Let’s start with Technology stocks, they’ve have had a rough start to 2022. Seen as sensitive to rising rates, investors are worried about higher inflation and expectations of tighter monetary policy from the US Federal Reserve that seems strongly committed to starting quantitative tightening in 2022, and, more recently, a serious spike in bond yields. The yield on the benchmark 10-year U.S. Treasury note is at its highest level since January 2020, recently touching 1.84% after beginning the year at 1.53%.
The U.S. stock market is down from it’s high in December 2021 against a backdrop of inflation that has surged to an almost 40-year high. The U.S. consumer-price index rose in December 2021 at the fastest annual rate since 1982. Investors are getting concerned about just how early, and fast, the Fed will raise interest rates. Markets have priced in three rate increases in 2022, with the first in March, but noise is growing that more or bigger increases may be on the horizon and this is unsettling investors.
None of this is good for stocks, especially tech stocks. The valuations of many high-growth technology companies bank on profits years into the future, and increased Bond yields tend to discount the present value of future cash. The steady rise in the 10-year yield since the beginning of 2022 has resulted in a decline for tech.
So what’s going on with FANG stocks? For those who may be wondering what stocks have got to do with vampires … FANG is the acronym given to a group of high performing technology stocks that include Facebook, Amazon, Netflix, and Google. Apple was later added into the mix, forming FAANGs! In all there are around 8 stocks that collectively represent 27% of the US S&P 500 index’s market capitalization. In 2021 the S&P 500 produced a total return of 28.7%, but even after excluding the group of eight stocks, returns still would have been 24.9%, according to Goldman Sachs. The takeaway from this is to understand that market growth has not been driven solely by a handful of tech stocks, despite their large weighting in the index.
Look at both the S&P 500 Chart above and the FTSE 100 Chart below. Both show the last 5 years in the markets. let’s not forget the sharp decline we saw worldwide on 23 March 2020 when the UK went into lockdown. If you ever needed proof to have the courage to buy in a dip look at the growth since then, particularly in America!
Diversification, time and patience!
For some time now we have positioned our portfolios with a global stance. Initially due to the uncertainty caused by Brexit, our preference has been to include underlying investments that are unlikely to be affected by Brexit. Global investment funds offer the opportunity to diversify our portfolios, using multi asset funds to provide stability whilst looking for outperformance from tactical equity holdings. This positioning has served us well through Brexit and the Covid Pandemic, and whilst we continue to have a keen eye on ‘systematic risk’, we continue to see good growth from many of our underlying investments. Diversification, time and patience is key!
The markets have priced in at least three US interest rate hikes this year, but in the event of a global disruption, including a resurgent pandemic, rates could be raised at a slower pace or even not at all. Policymakers do not want to send the world into recession, so although we may be in for a bumpy ride in 2022, careful timing of rate rises will reduce the risk of entering recession.
Goldman expects global growth to be 4.5% this year, which is “well above trend,” according to their latest report. The U.S. economy should expand 3.9% in 2022, with unemployment falling to 3.1% by the end of the year, the report shows.
Supply-chain bottlenecks have also stoked inflation in the pandemic, but this should ease this year as companies move supply chains out of China to other parts of the world, something that started even before the pandemic, with some of it onshoring back into the U.S. or moving to Mexico.
Although we’ve had a turbulent start to the year, we believe that US stocks offer great potential for growth, even though valuations are historically high. Stock valuations alone aren’t a reliable signal to get out of equities. Investors risk missing out on big returns by getting out of the market due to concerns over high stock valuations.
A more balanced approach will offer better results to investors, ensuring portfolios are well diversified will offer the best protection from individual stock risk and the best potential for long term growth.
If you are wondering about your investments and would like a qualified investment and risk specialist to review them, or would like to review your whole financial structure and consider alternatives to make sure that you are set up in the most tax efficient way please contact admin@speedfinancialsolutions.com
Speed Financial Solutions are a highly qualified financial services provider looking after clients throughout Spain and the UK. We provide a discreet and comprehensive service to individuals, and our service is tailored to suit your needs taking advantage of tactical opportunities as they arise in respect of your pension planning. We seek innovative solutions for our clients and employ our skills, based on many years of experience, to apply tax legislation to your advantage. Our relationships are built on trust and mutual respect. We are ready to answer your questions, giving you the confidence you want when dealing with a sensitive issue such as discussing your pensions, investments and savings.
Our Principal, Andrea Speed, is a qualified Discretionary Investment Manager specialising in Investment and Risk, Taxation and Trusts, and a qualified Pension Specialist. Andrea is also a Fellow of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.
Fellowship is the highest qualification awarded by the CII (Level 7) and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels. Along with a Fellowship, Andrea is a CII Chartered Financial Planner.
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This communication is for information purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
Andrea J Speed FPFS (DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
1 February 2022