Insight & Commentaries

Yields rose across all fixed income assets due to expectations of swift Federal Reserve (Fed) rate hikes to curb run-away inflation, and munis were no exception. The “rich” valuations that we pointed out last quarter have turned firmly into our “cheap” range as a result of the selloff.

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The first quarter brought a surge in inflation and war in Eastern Europe. This environment imposes a new reality on investors and policymakers. In this report, we discuss what is happening and how our top-down portfolios are positioned now.

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Against a backdrop of falling consumer expectations, we consider what a “typical” cycle tends to look like. As an old aphorism states: “History doesn’t repeat itself but it often rhymes.” We offer a highly “stylized” interpretation of market cycles to consider the current situation.

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Our process for tactical asset allocation involves assessing data. Specifically, we assess month-to-month trends in data. When Russia began a full-scale invasion of Ukraine in late February, most of the trends we follow seemed poised to bounce. Obviously, this is no longer the case. This week we assess how recent data is influencing our outlook.

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Russia’s invasion of Ukraine, and the West’s initial response, casts a veil over Eastern Europe. This veil of uncertainty can be unsettling as we confront many unknowns. This week we look at what actions are being taken and how these actions may influence the investing landscape.

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The Changes at Hand

The stock market is near $50 trillion in value, about $15 trillion greater than before COVID-19. Stock values rose far faster than bonds, market earnings forecasts are hitting new highs, and companies are finding it easy to borrow. Yet there are signs that this happy situation could be poised to change. This week, we look at some recent evidence to support this claim.

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Where do you want to be invested when faced with the prospect of a bear market? Some say that high dividend yields provide protection when stocks fall. This implies that since the yield rises as the stock price declines, new buyers will be attracted as the price drops. Such buyers could help establish a “floor” below the stock. While this sounds good in theory, we find scant evidence that it actually works in practice. This strategy fails when needed most because “high yielders” tend to be fundamentally weak. While some high-yielding stocks may be good bargains, most high yields reflect…

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Despite an ongoing economic recovery and bull market in stocks, we see a growing set of reasons suggesting some caution may now be warranted. In this week’s commentary, we will lay out these reasons and offer some ideas for navigating more challenging market environments.

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Beta, Revisited

With the U.S. stock market near highs, we look at the role “beta” plays in portfolios and why we favor combining “beta” with fundamentals. We find that 1) the pandemic era brought a rise in average “betas”, and 2) that “betas” behave differently based on fundamental quality.

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What Matters Most

In the very long run, it is growth that dominates other drivers of return. In this commentary, we look at why valuations and profit margins matter less than growth over time. With profit margins and valuations at or near highs, we conclude that we should not depend on further increases in margins or multiples for return. Instead, growth and dividends will become more important for us as long-term investors.

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The pandemic provides a test for our crucial proposition that dividend growth points to quality. We look at recent evidence since the pandemic’s beginning to test this proposition. We find great similarity in performance of dividend growers and high quality on the one hand, and dividend cutters and low quality on the other. We also question whether the risk of owning this year’s outperforming low-quality, dividend cutters is really worth the much higher volatility of such stocks.

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Dividend growers outperformed all dividend categories for the past 48 1/4 years with less risk. This is our conclusion based on data provided by Ned Davis Research. The research focuses on dividend payers, non-dividend payers, and dividend cutters. Note that the pattern of dividend growers outperformance holds for both the entire period of analysis and each sub-period (First Table). It also holds that growers experienced lower volatility for both the entire period and each sub-period (Second Table). In this note, we address why we think this phenomenon exists and what it could mean to investors. Return By Dividend Category (Annual)…

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Record fund inflows led to unprecedented demand for Munis last year, keeping volatility at a minimum compared to the wild swings in the Treasury market. As inflows are expected to continue and supply remains light to start the year, we expect modest outperformance in the near term.

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Viewpoint 2022

We publish this year’s Viewpoint 2022 amid ongoing recovery from an unprecedented pandemic. Signs of continued growth are apparent despite new COVID-19 variants and anticipated policy shifts. Long-run return expectations fall this year in as valuations and profit margins are elevated for stocks. For fixed income investors, surging inflation and expectations for rising rates are of primary focus.

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