Market Views Q1 2022 – Mission Wealth

Date:


Mission Wealth Market Perspectives Q1 2022


By Kieran Osborne, MBus, CFA®
Associate, Chief Funding Officer

Welcome to Mission Wealth’s market views for the primary quarter of 2022. I’m Kieran Osborne, Chief Funding Officer at Mission Wealth and I’m excited to be presenting our outlook on the economic system and monetary markets.

This presentation will cowl three broad themes: an replace in the marketplace, our ideas on the economic system, and our outlook shifting ahead. Every theme has it is personal video so it is simple so that you can watch or learn your market updates.

Click on right here for the total video showcase.


After ending 2021 strongly, shares have taken a breather to start this yr. Issues across the Fed’s coverage pivot and the outlook for rates of interest have significantly weighed on markets, with monetary situations starting to tighten globally, although nonetheless at traditionally simple ranges. Indicators of threat sentiment and positioning now seem extra favorable for the inventory market, whereas divergence in asset class efficiency might provide enhanced rebalancing alternatives. Bond yields have risen, and there stays a variety of uncertainty concerning the outlook for rates of interest.  

Turning to the economic system, omicron brought about a big spike in instances, although it proved to be much less extreme. The U.S. could also be previous the height, which ought to assist financial progress and the availability chain shifting ahead. The power of the patron might assist underpin above-trend financial progress for the foreseeable future, whereas accommodative insurance policies start to put on off. Inflation might migrate decrease within the second half of 2022 as manufacturing bottlenecks ease and virus enhancements cut back manufacturing disruptions. With this backdrop, the Fed has indicated it might start elevating the fed funds fee in March and we anticipate the Fed will enhance charges by a full 1% by the top of the yr.  

With this backdrop, what’s our outlook for monetary markets? Two key inventory market themes we see unfolding are: 1) a moderation in inventory market returns from the numerous power witnessed over current years, and a couple of) a rise in volatility in-line with historic norms. We preserve a constructive long-term outlook for shares and consider this backdrop might present us with enhanced rebalancing alternatives. Worldwide and rising markets shares specifically might provide upside potential.

Given the outlook for rates of interest, we expect longer-dated fastened revenue securities could also be challenged and have positioned ourselves accordingly.

We favor our direct funding methods which can be well-positioned to proceed to generate engaging yield, low correlation to the inventory market, and low ranges of rate of interest threat.  


Mission Wealth Actions

At the start, we proceed to keep up our disciplined method to portfolio rebalancing which forces us to “purchase low and promote excessive”. Elevated volatility and divergence in efficiency throughout asset courses more and more permits for enhanced rebalancing alternatives. As an example, we had been trimming again on U.S. Development shares in direction of the top of 2021 primarily based on relative outperformance on the time. Development shares have since underperformed to start 2022.  

We proceed to favor devoted allocations to world equities. We maintain a constructive long-term view and consider the macro atmosphere stays supportive. Any near-term volatility might provide a rebalancing alternative. 

Our core bond allocations are positioned with much less length threat (rate of interest sensitivity) than the broad bond market and now we have actively prevented areas of fastened revenue most inclined to rate of interest adjustments, similar to Treasuries with maturities of 10 years or extra. 

We’ve elevated our publicity to much less liquid income-oriented methods, which we consider provide engaging risk-adjusted returns, low ranges of rate of interest threat and low correlation to the inventory market 

In the end, we proceed to deal with long-term fundamentals and consider our portfolios are effectively positioned to proceed to meet the monetary targets of our purchasers.

Regardless of a variety of headline dangers –together with omicron, inflation, and monetary coverage – shares ended 2021 positively, marking the third straight yr of beneficial properties.  

This has since given option to considerations across the Fed’s coverage pivot and the outlook for rates of interest, which has weighed on markets up to now this yr. 

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The benchmark 10-year Treasury climbed above 1.85 p.c, after ending 2021 at 1.51 p.c and up from 1.2 p.c in August of 2021.  

The market now anticipates the Fed might elevate the fed funds fee by a full 1 proportion level or extra in 2022.

US 10Y T-Note Yield FactSet


We’ve additionally witnessed some dispersion in returns throughout asset courses which has allowed for enhanced rebalancing alternatives.   

As an example, Development and Worth shares are witnessing the same dynamic as what performed out originally of 2021, with Worth shares doing comparatively higher up to now this yr.  

US Stocks FactSet


Anticipation of rising charges has helped financials specifically, which are usually extra value-oriented companies, whereas it has largely damage growth-oriented shares. There have additionally been considerations round stretched valuations for progress firms which have weighed on these shares.

Dispersion in efficiency throughout asset courses underpins the significance of a disciplined method to portfolio building and periodic rebalancing. Not solely do now we have devoted allocations to Worth shares, but additionally to Worldwide and Rising Markets, each of which have held up comparatively effectively up to now vs. the broad U.S. market.


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This chart depicts the markets’ key concern. Tightening monetary situations globally – led by elevated yields and tightening spreads – has brought about the uptick in current market volatility. Although, regardless of the current rise in charges, world monetary situations stay very simple by historic requirements.


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On the similar time, measures of threat sentiment seem constructive for shares. Danger urge for food indicators are very low and this has traditionally been related to favorable entry factors.

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Whereas present threat sentiment indicators are pretty balanced, although tilting in direction of risk-off, which is a constructive signal for shares.


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What’s actually fascinating in regards to the begin to this yr is the fastened revenue market has skilled higher relative volatility vs. shares. This chart depicts the MOVE Index relative to the extra generally adopted VIX Index. The VIX is sometimes called the “worry index” for the inventory market. Consider the MOVE because the equal “worry Index” for bonds. They’re on totally different scales, however what’s clearly evident is all of the uncertainty across the Fed’s coverage pivot and the outlook for fee will increase has brought about an uptick in fastened revenue volatility.


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Subsequent, we’ll check out the Financial system.

Financial developments nonetheless stay tied to COVID. Omicron brought about a big spike in instances given its transmissibility however has confirmed to be far much less extreme than prior variants.


Daily Reported New Positive COVID-19 Tests vs. Daily Reported Deaths


That is highlighted within the decoupling between instances and deaths, with complete fatality charges declining.


Covid-19 mortality


It’s additionally in-line with current medical proof indicating variants might change into milder over time.

It has additionally led to some optimism {that a} silver lining of omicron’s unfold and comparatively delicate signs is that we might obtain herd immunity sooner – and in flip – convey ahead a return to normality.


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Latest information reveals the U.S. might now be previous the height and particular enchancment in instances, significantly if we observe the identical pattern because the U.Okay and South Africa.


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There may be additionally a transparent hesitancy by policymakers to impose new restrictions.

And possibly extra importantly the economic system has largely tailored to the brand new realities of a COVID world.

Companies throughout all sectors of the economic system have been compelled to speculate closely in expertise to remain aggressive, whereas shoppers have tailored their spending habits. Due to these components, we anticipate future variants or spikes in instances may have much less of an financial affect over time. 

We already had a pattern in direction of on-line spending earlier than COVID and COVID solely accelerated that pattern. Client’s habits have modified however spending stays sturdy. Knowledge continues to point out sturdy retail gross sales regardless of the consequences of omicron. It’s a very vital level, as client spending makes up about 70% of GDP.


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And that spending is supported by an extremely wholesome client.

As these charts depict, client steadiness sheets are very sturdy, family web value is at all-time highs, whereas family debt servicing ratios are close to all-time lows.


Consumer balance sheet chart


The economic system can also be supported by a really sturdy labor market, with the unemployment fee dropping precipitously following the COVID peak.


US Unemployment Rate via US Bureau of Labor Statistics


And we’re seeing an extremely bounce again in prime age employment relative to prior recessions.

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As you’ll be able to think about, the Fed is presently far much less involved about their full employment mandate as they’re about sustaining inflation across the 2% degree.

So what does all this imply for progress? We anticipate above-trend financial progress over the near-term. 2021 full yr GDP progress got here in at 5.7 p.c and 2022 consensus estimates are for progress of slightly below 4%. These estimates have come down just lately attributable to omicron.  Expectations are for the economic system to transition again in direction of long-term pattern progress over time, with consensus estimates of two and a half p.c progress in 2023, which continues to be above the long-term pattern progress fee of two p.c.


US 2022 vs 2023 Real GDP Growth


We additionally anticipate fiscal tailwind to reasonable shifting ahead.

For context, within the 18 months publish COVID unload in March 2020, about 5.3 trillion {dollars} of stimulus was injected instantly into the economic system.

Shifting ahead, the just lately handed infrastructure bundle is about 1.2 trillion {dollars} and negotiations are nonetheless ongoing concerning the Construct Again Higher bundle…who is aware of if one thing will get achieved nevertheless it’s more likely to be a smaller bundle. Importantly although, these packages can be spent over years. A lot of the infrastructure bundle – as an illustration – is ready to be spent over the course of 5 years.


Federal Budget Surplus-Deficit


One of many widespread questions that usually comes up is in regards to the Federal debt excellent. As this chart reveals, it’s set to be round 100% of GDP for the foreseeable future.

Federal net debt (accumulated deficits)

Nonetheless, we don’t suppose absolutely the degree of debt excellent is a very powerful metric however the means of the Authorities to service that debt that basically issues; and the U.S. is in a comparatively sturdy place to service its debt attributable to low rates of interest and above pattern financial progress. We don’t consider the extent of debt excellent presents a fabric threat, even with rising rates of interest.


Turning to inflation, Headline CPI posted the strongest enhance since 1982, as sturdy demand on the again of accommodative insurance policies coupled with provide chain constraints led to upward pricing stress.

We consider inflation might migrate decrease within the second half of 2022 as manufacturing bottlenecks ultimately ease and virus enhancements cut back manufacturing disruptions.

Curiously, if we normalize for the weak base results of COVID in 2020 and return 24 months to a pre-COVID timeframe in 2019, core CPI is working at an annualized fee of three.5%. So sure, elevated, however not the extent the headline numbers would counsel.


Core CPI Inflation


When it comes to the availability chain, there have been some enhancements in measures of supply instances just lately. Whereas omicron has brought about a scarcity of staff just lately, it seems we are actually previous the height, which can assist enhance provide chain points.


Global PMI suppliers' delivery times index


As such, we anticipate provide chain points to contribute much less to general inflation, significantly within the again half of 2022.


Contributions to Year-on-Year Core PCE Inflation


Considering longer-term, whereas the crimson bars on this chart depict that short-term output gaps stay tight attributable to ongoing provide chain points, the blue bars point out that each one international locations have a big quantity of long-term productiveness slack. This may increasingly assist alleviate inflationary pressures as provide chain disruptions start to abate.


Latest Output Gap Measures


A backdrop of elevated inflation, above pattern financial progress and a powerful labor market compelled the Fed right into a extra hawkish stance.

The median estimate from the newest “dot plot” financial projections in December was for 3 fee will increase in 2022 adopted by one other three in 2023. Nonetheless, January’s assembly assertion indicated 4 fee hikes are probably. As such, we consider the Fed may hike as early as March, with consensus expectations for an enhance of 1% or extra within the fed funds fee this yr. Clearly, there are Upward dangers for charges.


Economic projects of Federal Reserve Board members December 2021


Subsequent, we’ll check out our Outlook for monetary markets.


Two key inventory market themes we see unfolding are 1) a moderation in inventory market returns from the numerous power witnessed over current years, and a couple of) a rise in volatility in-line with historic norms as accommodative insurance policies are taken away. We consider current inventory market dynamics are indicative of this transition.

We’re broadly constructive on the outlook for shares, although tighter insurance policies might reasonable returns.

So what are the implications of a Fed mountaineering cycle on the inventory market? Traditionally, shares exhibit stable progress forward of the primary Fed hike however to the purpose of moderating returns, shares traditionally plateau 9 months after the mountaineering cycle begins.


Fed Hiking Cycle graph


Traditionally, Fed tightening cycles which are accompanied by accelerating progress are usually related to sturdy returns and comparatively low volatility.


Average monthly S&P 500 returns and volatility with different growth-policy mix


Tightening cycles with slowing progress are usually related decrease, however constructive, fairness returns and better volatility.

Average monthly S&P 500 returns and volatility with different growth-policy mix - Fed tightening & ISM falling


The markets presently seem like pricing within the latter. Nonetheless, whereas broad annual progress is ready to reasonable, as omicron abates, we might expertise a pick-up in progress within the second and third quarters.


Within the aftermath of the preliminary COVID-driven unload in March 2020, accommodative insurance policies have arguably contained inventory market volatility.

Now, with the Fed’s coverage pivot, we consider we might return to a extra traditionally “regular” volatility regime.

Market volatility ought to come as no shock to long-term inventory buyers. Nonetheless, many have change into accustomed to the just lately low ranges of volatility on the again of the Fed’s simple insurance policies.

So what does a “regular” inventory market seem like? Traditionally and on common, the inventory market experiences a 14.0% intra-year sell-off.


S&P intra-year declines vs. calendar year returns


In any given yr, it’s best to anticipate a number of declines of minus 5 p.c or extra. Importantly – and regardless of these intra-year sell-offs – shares as a rule finish the yr positively, with constructive returns in 32 of the final 42 years. An funding within the inventory market has traditionally concerned episodes of beneficial properties, losses and volatility inside an general upward pattern.

Intra-year sell-offs needs to be anticipated and will provide enhanced rebalancing alternatives – it might provide our disciplined method to portfolio rebalancing a higher means to “purchase low and promote excessive.”

The significance of staying disciplined can’t be overstated. As this chart highlights, within the years following the Nice Monetary Disaster, there have been numerous dire headlines and causes to promote shares, or to remain out of the market altogether. Nonetheless, in the event you’d listened to that noise, you’d have missed out on vital upside returns; staying disciplined, staying absolutely invested, and never getting sidetracked by short-term noise was rewarded over the long-haul.


Reasons to Sell infographic


Whereas we anticipate a moderation in inventory market returns, worldwide and rising market shares might provide upside potential. All our mannequin portfolios have devoted allocations to each worldwide and rising markets. This chart highlights that shares exterior the U.S. stay at traditionally low-cost ranges, whereas we consider upside progress potential could also be discovered exterior the U.S.


International Price-to-earnings discount vs US


A theme from years previous that’s fallen out of the limelight is the idea of progress within the center class inside rising markets. This continues to be a key driver of progress shifting ahead. Take China for instance. Within the 1990’s zero p.c of the inhabitants was center class. By 2020 about 40 p.c of the inhabitants was center class and that’s set to climb to over 70% by the top of this decade. It’s vital as a result of these are individuals who now have cash of their pockets who didn’t earlier than. They spend that cash and drive financial progress. That inside demand gives for extra sustained progress. Larger financial progress in flip ought to result in increased earnings progress within the shares of firms working in those self same international locations and result in the potential for outsized returns.


Growth of the Middle Class Percent of Total Population


Turning to bonds, this can be a good, easy chart that speaks volumes. The first driver of ahead trying 10-year returns is the present yield on these bonds. Because of the low – albeit rising – rate of interest atmosphere, we consider conventional core fastened revenue – suppose 10-year Treasury bonds – can be challenged shifting ahead.


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Given the outlook and rate of interest forecasts, there’s clearly upward dangers for charges, which is highlighted by estimates for the ten-year Treasury yield, with common expectations of two% by finish of yr.

What’s very clear right here is the numerous dispersion in expectations, indicative of the current volatility within the charges market we mentioned earlier.


Respondents generally expect the US 10 year to end the year around 2 percent


Whereas our base case is for upward stress on rates of interest, one concern is everybody anticipates the identical factor, and when everybody anticipates one factor, one other typically occurs.

There may very well be upward limits to how far yields may rise. Take final yr for example. The broad bond market was down practically 2% but over $200 billion flowed into fastened revenue ETFs in 2021. And that’s with the Fed telling the market they’re more likely to elevate charges a minimum of thrice!


Fixed Income Total Flows


The rationale? There’s a report sum of money looking for a house. Take a look at the amount of money yielding nothing. A few of it has flowed into the inventory market and will proceed to assist underpin shares, however there could also be pure upward caps on how far charges can rise. Even at 2 p.c, it’s so much higher than what money is yielding.


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Now additionally think about overseas buyers whose home bond yields could also be decrease – or in some instances adverse. If U.S. charges rise, they change into more and more engaging to these overseas buyers, which can act as a pure higher cap to how far yields are capable of rise.


With that being stated, we do consider rates of interest are more likely to transfer increased. As such, we consider longer dated bonds – suppose Treasuries with maturities of 10 years or extra – could also be significantly inclined and are actively positioning our fastened revenue allocations away from these securities.

Nonetheless, we do consider core, top quality fastened revenue performs an vital position inside well-diversified portfolios for 2 key causes.

Firstly – and that is most frequently cited – it’s the single finest portfolio diversifier when markets sell-off 20% or extra. In these environments bonds have traditionally held their worth or appreciated, providing draw back safety and insurance coverage. They actually do assist anchor the portfolio.

The second motive, and really a lot associated however not typically centered on – is that it gives for enhanced rebalancing alternatives. As an example, when a 60-40 portfolio strikes to a 50-50 as a result of shares have fallen, core fastened revenue permits you the chance to purchase these shares low-cost by promoting fastened revenue on power – once more shopping for low and promoting excessive. That additional advantage can add appreciable worth over the lengthy haul.

Elsewhere, we consider engaging risk-adjusted return alternatives exist in much less liquid income-oriented methods, which can provide equity-like return potential with decrease volatility and the potential to profit from a rising rate of interest atmosphere.


At a excessive degree, we proceed to favor shares over bonds.

We maintain a constructive long-term outlook for the inventory market and consider any enhance in market fluctuations might provide a possibility, permitting us to extra successfully rebalance throughout our shopper accounts.

Given the macro-economic backdrop, we consider our direct funding methods are effectively positioned to proceed to generate engaging yield, low correlation to the inventory market, and low ranges of rate of interest threat.

Total, we proceed to deal with long-term fundamentals and consider our portfolios are effectively positioned to proceed to fulfill the monetary targets of our purchasers. For extra data, please go to missionwealth.com or contact your advisor.


Disclaimers

The knowledge on this presentation is topic to alter with out notification. Sure statements contained inside are forward-looking statements, together with, however not restricted to, statements which are predictions of or point out future occasions, developments, plans, or goals. Undue reliance shouldn’t be positioned on such statements as a result of, by their nature, they’re topic to identified and unknown dangers and uncertainties. Though the opinions expressed are primarily based upon assumptions believed to be dependable, there isn’t a assure they’ll come to go. This data might change at any time attributable to market or different situations.

Worldwide investing entails particular threat issues, together with forex fluctuations, decrease liquidity, financial and political dangers, and variations in accounting strategies. Diversification can’t guarantee a revenue or defend in opposition to a loss.

Investments in commodities could also be affected by the general market actions, adjustments in rates of interest and different components similar to climate, illness, embargoes and worldwide financial and political developments. Commodities are risky investments and may kind solely a small a part of a diversified portfolio. The usage of by-product devices might add extra threat. An funding in commodities might not be appropriate for all buyers.

Diversification helps you unfold threat all through your portfolio, so investments that do poorly could also be balanced by others that do comparatively higher. Neither diversification nor rebalancing can guarantee a revenue or defend in opposition to a loss.

Actual property might not be acceptable for all buyers. Its worth might fluctuate primarily based on financial, regulatory, and environmental components. Redemption could also be at a worth, which is kind of than the unique worth paid.

Don’t act upon this data solely, and search skilled steering earlier than making funding choices.  This presentation isn’t supposed to supply any particular funding recommendation. No funding technique can guarantee a revenue.

Fastened revenue securities carry rate of interest threat, inflation threat and credit score and default dangers. Any fastened revenue safety bought or redeemed previous to maturity could also be topic to a considerable achieve or loss. Curiosity revenue generated by municipal bonds is mostly anticipated to be free from federal revenue taxes and, if the bonds are held by an investor resident within the state of issuance, state and native revenue taxes. Such curiosity revenue could also be topic to federal and/or state various minimal taxes. Investing in municipal bonds for the aim of producing tax-exempt revenue might not be acceptable for buyers in all tax brackets. Quick- and long-term capital beneficial properties and beneficial properties characterised as market low cost acknowledged when bonds are bought or mature are usually taxable at each the state and federal degree. Quick- and long-term losses acknowledged when bonds are bought or mature might usually offset capital beneficial properties and/or bizarre revenue at each the state and federal degree.

Fastened revenue yields are supplied by Barclay’s Capital primarily based on the next sources: US Treasury, Barclay’s Capital, FactSet, and JP Morgan Asset Administration, and are represented by Brad Market, US Barclay’s Capital Index, MBS, Fastened Fee MBS Index, Company, US Corporates, Municipals, Muni Bond Index, Rising Debt, Rising Markets Index, Excessive Yield, Company Excessive Yield Index. Treasury securities date for # of points and market worth primarily based on US Treasury benchmarks from Barclay’s Capital. Yield and return data primarily based on Bellwethers for Treasury securities.

Mission Wealth is a Registered Funding Adviser. This doc is solely for informational functions. Advisory companies are solely provided to purchasers or potential purchasers the place Mission Wealth and its representatives are correctly licensed or exempt from licensure. Previous efficiency isn’t any assure of future returns. Investing entails threat and doable lack of principal capital. No recommendation could also be rendered by Mission Wealth until a shopper service settlement is in place. California Insurance coverage License # 0D35068.

00439075 02/22



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