The first quarter of the year was a challenging one indeed. Parkview has and will continue to steadily assess the economic landscape with a sharp eye to shelter investors from risk and seek burgeoning opportunities.
"If we had no winter, the spring would not be so pleasant: if we did not sometimes taste adversity, prosperity would not be so welcome." - Ann Bradstreet
As the impact of the Omicron variant was slowly being addressed, inflation continued to rise as consumer demand rebounded and industries continued to face stubborn supply chain issues. Confronted with historically high and persistent inflation, the Federal Reserve raised interest rates and implemented a tighter monetary policy to ease accelerating consumer prices. Compounding the problems of high inflation and the challenges of global supply chain imbalances, sanctions tied to the Russia-Ukraine war exacerbated already rising prices in the commodities markets.
As might be expected, volatility increased across all asset classes and financial markets as investors reassessed their holdings. Equity markets corrected sharply, bond yields increased dramatically, and commodity prices—corn, wheat, cotton and of course, oil—rose at the fastest pace in over a decade.
Investment Landscape
In surveying the investment landscape, we look with perspective on the new stance of the Federal Reserve and the current health of global trade. In general, over the past two decades interest rates have been falling and inflation has substantially been benign. The drivers of those trends have been, most notably, expansionary global trade and highly accommodative monetary policy. Those important drivers have shifted as monetary policy has become less accommodative, and global trade continues to be disrupted. However, despite the shift in monetary policy, the Federal Reserve’s interest rate targets are still within historically low levels and a normalization of rates may in the long run be healthy for the economy. That being said, there will no doubt continue to be turbulence in the financial markets and sectors of the economy as long-term interest rates rise and global trade is constrained.
Given the changes in trends and the challenges of the current domestic and macroeconomic environment, there are several areas of opportunity for investors going forward.
The shock of disruptions in the global supply chain has accelerated many companies’ plans for the onshoring of manufacturing. As companies reassess supplier connections and factor changes into their long-range planning, a number of sectors in the domestic economy should ultimately be beneficiaries. For example, new investment in domestic semiconductor manufacturing should help chip equipment manufacturers and ultimately the manufacturers themselves in realizing a net benefit in cost structure and global competitive advantage.
A similar theme is playing out at the local level as federal and local government spending finds its way into infrastructure development and revitalization. Companies that supply the industrial equipment and resources necessary to execute these projects should be significant beneficiaries.
Inflation and the “re-reopening” of the economy has shifted consumer spending patterns once again. Discretionary income has been impacted by higher costs and consumers are adjusting spending on core items. In this space, price-friendly companies will continue to be big beneficiaries. We are also seeing consumers spend more on travel, leisure, and experiential activities through hotel and air travel booking in the face of high fuel costs.
Inflation is difficult to contain once it gets started and establishing price stability without nudging the economy into a recession is a daunting task. The Federal Reserve, having been cavalier in its initial assumption that the inflationary economic state was transitory, has stated and publicly affirmed its strong commitment to bringing inflation down to their 2.0% target as quickly as possible. There is a lot of speculation about whether the Fed will follow through with their commitment, but I would take them at their word. Therefore, as short and long-term interest rates drive higher and the cost of goods and energy remain high, we anticipate a slowdown in economic activity later this year.
With the strong possibility of a slowdown in the economy, Parkview’s strategy and positioning of our clients’ investments has two central components:
First, we believe in investing a diverse set of businesses that operate independently in separate sectors of the economy and to identify industries that weather economic slowdowns and emerge in good stead. The mix of companies we hold varies from those that are driven by consumer discretionary spending to those that are less impacted by changes in discretionary income, such as healthcare and basic consumer products.
Second, our strategies identify and hold positions in companies that have very high and accelerating earnings expectations and expanding profit margins, to those 'blue-chip' industry stalwarts with a long histories of steady cash flow, dividends and share buybacks.
We would expect that the second quarter and perhaps the remaining part of the year will be volatile and most challenging for investments in high growth oriented companies as investors realign their expectations and the impact of higher rates and global disruptions. ‘Value’ oriented investments (those companies exhibiting a long history of stable cash flow stability) performed relatively better in the first quarter as investors gravitated to those holdings amidst uncertainty and we would expect this to continue.
Uncertainty surrounding the future of the economy and, of course, the geopolitical climate weighs heavily on investors. In this challenging and evolving environment Parkview seeks to manage the significant risks that arise and are ever mindful of identifying long term opportunities for investors.
David W. Malmgren, CFA
Founder and Principal
Parkview Capital
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