Review & Outlook

During the quarter, the speed and magnitude with which narratives have shifted in both Bond and Stock markets since year end has been remarkable. Growth stocks went from a highly prized treasure to a dispensable asset. As a result, our stocks fell on average 12% as investors rotated toward lower quality cyclical and energy related sectors. In our view, the market’s reaction to rising interest rates and commodity prices have ignored the attractive relative fundamentals and prospects, both of which remain far stronger for our Quality Growth stock holdings.

With this trend in place, our activity for the period focused on raising our Equity cash reserve target from 10% at the beginning of the year to 25%, taking advantage of higher rates in fixed income and reducing risk in your portfolio. We expect to reinvest your cash reserves over the next few quarters as the market settles in, and, in our view, rotates back towards Quality Growth stocks and bonds at higher yields.

You may recall that we faced a similarly tough environment in the first quarter of 2021, only to end the year roughly even with major indices. But this year will be more complicated, with rising interest rates, a slowing post-Covid recovery and higher commodity costs all weighing on future growth prospects and equity valuations. In short, volatility is here to stay, but it should provide us with opportunities as earnings continue to grow amidst a relatively strong economic background.

Looking ahead, we are staying open-minded as the narrative continues to shift, and will be focusing on the following key themes:

• Our top holdings are in well-established profit machines, unlike the “technology bubble” of the late 1990s.
• Today’s “frothy” behavior is largely confined to alternative markets (Cryptocurrency, SPACs, venture capital, et. al).
• Constrained housing supply and higher rates will hamper single-family home sales in 2022, and thus durable goods demand.
• Labor markets have fully recovered to pre-Covid levels and wage growth is strong. With strong consumer demand, unionization is succeeding (Amazon, Starbucks) and employee benefits are surging (Walmart).
• Corporations are starting to re-orient from the long dominant shareholder first objective and increasingly towards the multi-stakeholder milieu of the late 1970s.

We see our investment prospects for the balance of the year driven by the following:

• Short of a recession, inflation will continue – higher than the Fed’s 2% goal but less than present levels. Recalibrating portfolios on this basis will evolve over time.
• We are biased toward shorter maturities in Fixed Income, with the view that the current cycle of rising rates will likely run 18-24 months.
• Green energy and Technology will continue to offer superior returns and investment opportunities, as global economies transition out of oil and gas.
• While we have not completely written off the oil industry, we believe it offers limited opportunities as most stocks in the sector do not fit our typical investment criteria.

Overall, we believe that sticking with highly profitable companies with strong balance sheets to withstand market volatility will prove to be a winning strategy over the coming quarters and years, despite their current woes. As the Federal Reserve begins its process of pumping the brakes on the economy, our Quality Growth stocks should fare better than the alternatives.

As always, feel free give us a call to discuss your investment progress or any questions you may have regarding our outlook.

Warmest Regards,

James W. Mersereau, CFA
President

Daniel A. Kane, CFA
Managing Director

Stephen F. Knapp, CFA
Director of Research and Quantitative Strategies