Market Trends & Outlook

There is no right or wrong way to build an investment portfolio. Rather than spreading money across style boxes simply using backward looking performance data, which is a typical approach, we think there's a more thoughtful strategy that can add attractive diversification benefits and enhance returns over time. Loosely, this strategy is named, "thematic investing."

The latest rate hike announcement by the Fed sent stocks tumbling to the year’s lows. While last week’s market action was brutal, the good news is the markets are set up for a rather significant short squeeze higher.

Although inflation has soared to levels not seen in forty years, expectations for future inflation have stayed remarkably low. This is evident in the bond market, where the spread between five year treasury notes and five year Treasury Inflation Protected Securities (TIPS) is 2.4%, implying average inflation of that level. The forecast over ten years is similar. Inflation over the next year is clearly going to be higher. JPMorgan estimates around 4.5%. So one can infer that the bond market is forecasting inflation starting in one year of less than 2%.

There are always some hindsight-based methods of predicting bear markets and taking full risk-off positioning. Sometimes they work perfectly. While other times they create a ton of capital gains and tax liabilities only to realize the exit level should have been where the cost averaging strategy began.

“The ‘Buffett Indicator’ says the stock market will crash.“ Such was an email I received recently and was worthy of a more detailed discussion. Let me begin with my favorite line from “The Princess Bride.”

So far in 2022, equity markets have been extremely volatile with a bearish trajectory amid economic uncertainty, monetary policy tightening, recession fears, inflation, and geopolitical tensions. Despite all these macro headwinds weighing on equity underperformance across market capitalizations, there remains one word that investors must keep top of mind to recover equities’ losses: “change”.

As the Fed continues to push interest rates higher to combat inflation (today announcing a 0.75% increase), investment professionals from across the Catalyst Funds and Rational Funds network weigh in on what this could mean for investors:

In last week's blog, I highlighted the positive long-term track records of a handful of the most admired brands to show how important the consumption thematic is for investors. I also showed the corrections that happen along the way as a reminder that stocks do not always go straight up, nor does a basket of stocks always outperform. Over the long-term, however, the data is very clear. The Consumer Discretionary & Tech sectors have a very strong track record versus the overall market as measured by the S&P 500. Today, it's important to widen the lens as the Consumer Discretionary & Tech sectors struggle with rising rates and a difficult macro environment. The important point, however, is to not get shaken out of owning great companies when they are underperforming. If you loved these companies and sectors when they were outperforming, you should love them even more now that they are experiencing a rare period of underperformance.