“There is no instance of a nation benefitting from prolonged warfare.” --Sun Tzu Contrary to the Russian ceasefire, the invasion of Ukraine shows little signs of slowing, and although consumers are feeling the impact of inflation at the gas pump, this pales in comparison to the impact of European nations. As global central banks follow the Feds lead of combating inflation with a limited toolkit, this balancing act may drive the US economy into a recession. In this month’s issue of The Samra Report we focus on policy mistakes with regards to inflation and our plan to hedge against volatility. As we close out the first quarter, the media has been quick to plant the seed of concern around inflation. With headlines from the Wall St. Journal reading “U.S. Inflation Rises to 40-Year Peak in February by Fed’s Preferred Measure.” At Samra Wealth Management we believe core Personal Consumption Expenditures (PCE), inflation excluding volatile food and energy, may have already peaked. Investors with a foundational understanding of economics grasp that in the short-term this trend is transitory, caused less by economic growth or expansion of the money supply, and more correlated towards supply-chain shortages driving up prices. Investors have reason to be confused, as hiking rates will not solve the supply-chain dilemma. According to Goldman Sachs there are two major growth risks against the backdrop of alarmingly high inflation: (1) the prospect of a policy mistake as the Fed embarks on a tightening cycle to rein in inflation, and whether the Fed will be able to pull off a soft landing in a challenging macro environment. (2) The prospect that the Russian-Ukraine conflict deals a crippling economic blow to Europe, given Europe’s dependency on Russian energy. In our March issue of The Samra Report, we recommended a systematic rotation out of treasuries into technology, increased exposure towards energy, real estate and precious metals, and an emphasis on investing in US Stocks. With US bond funds experiencing large outflows the week of March 9th, in the amount of $7.8 billion with $4.49 billion in purchases of equity funds, institutional investors recognize the negative real returns, when factoring in inflation and are opting towards riskier assets. Our recommendation is to invest in quality companies and hold throughout the volatile market cycle, and do not attempt to time the market. Investors may find themselves confused, as many of the mega-cap technology companies are trading far below their recent all-time highs. Investors should understand that select equities may be trading below all-time highs, however, this does not place them in the category of value. At Samra Wealth Management we recommend investors look towards quality, and our sector rotation strategy has seen little change, weighted highest towards Technology, Healthcare, Financials, industrials and select consumer discretionary stocks. With the volatility in energy prices, energy has become a tactical component as revenues of energy companies are strongly correlated to their underlying commodities. Furthermore, we expect little hesitation from Congress approving additional funds for defense and expect defense contractors and cybersecurity firms to benefit in the near-term. Conservative investors, those invested in treasuries may continue to see their portfolios shed value throughout the remainder of the year. With the Federal Reserve Chairman, Jerome Powell, stating the US economy has exhibited resilience, signaling further rate hikes. We believe the Fed’s approach to monetary policy is too little, too late, and an attempt to play catch-up could send the US economy into a recession, an issue that could negatively impact the Biden administration’s chances for a second term. At Samra Wealth Management, we believe it is unlikely President Biden can secure a second term in office without some form of the Build Back America bill, and a comprehensive immigration policy to help alleviate the labor shortage. Disclosures
This material is provided as a courtesy and for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results.
Nasdaq is a global electronic marketplace for buying and selling securities. Originally an acronym for "National Association of Securities Dealers Automated Quotations"—it was a subsidiary of the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA). Indexes are unmanaged and do not incur management fees, costs or expenses. It is not possible to invest directly in an index.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Investing involves risk including loss of principal. Investment advisory services offered through Samra Wealth Management, a Member of Advisory Services Network, LLC. References Edelberg, W., 2022. What does current inflation tell us about the future? . [online] Brookings. Available at: <https://www.brookings.edu/blog/up-front/2021/11/16/what-does-current-inflation-tell-us-about-the-future/> [Accessed 31 March 2022]. Guilford, G., 2022. U.S. bond funds see large outflows in the week to March 9 . [online] Reuters. Available at: <https://www.reuters.com/business/finance/us-bond-funds-see-large-outflows-week-march-9-2022-03-11/> [Accessed 31 March 2022]. Guilford, G., 2022. U.S. bond funds see large outflows in the week to March 9 . [online] Reuters. Available at: <https://www.wsj.com/articles/annual-inflation-measure-accelerates-to-6-4-highest-since-1982-by-feds-preferred-measure-11648733717?mod=pls_whats_news_us_business_f> [Accessed 31 March 2022]. Mankiw, G., Ball, L. and Romer, D., 2022. The New Keynesian Economics and the Output- Inflation Trade-off . [online] Brookings.edu. Available at: <https://www.brookings.edu/wp-content/uploads/1988/01/1988a_bpea_ball_mankiw_romer_akerlof_rose_yellen.pdf> [Accessed 31 March 2022]. Rosengren, E. and Hildebrand, P., 2022. Top of Mind: Stagflation Risk . [online] Goldman Sachs. Available at: <https://www.goldmansachs.com/insights/pages/gs-research/top-of-mind-stagflation-risk/report.pdf> [Accessed 31 March 2022]. Samra, I. and Chawla, P., 2022. The Samra Report" 2022 The Year Ahead . [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/2022-the-year-ahead-post-fed-meeting> [Accessed 31 March 2022]. Seddon, M., 2022. Russia no longer requesting Ukraine be ‘denazified’ as part of ceasefire talks . [online] Ft.com. Available at: <https://www.ft.com/content/7f14efe8-2f4c-47a2-aa6b-9a755a39b626> [Accessed 31 March 2022]. The Economist. 2022. The Biden administration’s defence-spending proposal is a muddle . [online] Available at: <https://www.economist.com/united-states/2022/04/02/the-biden-administrations-defence-spending-proposal-is-a-muddle> [Accessed 1 April 2022]. Wittenstein, J., 2022. Meta Trades Like Value Stock After $500 Billion Rout . [online] Bloomberg.com. Available at: <https://www.bloomberg.com/news/articles/2022-03-24/meta-trades-like-value-stock-after-500-billion-rout-tech-watch> [Accessed 31 March 2022]. Woodard, J. and Deverey, J., 2022. The RIC Report: Peace through strength . [online] ML.com. Available at: <https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2Fnet%2Futil%2FGetPdfFile%3Fdockey%3D6208-12389551-2%26segment%3DDIRECT> [Accessed 31 March 2022].