Welcome to 2022! Like us, many of you have been waiting to turn the chapter from 2021. And, yet, here we are still with the pandemic, uncertainty ahead of us, and a mid-year election this year.
What is going on?
That is the question many of us are asking right now. The team at Spaugh Dameron Tenny (SDT) decided to come together and share some thoughts about the information that we take in every day on your behalf to help give you thoughtful guidance and advice on making decisions for you, your family, and your goals.
First, we would like to thank our friends at Capital Group for their help in providing information, research, and visual aids.
Some of the themes that Shane Tenny, CFP®, managing partner at SDT touches on, include:
• The impact of the pandemic on the economy seems to have lessened over time
• Are there excesses in the market?
• Defining financial terms
• Opportunities for prudent investment
• What about inflation rates?
Additional resources mentioned in the video: The World in 2030 – from our friends at Capital Group http://worldin2030.com/
Transcript:
SHANE TENNY: Hi, everyone. My name is Shane Tenny. I'm the managing partner at Spaugh Dameron Tenny. And welcome to 2022. I can't believe it's here. And yet I've been waiting for so long as many of you have to turn the chapter from 2021. And yet here we are still with a pandemic. Omicron around the corner, uncertainty ahead of us, a midterm election. And what in the world is going on?
Well, that's the question many of us are asking. And the team and I wanted to come to you today and just share some thoughts with you about the information that we take in every day on your behalf to help give you thoughtful guidance and advice on making decisions for you, your family, and your goals. I'll give advance credit to our friends over at Capital Group for their help in providing information, research and visual aids for me today, as we kind of go through a couple of slides on balance between my notes and the screen and just share with you kind of our thoughts as we look at things.
One of the first things that of course, is on everybody's mind is just what the market's been doing. And while the pandemic is still raging all around us, we are definitely seeing its impact diminish. Of course, when COVID was first announced in early 2020, as you can see on the chart, the market dropped 34% in the matter of a month. But very quickly and over the last two years, we've seen the outbursts of COVID become a bit more regionalized. We've seen airports and travel agencies and malls and businesses and all of us really learn how to adapt to COVID. And so we've seen its impact on the economy really begin to diminish.
And in fact, we've even seen the markets begin to shrug off some of the headwinds of employment or inflation. And this 11-year bull market just won't stop. Of course, it does lead to the question about are there excesses in the market? And we certainly don't think stocks are trading at a discount. But with earnings so strong by so many businesses in our economy, it's hard to say that across the board they're overvalued.
And so we continue to think and hear from your portfolio management teams that stocks are at a fair to full value range. You can see using the color coding on the chart that the leadership in the market has rotated between defensive stocks, cyclical stocks and then the tech stocks or what is label here FAANG and that stands for Facebook, Amazon, Apple, Netflix, Google, sometimes Tesla's thrown in there, but tech stocks have absolutely been an engine of the economy.
And so as we head into this year, we know that just in the first couple of weeks, there's been a contraction in tech stocks and the Nasdaq being down about 10%. And so it raises the question, is this just kind of the long-awaited volatility that we saw none of last year, or is this the beginning of kind of a more persistent downward cycle in the market? I'll talk in a future video about kind of market movements during midyear election cycles.
But for now, I think it's important just to realize that what terminology is kind of beginning to float around the investment world is this concept of slow formation where we see earnings continuing to drive growth but at a slower pace, partly due to rate hikes, maybe inflation, maybe employment. But ultimately, as we get through this year, kind of a return to the old normal, if you will. And so as we anticipate the opportunities for prudent investment that begins us to ask questions about where are those opportunities now, it's certainly no surprise that China has been slowing down even more over the last couple of years. And so the question arises, is there still opportunities to invest in the world's second-largest economy?
And the answer is selectively. You know, as Chinese policymakers have begun to introduce the concept of common prosperity, terminology they've been using the last several months, it definitely has tempered investment interest in China, but at the same time, you can't count them out entirely because there are sectors that China is wanting to advance and keeping the doors open on, like biopharma. And so we see, you know, here listed for companies in China who are openly partnering with other vendors around the world. We see companies looking. In the US and Europe much larger in scale, but beginning to drive revenue from China.
And so from a portfolio standpoint, it's important to realize that your portfolio managers are looking for and identifying selectively, investment opportunities, driving results from China. Some of those aren't even in China, but just generating revenue from that marketplace. One of the important concepts that we've also all become aware of is just kind of the digital revolution. Of course, I mentioned a minute ago the FAANG stocks which have been so attractive because of their strong balance sheet and, what is often referred to as a moat around their business.
If you think about a moat around a castle, it made it hard to attack the castle. And certainly companies like Amazon, like Google, like Tesla, they're kind of unique out there. And it's going to be really hard for anybody to make a significant dent in their business model. But when we talk about the digital revolution, what is presenting itself from an investment opportunity is not just those e-commerce businesses, but some more traditional businesses like Home Depot and Williams-Sonoma, who are combining their brick and mortar operation with a real strategic digital supply business to grow their sales.
And so even between 2019 and 2021, you can see Home Depot's digital distribution really helping its total sales. We see the same thing in Europe between Nestlé and L'Oreal. We see the Chinese appliance maker Madaya really getting serious. And so portfolio managers are looking not just for companies who are selling things online, but for companies who have a real thought out and developed business model to distribute their value proposition online.
And that brings up one of the other themes that we're really beginning to see take traction now, and one that perhaps you've heard of, and that is ESG investing. Well-managed companies think about this now and really understand how the E, the environmental, the social, and the governance are affecting their bottom line. We're seeing more and more research coming out showing that companies who are thoughtful about how they do what they do drive better results.
And so we see there being a much more thoughtful and selective process around not just including companies who have an ESG quotient in their business and excluding those who don't, but an investment methodology that involves encouraging companies to pursue ESG concepts in their business.
And so, for example, even if you're the CEO of an oil company in Europe, we don't see the investment opportunity being to just exclude that. But being the opportunity to come alongside and encourage their business to be more environmentally conscious or socially aware or more diverse in their board of directors. ESG investing is one you've already heard about more than likely, and we think is going to continue to become more and more mainstream over the next decade from an investment standpoint.
This brings up a really important concept around just the terminology we used, you know, 20, 30 years ago. Words like growth and value and usage international were pretty clear. But even from what I showed you a minute ago around China, there are companies who are generating more revenue outside of their own borders than they are inside their borders. And so it's hard to determine whether labeling at a domestic company or an international company.
What we do know is that thoughtfully evaluating businesses around applicable methodologies today is really helpful. And so we see the portfolio teams working for you, not just using black and white labels around growth or value, but strategies like dividend investor. While it's hard to see on the screen perhaps here, but the chart on the right is really showing the pursuit of companies who are growing their dividends. Companies like Comcast or Zurich Insurance out of Switzerland, Taiwan Semiconductor. And what we know is that historically companies who grow their dividends tend to generate greater results than other dividend investment strategies.
And this is a theme that we see beginning to emerge as interest rates rise, as companies earnings and balance sheets become more and more robust following the initial onset of the pandemic. Now, one of the questions that some folks are having is what about rates? The Fed keeps saying they're going to raise rates. We know that rising rates are raising rates is one of the levers the Fed can pull to temper down inflation. And so there's some concern on what impact that will have on the economy.
It's important to realize that raising rates does not automatically create some sort of contraction or correction or recession in the market. In fact, the Fed goes to great lengths now to telegraph years in advance what they're planning to do. And it's important to remember that the market moves most significantly on surprises. So the Fed will have a meeting in March. They've been telling everyone for a year now that they will start increasing rates and it will come as no surprise to anyone if the Fed raises rates in March. Now there are reasons why they might choose not to or may delay, but if they do, it won't come as a great surprise.
And it's important to realize historically, if we look back to 1983, there have been seven cycles where the Fed has raised rates. You can see anywhere from one and a half to 4%. And in those seven cycles, five of them bonds did just fine, thank you very much, with an average return, nearly 4%. And even in the two cycles where bonds were down, they were down 2 to 3%. And so it's important to remember that bonds still have an important part in portfolios. Even in a rising rate environment because they still provide diversification and a hedge against equity market volatility. Bonds provide income, they help with capital preservation, and they can act as an inflation hedge.
Now, with that said, I do want to point out that with inflation, which can be a headwind in all scenarios, but the most egregious, both stocks and bonds have a history of performing well in inflationary periods. Now, of course, your eye looks to the far end of the chart here and sees the negative returns when inflation is over 6%. And you're thinking, I think we're there. It's important to realize that over the last hundred years, inflation by far has been far below 5% on any prolonged period. And even though for those of you old enough to remember the 1970s when inflation was pretty rampant. That was a pretty unique cycle in the market that the Fed has demonstrated an acute awareness of over the last couple of years heading into the cycle as a lot of dollars had been pumped into the system.
And so remember that a diversified portfolio is still a really important hedge against inflation and the most statistically probable way to continue generating the growth that you need for your goals. I want to say a final point about inflation, and that is a couple of things. Number one, some inflation is actually good. Remember, the Fed as a normal course of business is actually targeting 2% inflation, not zero. We need some inflation. And in fact, when there are periods of higher inflation, it can be a place where businesses are able to raise prices to enhance their profitability or for businesses that are really interest rate sensitive like banks or commodity-linked businesses, or utilities. A period of inflation can allow them to generate more profit easily or more easily than when there is a low-interest rate or low inflationary environment.
The second thing to remember during periods of higher inflation is what I've just shown you. Stocks and bonds can both perform well, so there's no need to try to freak out or time the market or bounce out. And third, remember that really high ultra inflation is pretty rare. And I think history will show that the Fed will have done a good job managing the levers of the economy and fiscal policy and monetary policy to help keep the economy moving forward through all of the uncertainty we're going through.
And finally, I want to give you a resource that you may find interesting as you think about this next decade. It's in small print down at the bottom of the slide, but you can see the website worldin2030.com. It's an e-book generated by our friends over at Capital Group. You can register there and download it for free, but it'll just kind of outline some of the themes that thoughtful investment professionals are looking at as they think about where to invest your dollars over the coming decade. I've touched on a couple of these themes.
The first being ESG investing, environmental, social, and governance. Progressive companies reimagining how they do what they do are going to be an attractive source of investment capital over the next decade. Number two, technology. And again, it's not just the headline names here, but everywhere, reimagining how to use technology to better deliver better products to consumers. This is showing up already in food. It's showing up in clothing. And it's going to become more and more ubiquitous all around us.
And the third concept is health care. Genome research is absolutely phenomenal. That RNA technology that created the vaccines has been around for 20 years, but is only now becoming available for a widespread manufacturing distribution. We see the healthcare impact of wearables, the oral rate, the data that Apple Watch and all of these wearables is creating. It's just going to be a tremendous opportunity. And so as we face another year with uncertainty over what's going to happen, what's the outcome going to be and how should we respond?
I want you to feel reassured that there are really thoughtful people taking a really thoughtful look at your portfolio, your goals, and your future. And of course, as always, if you have questions, it's our pleasure and privilege to come alongside you and help you navigate the decisions that are most applicable to your family. Thanks so much for your trust and confidence. We'll see you back here next time.
