Wright Cove Capital: July 2022
July 7th, 2022
An article from last week’s Wall Street Journal puts into context how difficult the first half of 2022 has been in markets:
Accelerating inflation and rising interest rates fueled a monthslong rout that left few markets unscathed. The S&P 500 fell 21% through Thursday, suffering its worst first half of a year since 1970, according to Dow Jones Market Data. Investment-grade bonds, as measured by the iShares Core U.S. Aggregate Bond exchange-traded fund, lost 11%—posting their worst start to a year in history. Stock Markets Post Worst First Half of a Year in Over Five Decades
It has not been a great start to the year in financial markets – but what the headline above doesn’t mention is how many investors were hurt much more than the broad indices are showing. The tech heavy Nasdaq is down nearly 30%, The Ark Innovation fund (ARKK) which gained recognition during the pandemic is off over 57% to start the year and is down 75% from its high in 2021, and Bitcoin and other crypto assets have also had a similar fall from their pandemic highs.
We continue to believe that prudent risk management and the avoidance of sectors and securities that trade at unrealistic valuations is paramount in the current environment.
While it has been a difficult start to the year, we began taking measures in preparation for higher interest rates late last year in an attempt to mitigate losses and reduce volatility in both stocks and bonds.
We reduced and eliminated longer duration and high-yield bonds and replaced them with short-term bond funds and treasury bills. This move led to an outperformance of 5-10% across the fixed income portion of most accounts.
On the equity side, we avoided the meme-stock trend and many of the unprofitable “unicorns” of the pandemic that have fallen well over 50% to start the year and instead focused on dividend paying stocks and sectors with strong balance sheets that, while also down on the year, have outperformed both growth stocks and the broad-based stock market by a wide margin.
Having a defensive mind-set does not mean we are resigned to staying overweight cash and short-term treasuries. We believe the next few months will present a better risk/reward environment for stocks as valuations adjust to a world with less stimulus and higher interest rates.
The themes and strategies that we speak about and the positioning we take in portfolios are all customizable to best reflect each of our clients’ own unique goals and should not be interpreted as general investment advice.
As always, if you have any questions or comments – or would like to hear more about Wright Cove Capital, please fee to reach out.
Eric and Cass
Eric Leinwand, Principal – Eric@wrightcovecapital.com
Cass Tokarski, Principal – Cass@wrightcovecapital.com