly
- Increase diversification to be prepared for a wider range of outcomes and include investments that do well in inflationary environments
- Natural resources & energy investments are important parts of a portfolio
- Be valuation disciplined higher interest rates mean valuations compress, this has already played out violently in speculative growth stocks
- Geopolitical tensions remain very elevated
- Prepare for continued volatility across financial markets
- Mid-term election years are historically very volatile and see big drawdowns (on average)
- Increase allocations to alternatives and private real assets
- Interval Funds (see attached our latest whitepaper) offer an attractive way to access these asset classes
- 5-10% yielding assets, very low volatility, and low correlation to stock and bond markets
Charts
The Fed is behind the curve and is now expected to quickly raise interest rates to combat persistently high inflation
Interest rates across the board have risen considerably, tightening financial conditions for businesses, real estate, and households alike
- Higher interest rates impact the value of every financial assets – all else equal, higher interest rates reduce the value of most assets (higher discount rate, higher borrowing costs, increased alternatives for capital)
Stocks and bonds are going down in tandem
- Worst start to the year for bonds since 1981
- The S&P 500 has fallen -12%
S&P 500 Valuations
- Interest rates going up means valuations on most financial assets come down
- It’s very important to be valuation sensitive, make sure you aren’t overpaying
- Much of the market is still richly valued, the most expensively valued stocks have been getting hit the hardest
Real Assets / Natural Resources are vital to diversified portfolios in inflationary environments
- Real assets are an important part of portfolios for the first time in several years
- During periods of high inflation real assets are the best inflation hedges and have historically been the best performing assets
- Most investors have little to no exposure to Real Assets / Natural Resources equities after years of poor returns. We began including in portfolios several months ago as it became clear inflation was a bigger and longer-term issue
Volatility – Mid-Term Elections
- Mid-term election years are historically the most volatile years
- Combined with rising interest rates, it is essential to be prepared and to be able to withstand bouts of volatility
- Make sure portfolios are ultra-high quality and comprised of assets that will do well regardless of the environment
Interval Funds
- Year-to-date, select interval funds have provided ballast and balance to portfolios
- These investments are a very attractive way to generate income and steady returns with very low volatility and very low correlation to the broader stock and bond markets
- See link for our recent whitepaper on interval funds and why they are helpful to portfolios right now
Athos Capital Advisors
www.AthosCapitalAdvisors.com
Henry A. Miketa
Founder & President
310-971-4765
hmiketa@athoscapitaladvisors.com