Volatility = Opportunity in 2022

We hope the new year finds you and your family safe, healthy, and well. Each January, we like to take a look at the year ahead, so please join us as we share our investment outlook for 2022.

Each day, our core goal is to safeguard and build our clients’ wealth (what we call protecting the castle), while achieving strong investment returns. But every year is different, and this one may be a little more so. As the Fed tightens monetary policy and drains liquidity, there will be volatility in the fixed income and equity markets. And with that volatility comes many opportunities.

The Fed Tries to Thread the Needle -A Balancing Act

We would not be surprised if the markets overreact to the Fed’s announcements or interpretations by outside parties. When this does occur, we will filter the noise, as the Fed’s intentions have already been telegraphed to the markets, typically well in advance. And we will find the opportunities this scenario creates.

The Fed will try to maintain their dual mandate of price stability and maximum employment, which will not be easy, as low interest rates and full employment are political hot buttons. As the Fed tries to thread this needle, it will be a real balancing act, as the Fed does not want to throw the U.S. into a recession and increase unemployment with higher interest rates.

Although this year may be unlike the past few, with inflation and rising interest rates, we adapt our strict discipline of study and the construction of our portfolios to the current environment.

Inflation – What You Need to Know

The inflation story starts with the pandemic. The pandemic is driving up labor costs, by increasing wages and core inflation. Many businesses have been forced to close temporarily or permanently. Supply chain issues are pervasive, as COVID and the subsequent variants are wreaking havoc on the workforce and employers. This is creating labor shortages and logistical supply chain issues, further increasing labor costs. And many foreign ports are being impacted by COVID as well, creating shortages and driving up prices on the goods we import.

Once the pandemic moderates and we adjust to the new landscape, we anticipate the supply chain and inflation issues will self-correct over time. We need to understand inflation will be with us for a while, but it will not be permanently built into the economy. Our current forecast is that the inflation picture will moderate by the middle of 2023.

How We Invest with this Picture in Mind

We will focus on companies that have substantial revenue and earnings, solid balance sheets, healthy cash flow, superior leadership, and that pay good dividends. We also like our companies to have strong employee productivity, and wide moats separating them from their competitors. It is through this lens that we will focus on being opportunistic in owning companies in industries which we can see making major gains.

Our companies have substantial revenue growth, strong earnings and most have little or no debt, and they should fare well in 2022. Higher interest rates and bond yields should not be disruptive to these equities. We will avoid companies selling at a multiple of revenues with little in the form of earnings, as they will struggle. We will also avoid companies with substantial debt, as interest expenses will increase as interest rates rise.

So, to Summarize...

Although we are expecting a more volatile year than 2021, particularly in the first half of the year in the equity and fixed income markets, we think 2022 will be a good year overall. It will not be a year to throw a dart at the dartboard and expect to make money, but a thoughtful, well-defined approach should serve us well.

Currently, the U.S. consumer is in very strong financial shape, stronger than they were prior to COVID. Corporate America is generally also in very good shape with low levels of debt. As we approach the end of 2022 to the middle of 2023, we should see inflation moderating from current levels, as COVID retreats, supply chain issues improve, and people go back to work.

As your Fiduciary Registered Investment Advisor (RIA), we take managing your monies very seriously. We thank you for your trust, confidence, and the opportunity to work with you. As always, please do not hesitate to contact us directly with any questions you may have or if you would like to discuss these topics in more detail.

All the best,

Bruce and Leon

Nollenberger McCullough Investment Advisors

Performance - Trust - Experience

Bruce Nollenberger

415-287-5100

brucen@nollmac.com

Leon Wiatrak

415-956-8700

lwiatrak@nollmac.com