ABL Money Management 4th Qtr 2022

After one of the worst years in history for bond and stock investors, we still expect a ceiling on stock valuations, and have gone from avoid to a neutral stance on bonds.  This is what we stated in our year-end report exactly one year ago:

“These macro results corresponded with our dynamic pivot over the past two years to own real assets and to avoid (or minimize exposure) to bonds, particularly those long-term fixed income type investments.  Investors that continued with a 60:40 stocks to bonds allocation were once again disappointed with the bond component.  More importantly, as interest rates rise the negative impact on bonds will only become more significant.”                            (1/3/2022)

Part of our negative thesis on bonds over the past two years was not only the historically low yields at the time on the cusp of a rising interest rate environment, but also our anticipation of the negative effects of inflation.  We stated our concerns on bonds and the prospect of rising inflation in our 1st quarter 2021 report:

”Many investors have yet to recognize the seeds of inflation that are already upon us. Official government inflation numbers do not include food or energy. In addition, government economists consider homes an asset—not a good or service to be consumed—so home prices are not factored into inflation data. Therefore, three of the key areas that are already soaring in price, that directly affect all Americans, are not even considered in the official inflation numbers.The truth is that grocery prices are at seven-year highs, with the CRB Foodstuff index up 15% this year alone, while the prices of existing homes surged 17% last month, compared to a year ago, the fastest pace ever recorded. Investors not factoring rising inflation into their investment equations are making what will be a very costly mistake.

As we review the events over the first 100 days of the Biden administration, our strategy to lessen exposure in paper assets and emphasize exposure into real assets that offer inflation protection is confirmed.  It is time to plan portfolios and your retirement for inflation, higher taxes and eventually another rise in interest rates.  One of our best media interviews from last August was to make sure investors understand the risk in the bond market – particularly long-term treasuries.  At that time the 10-year was at a record low of 52 bps, since then the 10-year treasury yield has tripled to 1.56%.  It is no wonder in the face of all of this investor euphoria the only investment category down YTD is in the fixed income arena.  In fact, the first quarter of 2021 was the worst overall performance in any quarter for bonds in over 40 years.”                                     4/3/2021

Even with a significant markdown in stock valuations, we still see many challenges, along with only very select opportunities currently, heading into 2023.  It is meaningful in this environment that one of the stocks we feel most comfortable in accumulating of late is Verizon Corp. (VZ), yielding approximately 7.1% and trading in the mid-to-upper thirties, the same level as 20 years ago.  Investors should expect a challenging environment with many areas that still need to be avoided, likely making passive allocated investing and 60:40 investors still somewhat disappointed.