Q2 2022 Compass Review

Last quarter we said: “We were welcoming the correction as a necessary adjustment in speculative excess that in the long run would threaten market stability.”   So, while we don’t necessarily welcome last quarter’s 16% plus market decline on top of the first quarter’s 4.6% hit, it is not unexpected, given the amount of excess that the market had to correct for.   

Covid worries receded so the Covid darlings (Zoom, Peloton, Shopify, etc.) had to fall, SPACs were bound to fail once money wasn’t free anymore, and FAANG stocks proved once again that every oversimplified trend ends badly.  That’s a fair amount of damage done even before we get to the billions that are being vaporized in the crypto markets, overleveraged real estate and developing market debt.  

A healthy distrust of all things described as “too good to be true” and some experience with past manias protected our portfolios from the worst of these excesses, but the rest of the market trades on fundamentals and right now, fundamentals are confusing.

Unemployment is below 4% but we are worried that we are in a recession.   The fed has officially switched from loosening to tightening monetary policy, but long-term interest rates remain stubbornly low.  Commodity prices went through the roof then sank like a stone making the crowd that was calling for stagflation look very foolish, but no worse than the bond bears, the skeptics on the economy, or the gold bugs.

It’s a great time to be a forecaster because everybody wants to know what’s going on…unless you are asked how your last forecast worked out.  The Fed clearly got it wrong when they kept their foot on the accelerator right up to the point that they had to slam on the breaks, but to be fair, nobody knew there would be a war that sent energy prices through the roof, that Covid would be downgraded from a deadly pandemic to a bout of flu, that a major portion of the work force would remain in “retirement” after jobs became available or that the supply chain was really a piece of dental floss. 

If the authorities fail to predict the future, there is always the stock market which generally tries to predict what will happen about six months out and gets it right a little better than 50% of the time.  After a 20% correction in the overall market, 30% plus correction in growth stocks and a massacre in speculative sectors, the market is pricing in a mild recession but not a catastrophe.  Nothing that we haven’t seen a dozen times in the last fifty years.   

So, we welcome the chance to buy great companies at bargain prices knowing full well that we will not get them at the absolute bottom, but confident that they will make great investments. For the first time in years, we are finding great opportunities in fast growing technology companies.   Their valuations are now compelling because the market has priced in a steep decline in earnings which may or may not actually happen. Even if it does, as long term investors we look beyond the next six months.

We also welcome the fact that we can now get much better returns in the bond market so, what was recently just a defensive position in fixed income actually shows some positive income.  Yields will get better as the short-term debt in our portfolios matures and we roll into longer dated assets.  This is made possible by the fact that we kept our bond portfolios in short-term debt and avoided the worst losses for long-term bonds in decades.

We have gradually begun to use this correction in both the stock and bond markets to move from more defensive positions to a more offensive stance.   How long and how deep this correction becomes is anyone’s guess, but we know that the correct course of action is to take advantage of the market’s tendency to overreact to current events and look beyond today’s headlines.  We think we owe much of our past success to that discipline and believe it will serve us well in the future.  

_{Compass Wealth Management LLC is a SEC registered investment advisor, clearing transactions primarily through Pershing Advisor Solutions and Pershing LLC subsidiaries of Bank of New York Mellon Corp. This letter is written by Compass for the benefit of its clients and does not necessarily represent the opinions of its affiliated organizations. It is based on information believed to be reliable, but which is not guaranteed to be correct. Nothing herein shall be construed to be a solicitation to buy or sell securities, indicate that past performance is predictive of future returns, or recommend individual investments.}