Insight & Commentaries
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.
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.
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.
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.
As the consumer price index rises faster than any time in 40 years, we look back at how American economist Milton Friedman and statistician Janet L. Norwood helped shaped today’s understanding of “inflation.”
After an initial strong run, signs of stress may now be emerging in the global recovery. Moreover, we note that financial markets appear priced for strong growth, record profits, and limited financial stress among corporate issuers. Given this backdrop, we now tactically reduce equity exposure to neutral following fourteen months of significantly overweight equity exposure.
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.
Have you noticed more crowded roads and airports lately? The benefits of reopening are now seen across many sectors, and the municipal bond market is paying attention. This report explores how the process of reopening the economy is impacting municipal bond issuers and investors. Highlights The Muni curve steepened in the third quarter, slightly underperforming U.S. Treasuries, in very quiet trading activity. Flows into Muni Mutual Funds continued their torrid pace as increased taxes become more certain. The reopening economy has benefited Munis, too. Part 1 of our Muni Market Education Series: Why the High Coupon?
We discuss the recent record-breaking rally, what is driving it, and the potential impact of higher prices on future returns. Also considered is the impact on wealth and appropriate portfolio strategies are suggested.
Quarterly Report
Principles
Dividend Investing
