Weekly Inspiration - “Successful investing is about managing risk, not avoiding it.”
Those of you who are familiar with the work of Benjamin Graham may believe that this post is an argument on value vs growth investing. It’s not.
This post is an argument for advice and the advisor. There are plenty of reasons today for clients to feel a bit squeamish. Inflation remains stubbornly entrenched and interest rates are volatile. The equity markets can’t seem to decide day to day which way they are headed. And there is certainly enough domestic and international tension, anxiety, and conflict to go around. It would be easy to close the curtains and wait for it all to blow over.
But this is the time when clients need advisors. We’re not going to advocate pulling out of any particular market or going all in…but we are going to advocate for the advisor. Your role is more difficult than it’s been in decades. Pandemic recovery is uncharted territory and while we’ve seen geo-political events in the past, each one carries its own unique nuance and circumstance. Technology is changing, work environments are changing and with a quarter of today’s work force saying they will look for another job in 2022…change appears to be here to stay.
That’s why we like the Benjamin Graham quote above. Risk is here. Risk has always been here. To be successful, one must understand the risk and take steps to meet it. It goes to the heart of being an advisor. Don’t be shy in making sure your clients understand that.
Find out exactly what they are afraid or. Quantify it…ask them to describe their worst-case scenario as an investor. Once identified…clearly and precisely…you can begin to manage it. You might even ask them to write it down if that helps the exercise. You can then use those fears as a cornerstone for your quarterly reviews. Are the fears still there? What steps did we take to mitigate those fears? Are there any new ones to consider? Juxtaposed with a performance review, you can have a healthy client interaction. General anxiety is difficult to manage, a specific fear is much easier to handle.
In a volatile trading week, stocks extended their losses as economic growth and inflation concerns soured investor sentiment.
The Dow Jones Industrial Average dropped 2.14%, while the Standard & Poor’s 500 lost 2.41%. The Nasdaq Composite index fell 2.80% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, slumped 3.21%.1,2,3
A Turbulent Week
Inflation moved to center stage last week with the release of April’s Consumer Price Index (CPI) and the Producer Price Index. Both numbers came near their 40-year highs but were lower than March’s year-over-year numbers. The results heightened investor anxiety about future Fed monetary tightening and its impact on economic growth.
In recent weeks, technology stocks have borne the brunt of the downdraft as investors lightened up on risk exposures, with some of the mega-cap tech names getting swept up in the selling pressure. Cooling import price increases buoyed spirits on Friday, helping spark a rally that reduced the week’s losses.
Inflation Stays Hot
Investors were greeted with a mixed CPI report, looking for signs that inflation may be cooling. Year-over-year costs rose 8.3%, slower than the previous month but faster than consensus estimates. Excluding food and energy, core inflation climbed 6.2%. Buried beneath the headline number was a 5.1% yearly increase in shelter costs, the most significant increase since 1991. Shelter costs account for one-third of the CPI.4
Inflation has been a weight on markets all year. Investors are concerned that the persistence of higher prices may tip the economy into recession as increased spending on essential needs crimps consumers’ spending power.
This Week: Key Economic Data
Tuesday: Retail Sales. Industrial Production.
Wednesday: Housing Starts.
Thursday: Existing Home Sales. Jobless Claims. Index of Leading Economic Indicators.
Source: Econoday, May 13, 2022
This Week: Companies Reporting Earnings
Tuesday: Walmart, Inc. (WMT), The Home Depot, Inc. (HD).
Wednesday: Cisco Systems, Inc. (CSCO), Target Corporation (TGT), Lowe’s Companies, Inc. (LOW), The TJX Companies, Inc. (TJX), Analog Devices, Inc. (ADI).
Thursday: Applied Materials, Inc. (AMAT), Palo Alto Networks, Inc. (PANW), Ross Stores, Inc. (ROST).
Friday: Deere & Company (DE).
Source: Zacks, May 13, 2022
Footnotes and Sources
2. The Wall Street Journal, May 13, 2022
3. The Wall Street Journal, May 13, 2022
4. CNBC, May 11, 2022
Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.
The forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
The market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results.
The Dow Jones Industrial Average is an unmanaged index that is generally considered representative of large-capitalization companies on the U.S. stock market. Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of technology and growth companies. The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) and serves as a benchmark of the performance of major international equity markets, as represented by 21 major MSCI indexes from Europe, Australia, and Southeast Asia. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.
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