2023 Forecast

The new year can’t get here soon enough. Twenty twenty-two will go down in history as one of the toughest markets ever. The famed 60/40 portfolio consisting of 60 percent stocks and 40 percent bonds had its worst year on record giving up around 19%, which is not far off from the 20% drawdown of the S&P 500. Usually, bonds offer a hedge against falling stock markets as interest rates are cut to spur demand. There were simply very few places to hide as interest rates suddenly shot up in efforts to tame soaring inflation causing both stocks and bonds to fall simultaneously.

Rising interest rates can be a powerful tool to reduce high prices by making money more expensive, jobs more scarce, and hampering demand for goods and services. The problem is that it can take months to work, so it’s difficult for the Fed to know when to stop hiking rates and how much the economy will suffer. In 2023 we believe the Fed will push rates up several more times before topping out around 6% mid-year. Hopefully, this will be just enough to slow inflation but not enough to severely damage the economy. There is a chance the Fed can pull a rabbit out of the hat and do just that, something that has not been easily accomplished during previous rate hiking cycles. The job market might be strong enough to allow this to happen. Deep recessions coincide with massive job losses, yet it’s unlikely we’ll see mass unemployment this time around as most businesses’ main complaint is the struggle to find and keep quality workers. The tight labor market is one of the reasons we are seeing such strong and persistent inflation. It’s still better than the alternative. No jobs and lower prices. Related to this is another reason to be hopeful we won’t see a bad recession in 2023. Namely, business and household balance sheets are surprisingly healthy. The US is a consumer driven economy and so far the consumers have remained resilient, continuing to buy goods and services at a brisk pace, propping up the economy. Rising wages from the tight labor market and the $2 trillion savings built up during the pandemic have greatly bolstered balance sheets and allowed for continued and increased spending.

Driven by the strong consumer and the dollar’s status as the global reserve currency, we remain optimistic for the US relative to the global markets. It is likely that Europe will fall into recession, if not already in one, and the rest of the world will see only modest GDP growth of roughly 2.5%. Tailwinds from Federal, state, and local fiscal stimulus enacted in the past two years should support US GDP growth. However, we don’t expect to see quite the same returns this coming decade as we saw during the last decade. Now that 4% can be made on cash, stocks suddenly have some competition. Interest rates will likely remain elevated for some time due to the inflationary pressures of an aging workforce and increased protectionism around the globe. As countries close borders it makes it more difficult for businesses to find cheaper labor elsewhere. Additionally, the movement and availability of goods is hindered adding to business overhead and putting upward pressure on prices. In this economic environment, businesses with established supply chains, robust market share, and reliable cash flows will likely be more desired by the investment community than their fast-growing, capital-intensive peers.

Some predictions for 2023. It is likely to be volatile (although much less so than 2022), with dividend paying stocks outperforming non-dividend payers, and domestic stocks outperforming international stocks. Corporate earnings will grow 5-10% and instead of retracting, equities will advance by year-end in the high single digits with some areas of the market seeing massive returns as investors realize fears were overblown. Energy companies will underperform relative to other sectors such as healthcare, and housing will continue to drag as mortgage rates climb, destroying purchasing power. Technology companies will remain under pressure, but we will start to see the leaders of the next decade rise from the heap. Bonds will also continue to struggle as longer-dated maturities quickly lose value with each increase in interest rate, but short-term notes and cash will offer attractive alternatives to stocks for risk-averse investors for the first time in two decades.

The Value of Value

Value is back and being talked about more than at any time in the last 15 years. The value investing strategy has been around forever but often gets overshadowed by more exciting “growth” investing. The basic premise is to invest in a stock or basket of stocks that appear cheap based on a particular metric, say earnings per share (total profit divided by total share count). The strategy was codified in 1928 by Benjamin Graham and later made more famous by Warren Buffett. All year there has been a growing drumbeat for the value sector as borrowing rates have increased and growth stocks have fallen out of favor. The darling of this sector has been energy (as discussed in previous posts), but favored names now include drug companies, banks, defense industry stocks, and some consumer staples like Walmart and Coke. Investing in boring companies and industries like these have remained a part of our core strategy (even during the high growth euphoria era) because they are stable and allow you to fight another day. Additionally, value investing often leads to dividend investing by default. Many companies that are well established and stable, without rapid growth trajectories will issue dividends to their shareholders rather than reinvest the cash for growth. This too can smooth out a bumpy market in your portfolio. So, regardless of where one is in the market cycle, value investing plays an important role in a healthy overall portfolio.

As mentioned above, growth investing has outperformed value over the last 15 years, with some variance along the way. Cheap money made it easier for start-ups and other high-growth companies to grow market share using leverage. And many companies built up a lot of leverage. We are seeing bankruptcies in that high-growth space now, especially crypto companies that essentially grew from obscurity to multibillion-dollar companies in the span of a few years using massive amounts of borrowing (or in some cases customer funds). The reckoning for growth stocks and relative outperformance by value stocks have been so severe over the past year that now around 20 “growth” stocks are trading at a lower price-to-earnings than their “value” counterparts in the large-cap index. This may be a sign that a bottom is near for growth companies or possibly the market in general. The growth index is down 25% this year versus just 5% for the value index. Chip maker Qualcomm and parent company of Facebook, Meta, (both growth companies) now trade at just 11 times earnings making them about half as expensive as Lowe’s and Home Depot and about a 65% discount to Nike. There may be some value in the growth sector.

It is impossible to tell precisely when one sector will fall out of favor for another, that’s why a balanced approach makes the most sense for most investors. Our philosophy is to both follow momentum and invest for stability (low volatility and value/dividend funds). The market is forward looking. It consistently tries to look 6-9 months ahead. Take for example the price action of video chat company Zoom. The stock price has been declining for months even as the earnings were growing. But in their latest earnings report they announced slower growth and the stock actually improved. The market anticipated the slower growth and beat down the stock in the previous months. But now it appears an equilibrium has been reached if not an expectation or renewed growth to come. The market anticipated and acted accordingly. The market has been anticipating value stocks to play a larger role in the new high-interest rate economy. While that is most likely true, we cannot count out the value that is hiding among the growth companies.

“Always buy your straw hats in the winter.” – Benjamin Graham

Earnings and Flow

Over the past several quarters we have discussed the Fed and their influence on the overall market at length. This time we would like to take a deeper look and zoom in to the company level. Last week closed out the Q3 earnings season for large industrial and tech companies. There were some major winners and losers and lots of drama along the way. Oil companies reported their strongest profits since the early days of the War on Terror and have by far been the best performing sector this year - surging over 65% year to date. Google fell below earnings expectations citing a slowdown in ad spending by businesses and headwinds internationally due to the strong dollar. The stock tanked 6% following the announcement. Amazon similarly got crushed after missing expectations and lowering their guidance for holiday shopping as inflation soars and wages stagnate. Apple, on the other hand narrowly beat expectations as demand for their products remained robust. The stock recorded its best day since 2020 by rising over 7.5%. Then there was Facebook. Meta (Facebook) reported a staggering increase in spending that sent many stockholders and analysts fleeing. The reaction was so sharp and strong it felt personal – declining over 20% in a single day. In fact, CNBC personality Jim Cramer was brought to tears feeling that he let his viewers down by leading them to a company that in his view betrayed them by burning through their free cash flow in attempts to create the new “metaverse.”  

As interest rates continue to rise, earnings are once again placed in the spotlight. Over the past year it has become more difficult to obtain cash from a creditor, and businesses must find ways to create and retain more cash than previously. A simple and fundamental concept that at times seems to be forgotten when the going is good, and money is cheap. High growth companies notoriously have poor earnings relative to their conglomerate and industrial peers because instead of retaining and returning revenues to investors they use their cash flow to grow the business. But as interest rates go up, more and more cash from revenue are needed to fulfill the growth needs as credit gets more expensive or dries up completely. The overall cash flow is diminished. Let us reflect on this concept of flow. Standing in a flowing river you always have access to water, just dip in your hand. In business it’s very similar. 

Take the example of a private company called Citadel. They position themselves in-between traders. In technical terms they are a market maker, in layman’s terms they buy what you want to sell and immediately sell it to another buyer. But they do so at a slightly higher price than if you were to have no middleman. It is estimated that they execute approximately 47% of all US listed stock trades. They are capturing the flow of stock and able to skim billions in profit while essentially taking no risk. Most businesses do not have such an elegant way to generate cash from the literal flow of cash running through them. Usually, a company has to convert their control of flow of some widget into cash profits. Once a company is able to do this and consistently generate cash it is prudent to protect that line of business. That’s what made Cramer weep. He felt that Facebook was uniquely positioned to capture a huge flow of the advertising market and that the cash flow generated from it should ethically be distributed back to shareholders (dividends or share buy-backs). And instead of doing that they invested in a business that is not capturing the flow of anyone or anything. 

Now that dollars are more expensive to borrow and economic output is low, positioning one’s business to capture and retain flow is maximally important. Oil companies literally control the flow of oil and the more expensive it is the better they do. In times of geopolitical strife, they are a good place to hide out. Apple is worth almost $2.5 trillion because it captures the flow of smartphones, apps, media, and advertising. Google, despite the recent sell-off, captures about 1/3rd of all online advertising revenue flowing by them and are well positioned to continue to dominate digital advertising. Amazon accounts for almost 40% of online shopping and much of the internet flow runs though the pipelines of Amazon Web Services (AWS cloud). Meta (Facebook) also deserves a second look. While it is irresponsible to spend tens of billions of dollars quarter after quarter on a product with few customers, their core business is unparalleled in human history. As of last month, 3,710,000,000 unique individuals used at least one of their applications (Facebook, Instagram, WhatsApp). That is just shy of half of humanity. A tremendous flow of human communication. In general, one should not let a bad quarter or year scare you out of a strong company. Companies with large market shares have tremendous pricing flexibility and protection, or in Warren Buffet’s words, “wide moats.” They can withstand downturns and recessions much better than low revenue companies in more competitive industries. Be patient and follow the (revenue) flow. 

We’ll leave you with an old Wall Street axiom, “Bear markets are when stocks are returned to their rightful owners.” 

Monetary Tightening

This month’s market update should be titled “How I Learned to Stop Worrying and Love Losing Money.” At least that’s what it feels like the Fed is telling us. The Federal Reserve has a pretty substantial credibility problem right now. A year ago this month the Fed was buying billions of dollars worth of mortgages (in the form of mortgage backed securities) amidst surging home prices causing home values to skyrocket. And doing this while stating that they did not see inflation on the horizon (spoiler alert, housing makes up about 1/3rd of CPI). A few months later in December, as they saw inflation ticking up, they stated the most they would have to raise rates this year to combat it would be 0.5%. Now, looking at the same data (home prices, jobs, energy) they are saying rates need to raise substantially, potentially to 4.5-5% for the Fed Funds rate, to quell the 9% inflation staring at them. The problem is the metrics used to measure inflation are backward looking. The Fed and investors understand this. Thus, policy actions taken by the Federal Reserve should follow accordingly and be pre-emptive rather than reactive. The Fed is mandated to facilitate price stability and maximum employment. On the employment side they are doing great (3.7% unemployment). On the price stability side, they are utterly failing. Not only is inflation soaring, but the value (market cap) of stocks and bonds in the US has declined by $57.8 trillion (based on Bloomberg data). At the very least they could express what they intend to look at going forward since they missed the mark so badly coming into this cycle.

Inflation was guaranteed to show up after the massive monetary expansion during the pandemic. The Fed increased the supply of dollars in the economy by roughly 41%, pushing up the prices on everything from stocks and homes to meat and fuel. Increasing the money in circulation is a healthy part of a functioning economy. A 5% increase in the supply of dollars correlates to roughly 2% inflation. If the Fed was not going to be comfortable with this current level of inflation we are seeing now, they probably should have made the treasury float their bonds on the open market to pay for the pandemic stimulus rather than buying them (printing money). This would have resulted in interest rates naturally going up as the supply of bonds in the market increased, potentially easing the transition to higher rates. Instead, what we got was very cheap and easy money and “dovish” speeches from the Fed through 2021, then an abrupt shift to monetary tightening pushing rates up faster than ever before. The dollar is at 20-year highs, commodity prices are declining, and the money supply is decreasing. The Fed is saying we need to remove money from the economy, and that we should all love this because it will drive down inflation. That’s all fine except for the fact that the economy is already shrinking, productivity is down, wages are barely inching higher, and trillions in valuation have been wiped out. Aggressively raising rates and removing cash will certainly tame inflation but it will do so at the expense of millions of jobs and people’s wages.

We don’t have a crystal ball, but here are some predictions of what is likely to happen. Inflation numbers will continue to look ugly in the Fed’s eyes as housing costs worm their way through the system. The Fed will want to continue rate hiking until it sees material deterioration in CPI, which could take over a year to manifest. During that time there will be an amplifying chorus from the business community and politicians to ease the pain as job losses mount and markets remain volatile. The Fed will eventually succumb, and their language will get more dovish with statements such as, “we are seeing a moderating of inflation” (even if they aren’t). At that time whether they cut rates, stop raising them, or do nothing the markets will rally. Inflation will then actually moderate as monetary tightening filters through the economy, market volatility will subside, and the Fed will get to decide if they want to start juicing growth by adding dollars back in – and the cycle will start over.

As an investor, the key is to remain diversified, disciplined, and patient. Every cycle rhymes but they are hardly the same script. How long a recession or bear market will last is anyone’s guess. But you don’t want to get left on the sideline (or worse, short) when the next bull market takes off. As has been stated here before and is still true today – stocks offer a better risk/reward than bonds and cash over time, even with increasing competition.

Soft Landing

The Fed has been talking about having their goal be a “soft landing ”for the economy –meaning avoid a recession and manage inflation as GDP comes down all while keeping the job market relatively stable. But as of last Friday ,when Fed Chairman Powell spoke at Jackson Hole it was clear that the new priority is to tackle inflation at the expense of a “soft landing”. Commentators are now keen to point out that this Fed does not want to go down in history as the one that let inflation run away. Part of this shift is most likely Powell trying to save face after repeatedly stating that inflation was “transitory” and would come down much sooner than is playing out. Although we have seen two consecutive quarters of GDP contraction, it is difficult to call what is going on a recession. The labor market is still very healthy. However, what economists are predicting going forward is known as a “growth recession”. This is where GDP does not go negative, but growth is very anemic and unemployment creeps higher. Investors fear this scenario because it is a slow drip of prolonged pain, thus the sell off on Friday and the days to follow. A short actual recession is preferred to that, but a “soft landing” as we sustained in 1994-95 when interest rates doubled and unemployment never rose is still not out of the question. The difference this time is that inflation is much higher than it was then and might prove more tricky to tackle. But even that points to the silver lining of this current economy. Inflation has been stubborn partly due to the fact that jobs are so strong. There is still a tremendous amount of money going into the hands of the American consumer. Unemployment is at 50-year lows. That makes it hard to drive the economy into a recession when 80% of it is composed of consumer spending. The bottom line is that whether we are in a recession, headed toward a “growth recession”, or experiencing a “soft landing”, stocks still remain the best risk-adjusted asset to be invested in over a multi-year timeframe. Valuations have come down and most S&P sectors look very compelling.

Inflation Fears, Recession Fears, Rising Stock Market

The first half of the year was marred by inflation fears, this past month recession fears have been the headlines, and yet now markets are moving higher. Our discussion of inflation and the role of the Fed has been well documented. Inflation ruled the day over these past six-plus months and the Federal Reserve has been acting swiftly (and playing catch up) to squash it. The CPI numbers that measure inflation are lagging indicators and still show rising inflation, but the forward-looking numbers like commodity prices (especially gas) and business growth (measured by revenue) are coming down significantly. Oil and other commodities peaked in early June, and of these companies – Google, Tesla, Microsoft, Netflix, Amazon, Apple, and Facebook – all are growing at their slowest pace since 2019 or in Netflix and Facebook’s cases, slowest since 2012 and company history, respectively. On top of that, GDP growth has been negative over the past two quarters meeting a classical definition of recession. Note that recessions are also good ways to curb inflation, even though that’s not what anybody wants. So, why are the markets up roughly 15% from their lows? Markets are forward-looking and they are predicting that interest rates have peaked, and growth will continue even if it is slow.

The simple definition of a recession being two consecutive quarters of contraction does not give the full picture. For most people, a recession shows up in their daily lives through job losses, business closings, and bankruptcies. But as we look around, that is not what we see. Job growth remains strong, with millions of excess job openings available, and voluntary quit rates are still at all-time highs. Consumer spending is still growing, and business investment is unchanged from a year ago. And if you look at GDP from a year ago instead of relative to last quarter you also still see growth. Slower growth, but growth, nonetheless. This is what the market is pricing in.

To summarize, massive stimulus during the pandemic along with supply chain disruption from COVID and war caused a huge inflation spike, the markets and the Fed freaked out and made efforts to remove cash from the economy and thus caused economic slowdown/contraction. Now the markets are looking ahead to lower inflation and moderating growth and bidding stock prices higher again. It will be a choppy second half of the year, but history tells us the risk/reward of investing during this part of the economic cycle favors taking the risk.

Green Shoots

We finally saw some green on our screens last week after seven consecutive weeks of declines. The question is, were these the green shoots of new growth or just another head fake from this grinding bear market? The negative sentiment in the market has been substantial as seemingly everywhere we look we see financial pain – with increasing prices on food and fuel, new and used cars, airlines and travel, and continued supply bottlenecks due to war and shipping disruptions. When sentiment gets overwhelmingly negative it eventually becomes exhausting and the selling can quickly dry up. At this point buyers step back in. During a bear market you can see this cycle take place many times before the ultimate bottom. But trying to predict which specific rally is the true beginning of the next bull market and which one is just a head fake is a fool’s errand.  As long-term investors we are buyers on the way up and the way down and try to capture the most value along the way. That means rotating from overvalued sectors to undervalued ones rather than outright selling and moving to cash for prolonged periods of time jumping in and out of trades. Too many investors will make the devastating mistake of getting overconfident and trying to become traders during bull markets as everything is going up only to see their trades wiped out during a bear market and then feel the urge to sell not just losing trades but quality holdings as well, for “peace of mind”.

The rally we saw last week was most likely a result of more than just a break from relentless selling. The big metric all traders are focused on is inflation. And last week the Fed’s preferred inflation metric, the Core Personal Consumption Expenditure (PCE), showed signs of easing inflationary pressure. The figure came in at 4.9%, down from 5.2% the previous month. The markets reacted positively to the news since it raises the possibility that the Fed may be able to moderate its rate hikes if inflation continues to come down.

Consider this example on how raising interest rates by the Fed works its way through the economy and decreases spending power and ultimately demand for goods.

Today the median home price is 6.7x higher than median household income. Homes have never been more unaffordable - the Fed is aware and wants to moderate home price inflation. Raising interest rates will accomplish this. Furthermore, the Fed understands this action will moderate inflation more broadly as well. In Jan 2021 the cost of a 30-year mortgage was 2.65%. At that time the average home price was $401,700. Today a 30-year mortgage is 5.25% and the average home price is $570,000. That is a 95% increase in monthly payment from $1,294 to $2,519.

The cost of living in a home (for new buyers) essentially doubled in that time frame. All those extra dollars that would have flown through into the economy to be spent on gadgets, and clothes, and travel and whatever else will now be sucked up by banks rather than chasing goods and services.

All About the Benjamins

The Fed more than any other factor is driving this market. They control the money supply and cash is king right now. Markets rallied on April 28th after GDP numbers showed the economy contracted in the first quarter by 1.4%. Economists were expecting a 1% gain. Why did stocks go up as the economy contracted? The Fed. If the economy is not growing, then the Federal Reserve will have less incentive to raise interest rates and decrease the supply of money. More money available to grow your business and buy stocks equals higher stock prices (and other prices). Inflation must be combatted but it is unlikely that the Fed will do so at the expense of growth and jobs.

Given this reality, news and global events are all noise unless they push the Fed narrative further in one direction or the other. The Ukraine war, high inflation, and slowing earnings growth are all baked into market expectations at this point. The markets are already pricing in interest rate hikes up to 2.75% by year end (we stand at 0.5% today). Due to this dynamic with interest rates (at least in the near term), the worse things get economically the better the markets might perform.

As rates have risen this year, we have a seen pretty significant rotation out of growth stocks and into non-cyclical sectors like energy, materials, real estate, and consumer staples stocks. These “defensive” stocks typically have less volatility, trade at lower price to earnings multiples, and are less dependent on low interest rates. However, if we see the economy slow and rate hike expectations come down meaningfully, we will most likely get a reversal back into growth names (like Google, Tesla, etc). We advocate holding a portfolio with a balance between defensive and offensive stocks. While some people may get lucky holding concentrated positions that go to the moon, most of the time this doesn’t work out.

As we have seen over these past 25 months markets can change very quickly, and the punishment can be brutal. We have seen pandemic play darlings like DraftKings, Zoom, and Teladoc (and many, many others) decline 80% or more. Large-scale market declines like this have not been seen since the tech bubble burst in 2000-2001. We are still sifting though the current carnage to find the names that will emerge as winners (as Apple and Microsoft did following the tech bubble), but in the meantime it is prudent to steadily invest in a diversified basket of securities so your savings can overcome the erosion of inflation.

Market Update - Q1 2022

The first quarter this year has so far been marred by war, oil price shocks, inflation, and rising interest rates. As it stands now, the Dow and S&P 500 indices have each fallen about 4% this year, while the tech-heavy Nasdaq index has fallen 8%. Yet, the markets have rallied strongly off their bottoms. The Dow is up about 8% from its low, and the S&P 500 and Nasdaq are up 15% and 16% from their lows, respectively. It goes to show that trying to time the market can be very difficult. In the age of fast internet access and the ability of traders to trade from anywhere, market moves are happening quicker than ever. Just as everything seemed to be at its worst in terms of geopolitics and economics markets started rapidly recovering.

War and surplus cash have pushed oil and other commodity prices soaring over the past three months. This has compelled the White House to announce that the US would be tapping its “strategic reserves” of oil in order to add supply to the market and help ease the upward pressure on price. The reaction of the oil markets were swift and crude prices immediately fell by nearly 10%. Still, year-to-date oil prices are up over 35% and we are all feeling it at the pump. Further price declines from here along with easing of tensions in Eastern Europe should help moderate inflation somewhat as commodities (and goods made from those commodities) flow more smoothly.

Unfortunately, inflation remains a concern for both consumers and the Federal Reserve, who is mandated to maintain price stability and full employment. As of now, the markets are pricing in 8 interest rate increases in 2022. That would mean the Fed would be increasing rates every month on average. Anyone who has recently looked to buy a home or refinance has seen rates jump considerably since last year. However, this is not all doom and gloom. Rates are still very low by historical standards and any deviation away from aggressive rate increases will be greatly cheered on by the equity markets.

As we head into Q2 we anticipate less volatility than we saw this past three months and still maintain a strong bias to equities versus fixed income.

Russia, Ukraine, and the Markets

Firstly, across all investment portfolios that we manage, we have no direct investments in companies located in either the Ukraine or Russia. That said, economic ramifications will reverberate around the globe, so it is a priority for HWM to stay apprised and analyze the current events as they effect securities everywhere.

The US and EU along with other Western powers in the financial world have placed severe sanctions on the Russian economy and some of its wealthy oligarchs. Even the Swiss jumped in and announced they will be freezing assets. The major economic development so far has been the cutting off of Russian banks from SWIFT, the international banking communication system. US Intelligence states that Putin has been building a war chest since 2014 while reducing national debt. Their reserves currently stand at roughly $640 billion in foreign assets. Nevertheless, war is straining the Russian economy and citizens are already feeling the pain in terms of inflation and cross boarder capital restrictions. The ruble tumbled over 30% and had its largest one day drop in history on Monday. In order to combat inflation and stymie further erosion of the currency, the Russian central bank pushed interest rates up to 20% from 9.5%. This along with SWIFT actions have caused Sperbank (Russia’s largest bank) and other Russian banks serious liquidity issues and is pushing them to the brink of failure. It is difficult to determine just how much exposure key financial entities have to Russian banks and assets, but it has been reported that for S&P 500 companies only 0.1% of their sales come from Russian customers. It is also important to point out that paying for oil and gas is currently exempt from the SWIFT sanctions. Reasons being, Western Europe needs its energy and equally if not more importantly commodity markets (prices and availability) in general must remain relatively stable lest the entire industrial-financial complex experience severe shocks.

What does this mean for our market positioning? Let’s examine three scenarios: the bad, the terrible, and the most likely.

In the bad scenario, fighting draws out longer, more foreign aid is poured into Ukraine, Putin ramps up nuclear threat language, China increases support and even advances it war aims in Taiwan, and supply chains get constrained. In the terrible scenario, both Russia and China engage in full scale war in their theatres, Russia initiates preparations to deploy nuclear missiles aimed at any country that threatens its advances in Ukraine. Runs on banks and global panic ensues. Hopefully those two scenarios don’t play out. In the most likely (and better) scenario, battling continues, Russia surrounds and takes Kyiv, installs a pro-Russian government, and refrains from further hostilities for the time being. In the US, talk returns to inflation and Fed.

In all three of these cases, it stands to reason that the Fed would be less aggressive going forward. But regardless of Fed actions we would look to raise some cash in the first scenario, and aggressively in the second (looking for stores of value like gold). In the meantime, we are still cautiously optimistic and see risk assets (stocks) as better investment options than cash. We like growth over value in the long run but could see value continue to outperform in the near-term as investors seek the comfort of dividends.