Answers to Questions From DWM Seminar
If you did not have a chance to attend last week's market and economy update, we are providing a link for you to review at your leisure. I trust you will find this helpful in understanding how we are investing portfolios in 2022.
There were many questions asked during the event and I thought I would share a few of those with you as well as our answers. The responses were developed by the DWM investment team.
1. I’m nervous about the Russian-Ukraine situation. Will it affect the markets?
The Russia-Ukraine situation certainly is a dangerous one for the global economy. If there is an invasion there is a significant chance there will be energy supply disruptions which will cause the price of oil to spike higher. Any spike in oil prices could create additional inflation as well as a stagnation for global growth.
We do think the bigger issue is inflation trends as well as developing news in China regarding their economy. In combination with the Russia-Ukraine situation, it does create additional headwinds for the global economy which is why we are forecasting a slowing of global GDP growth.
Portfolio strategies have already been invested towards an understanding of the complex issues that the global economy will face in 2022. We will be watching and making adjustments as needed as news develops.
2. Since there is an inverse relationship with interest rates and bonds, and we know or think interest rates are rising, why are bond prices not moving much?
Bond prices do typically move inversely to interest rates, but the magnitude of bond price change can also be affected by the maturity and credit rating of the bond. One of the things Destination does is to take these factors into account as we build out fixed income portfolios.
3. How do you know when to trade? Is it when the stock price goes down or when computers or individuals panic? How do you know the difference?
DWM has a dedicated research and trading team that watches both macro headlines and company specific news such as earnings. High frequency trading, involving computers, could play a role when the market experiences big swings without any major headline news and company specific news. It's important to remember that we are fundamental investors and do not trade short term headlines or market movements unless we believe there's an opportunity or an outsized risk.
4. What is a bear market probability in the next year?
Our base case for a recession and a bear market is fairly low right now given that we are still in the recovery phase of economic cycle. Headwinds such as the pandemic, supply chain constraints, and geopolitical tensions could contribute to a market correction. On the other hand, a market correction wouldn’t necessarily lead to a bear market given the low unemployment rate and solid GDP growth.
5. We hear so much about China yet our government doesn't seem to be very concerned. Makes me think they know something we don't. So, do you think China can hurt us economically anytime soon?
We do not believe China can hurt the US economically anytime soon. China is going through the process of transitioning from an export driven economy to internal consumption economy. While they could potentially disrupt the treasury market by selling bond positions, we think that is highly unlikely given their current economic fragility. A bigger concern is the global impact on economic markets as China continues to struggle. In particular, we are watching the banking sector very closely.
6. What is your perspective on investments in the international market, primarily Europe, Japan, and other developed countries?
Investing internationally has a number of headwinds including responding to Covid-19, rising wages in emerging market countries, a pivot in China towards a more nationalistic perspective involving increased domestic consumption, and the impact of tensions between Russia and Ukraine. We prefer holding U.S. domiciled companies many of which already have international exposure. But we still hold some international investments; we are heavily weighted towards US equities.
7. The US dollar is strong given our deficit, why the strength?
The expectations of the Federal Reserve raising interest rates, inflation, and strong economic recovery have contributed to the recent strength in the USD.
8. Why not invest more in TIPS?
Treasury Inflation-Protected Securities (TIPS) are bonds intended to offset the effects of rising prices by adjusting its principal value as inflation rises. While TIPS help to mitigate inflation risk, TIPS face interest rate risk in a rising rate environment given its duration is longer than the overall aggregate bond index. DWM considers both interest rate risks and credit risks as we build out fixed income portfolios.
9. NASDAQ and certain fast growing tech companies in Lithium, EV Infrastructure, Semiconductors, AI, etc. with high PE's are in a correction, making it tricky to re-allocate portfolio right now. How long before they start to recover and what kind of multiples and valuations to expect now vs. the past? And how to manage this 4-5 years before retirement?
Longer term, DWM believes these innovations can displace existing technologies or players and create substantial global economic value. DWM has strategically carved out a small portion of overall portfolios, investing in these sector related securities, diversifying through a combination of high quality individual equities and funds.
10. Growth stocks trumped value stocks in the last decade. Will it reverse? If so, will our portfolio reflect the change?
As DWM builds the equity portion of a portfolio, we consider qualitative factors such as industry/company tailwinds and quantitative factors such as valuation. DWM prefers not to focus on one specific factor such as value. For this reason we tend to have a more balanced type of strategy where we hold growth as well as value positions. In this way, we develop portfolios that are designed for the long-term to take advantage of both value and growth appreciation.
11. What are your thoughts about investing in crypto ETF's for the long-term if we are willing to take the risk of this asset class? There has been a large drop in prices of these funds over the last year so is now a good time to buy? Also, why does the US Govt. only allow these funds to invest in crytpo futures and not the currency directly?
We have concerns over cryptocurrency’s unexplained volatility sometimes involving massive price swings on negative headlines occurring during off hours. Buying cryptocurrency directly carries more risks than holding it through more diversified methods like an ETF. We just can't fundamentally value these assets and as a fiduciary feel uncomfortable exposing portfolios to this type of risk.
12. What is your opinion on owning precious metals?
Included in commodities, precious metals are sometimes considered good portfolio diversifiers and inflation hedges. However, these relationships haven’t necessarily held up over the years. These assets don’t necessarily pay dividends. They are often impacted by the U.S. Dollar and exchange rates. Some commodities represent sunset industries that will eventually be replaced by newer technologies that are more environmentally friendly.
As always, if you have other questions please do let us know.
Fundamental Investing: Method investors use to analyze the benefits and risks associated with long-term investments. The goal of fundamental analysis is to come up with a fair value of a company by evaluating all aspects of the business, along with the industry, the market as a whole, and the domestic and global environment. Fundamental analysis is the process of measuring a security's intrinsic value.
A recession is a period of declining economic performance across an entire economy that lasts for several months.
Bear markets occur when prices in a market decline by more than 20%, often accompanied by negative investor sentiment and declining economic prospects. Bear markets can be cyclical or longer-term. The former lasts for several weeks or a couple of months and the latter can last for several years or even decades.