Quarterly Commentary - Q4 2022

Kyrill Asatur
February 14, 2023

The fourth quarter was largely positive for stocks and other risk assets. While still focused on interest rate policy set by the Federal Reserve (related to inflation), we have witnessed a shift of market attention away from inflation to the state of the economy.  Regardless, we believe 2022 was an inflection point marking a change to a new market regime. Gone are the days of growth at all costs without consideration to profit, 100x revenue valuations for SaaS businesses, meme stocks, and multi-million dollar beach properties…in the metaverse.  

The above examples, along with many others, were all a function of a zero-interest rate environment that incentivized risk-taking, stretching farther and farther out the risk curve the longer the conditions existed. The end of the past regime was brought on by Covid, and a coordinated global shutdown of the world economy. Governments’ response of unprecedented fiscal and monetary stimulus, only seen historically during wartimes, dramatically shook the status quo. The global economy is still settling into this new regime.

It is precisely why many are having difficulty predicting the state of the economy and markets. We believe this means that former playbooks, including passive investing and the ubiquitous 60/40 portfolio are unlikely to work going forward. Passive investing success was fueled by ultra-loose monetary policy following the financial crisis. 60/40 portfolios benefited from a negative correlation between stocks and bonds, made possible by little to no inflation. For the foreseeable future, we find ourselves in a world defined by a higher risk of inflation, driven by de-globalization trends, clean energy transition, quantitative tightening, changes in labor dynamics, and geopolitical tensions. This means monetary policy leaders are no longer able to reuse the playbooks of the recent past, and “normalized” levels of interest rates are likely here for the time being. Higher interest rates mean on the margin savings and cash flows are rewarded, and multiples for stocks, in general, need to adjust to lower levels.

During the quarter, we continued to reposition client portfolios to better reflect our views above. We used the rally in risk assets in the first part of the quarter to exit certain higher-valued and more speculative exposures in favor of small-cap equities, gold equities, and additional exposure to natural resource equities.

As we begin 2023, we have witnessed a rally in stocks and risk assets, led by the more speculative parts of the market. We have also witnessed certain elements of the economy remain stronger than most expected, namely the labor market. We continue to be positioned tactically conservatively as we digest incoming economic data and company earnings. We believe it is important to be flexible as data clarifies the path forward. As noted above, we believe actively managed portfolios, with exposure to alternative assets and strategies, will be important in this new market regime.

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