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  • Chip Barnett

Markets Have Changed

April 2022

Markets have changed. Inflation is here for the first time in 40 years, and the Fed will fight it by tighter policy. The red circle below shows their rate hike campaign is just starting, and they’re likely to raise them at least 2% before pausing.

When the Fed goes on offense, investors play defense. High growth stocks with little or no earnings come down. Unsexy but steady businesses become sexy. Bond funds struggle. Think cash is the place to hide? Inflation gnaws at it.

There will be days between now and Labor Day when growth stocks jump, and retail investors want to call the bottom. It’s my experience that institutional money doesn’t really return until the Fed signals a pause.

The blue line is the rate that the Fed controls. The shaded columns are the eventual recessions.

We repositioned the portfolios last year to shift away from those expensive, large cap growth names and into small cap and value. That’s showing up this year in relative performance and I think will continue to, at least as long as the Fed is tightening.

High oil prices, Covid now impacting China’s labor supply, and marginalized wheat and fertilizer supplies from eastern Europe are going to keep investors and the Fed guessing about inflation. It is too soon to say how the 2nd half of 2022, or 2023 will turn out for the economy or the stock market.

Those tech stocks with the cool new business ideas - they’re still there. They still have disruptive ideas that will be back in favor some day - but not for now. I want to add to value in tax-deferred accounts. I think after a few more rates hikes, or maybe later this year, growth could underperform significantly and then we could look at adding some back to the portfolio.

I’m recycling a chart from last quarter because I think it’s important. It shows the huge divergence in growth (gold) and value (black) over the past five years. Over the long run, both styles tend to perform similarly, and with rate hikes favoring value, reversion is compelling. I think value can be a smart place to wait out inflation and the Fed’s campaign.



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