After the extreme market volatility of 2020, we were hopeful markets might have a more “normal” and calm stretch.
Instead, it feels like investment markets continue lurching from one crisis to the next.
Central banks printed vast sums of money to bail out…nearly everyone. Russia launched an unprovoked attack on Ukraine. Inflation is surging because of the money printed in 2020, the supply disruptions resulting from COVID lockdowns, and the war in Ukraine. The US Fed has announced its intention to raise interest rates aggressively to battle inflation. Some fear these increases will lead to a recession.
It’s always difficult to predict what markets might do in the coming 12 months – and they often reverse course when it’s least expected. So, we carry on with a steady process based on what we believe are two guiding truths today:
- Equity markets perform well in the long run
- Fixed income is broken
The S&P 500 has averaged about 8% per year for over sixty years. There have been dozens of crises and corrections over that time, but good companies improve what they offer and look for ways to grow. Investing in successful companies has historically been a very rewarding strategy.
The stock holdings in our QW Elevate Enhanced Global Equity Fund (Apple, Microsoft, Amazon, Nvidia, etc.) are great companies with solid fundamentals and an attractive outlook, but in the short term they are being sold along with everything else. Too many investors are focused on performance in the next 90 days rather than keeping companies that will continue to be leaders over the next 5 years.
As for fixed income…who would want to own bonds or GICs that earn 2% when inflation is 6%? It may feel like one is slowly growing their assets, but purchasing power is being seriously eroded. Further complicating investments in this asset class, bonds lose money when interest rates go up – and one of the stated goals of central banks is to raise interest rates significantly. Many bond indices are down over 10% year-to-date.
Given this challenging environment, we are very pleased with the performance of our QW Elevate Enhanced Low Volatility Yield Fund. We seek yield in this fund by using alternatives to bonds and cash. This has provided a stable foundation for our discretionary portfolios. Most of our “Balanced” clients have more than 50% exposure to this pool and have been spared a significant amount of volatility this year.
Fortunately, we can also use options in both funds to provide additional layers of protection. While these options have been our best performers this year, they have not been able to offset the declines in equity markets. Some clients don’t mind volatility and are more focused on long-term growth. For our more risk-averse clients, we are working to make our option strategies more robust to provide even greater protection going forward.
While the crises we have experienced over the past couple of years have been traumatic, they have also spurred us to seek further enhancements to our process. As always, we continue to look for ways to improve.