The Pacific Financial Group’s Asset Allocation Committee features a group of our partners and strategists. Each shared their viewpoints and outlook on the market and their strategies.
- Continued Fed tapering and rate hikes are expected in 2022 in response to growing inflation readings over the latter half of 2021.
- Volatility in equity markets is expected to continue into 2022.
- Investments should be leaning towards domestic or developed markets instead of emerging markets, and should be cautious towards duration investments, heading into the new year.
Sharika Cabrera, CIMA®, Executive Director, Investment Specialist
JPMorgan continues to expect above-trend global growth in 2022, with further upside earnings and a positive outlook for markets. The U.S. consumer is strong, supported by healthy balance sheets, and is matched with ample liquidity and strong capital investment spending for businesses. JPM remains constructive on their economic outlook.
JPMorgan closed 2021 with an overweight to equities vs fixed income, particularly to U.S. stocks. While their equity overweight continues to display a cyclical tilt, they have recently moderated the exposure in favor of quality as the U.S. moves deeper into mid-cycle. U.S. large-cap stocks have had an exceptional year, owed to the market’s sustained earnings growth and limited valuation retracement, and remain attractive. Globally, mid-to-high single-digit equity returns seem a reasonable assumption and supports their stance to overweight equities. European markets, in particular, are attractive due to the continued strength in earnings revisions and attractive valuations when compared to the U.S. It is too early, however, to make a big shift back into the emerging markets stocks, and JPMorgan maintains their neutral position across their portfolios.
While financial conditions will likely remain easy for some time, JPMorgan expects monetary policy to begin to normalize in the coming months on the back of above-trend, global growth and rising inflation. This backdrop should lead to higher interest rates, prompting an underweight to duration. While credit does not have the upside gearing that equities offer, they believe that the carry pickup is attractive and that defaults will remain extremely low in the coming year. Ultimately, JPMorgan remains overweight to equities, and underweight to duration with a preference for extended credit, namely high-yield and securitized credit.
Kyan Nafissi, CFA, Investment Director
While the U.S. economy is still in mid-cycle, Fidelity continues to see a rising probability of a late-cycle shift driven by a tightening labor market, rising inflationary pressures, and signs of peaking economic growth. There is still available runway for a longer mid-cycle expansion, but Fidelity is monitoring risks that have contributed to recent market volatility. These risks include signs of peaking growth and sentiment in the U.S. and rising inflationary pressures, likely to lead towards fiscal and monetary tightening. Nonetheless, fundamentals of the U.S. economy and activity levels remain strong. Consumers have solid balance sheets, banks are well capitalized and have lending capacity, and corporations have seen faster-than-typical earnings recoveries.
Inflation rates should moderate from high levels, but inflationary pressure may prove more persistent than expected. Currently, inflation forecasts remain higher than breakeven rates. Fidelity’s business cycle model picked up on rising late-cycle signals, primarily due to tightening labor market and inflationary pressures. Robust consumer sentiment, increasing inflation expectations, and a higher probability of being in late-cycle partially offset the disinflationary contribution of the improving supply chain environment. The composition of inflation continues to shift into more persistent categories (necessities including housing and food and wages), increasing the likelihood of more sustained inflation.
During the quarter, the portfolio gained exposure to the energy and utility sectors, and increased existing holdings in materials and healthcare. It remains overweight to industrials, as industrials have performed well in mid-cycle environments. Exposure has been reduced in Technology and consumer discretionary sectors.
Michael Krause, CFA, Partner
Counterpoint manages a high-yield, bond timing strategy within the PFG Tactical Income fund. They are a quantitative boutique manager, utilizing both high-yield corporates and high-yield municipal bonds. Their Tactical Income strategy, positioned in a blend of low duration treasuries and entirely hedged high-yield bond positions, received a sell signal for high-yield corporates in January 2022. Their Tactical Muni strategy also received a sell signal in the same time period. The fund is positioned mostly in cash in a risk-off posture. Tactical Equity strategy has done quite well, outperforming the S&P 500 so far in January 2022. The performance differential between junk and quality names is driving the bulk of this, and they believe this will likely continue.
Meeder Investment Management
Joe Bell, CFA, CMT, CFP®, Co-Chief Investment Officer
The Fund, which utilizes their tactical allocations strategy, switched from being 71% invested in equities to 65% during the quarter. The tactical allocations strategy quantitative model compares the “reward” to the “risk” of the stock market to determine their equity allocation. While the “risk” measure was normal, the “reward” portion weakened significantly. While long-term trends are still in place for U.S. equities, there has been a significant increase in the number of individual stocks in bearish territory. In addition, valuations remain high, but above-average inflation and rising interest rates remain a concern as we turn the corner to 2022.
Meeder prefers U.S. stocks, as opposed to international, ex-U.S. stocks, and emerging markets. They remain primarily overweight to healthcare, information technology, and energy, while being underweight to consumer staples and industrials.
Justin Blesy, CFA, Senior Vice President, Asset Allocation Strategist
The fourth quarter was interesting, and likely a precursor of things to come. Markets experienced a bit of a whipsaw as investors digested the spread of the new Omicron variant and its impact on the recovery. This was accompanied by the Fed’s announcement to expedite their tapering and an earlier than expected start to rate hikes, both in reaction to persistently high levels of inflation. Initial reactions to both events led to a risk-off market and rising yields at the end of November, only to reverse in December as the severity of Omicron was found to be more modest than previous variants, and the market digested the Fed’s more hawkish tone in stride. Given multiple continuing risks on the horizon, PIMCO continues to expect the bouts of volatility seen in 4Q21 to continue in 2022.
The US economy has transitioned quickly from an early-cycle recovery to a mid-cycle expansion, and now appears to be progressing towards late-cycle dynamics. The unemployment rate of 3.9% is now under the Fed’s long run estimate of full employment, and global growth is moderating from its double-digit pace coming out of the recovery. While slowing, PIMCO still expect growth to be positive in the 3-4% range globally for 2022. Both core and headline CPI remain elevated from pre-pandemic levels due to supply bottlenecks, wage growth, and some other key sub-components of inflation. However, PIMCO’s base case is that inflation will moderate over the coming quarters as pandemic-related product market bottlenecks fade, the Fed begins to raise rates in part to help tame inflation and labor force participation will continue to increase as challenges caused by COVID wanes.
The low unemployment and spikes in inflation has spurred the Fed into action much sooner than the market anticipated. In line with November’s announcement, 3-4 rate hikes now seem likely in 2022, with more to come in 2023 and 2024. Purchases of Treasuries and MBS are likely to stop by March, and the Fed may make their first rate hike around then, possibly accompanied by some guidance on how it anticipates reducing its balance sheet. This means that PIMCO is cautious on duration and underweight in their benchmark-oriented underlying funds. In general, they are taking a higher quality and more diversified approach to credit allocations, not just in corporate credit, but also securitized credits, most notable non-agency MBS as well as emerging markets.
Janus Henderson Investors
Matt Peron, Director of Research, Portfolio Manager
Janus Henderson expects volatility in the coming months, both at the index level and especially at the factor level beneath the headline index as the market adjusts to a more hawkish Fed and the removal of monetary accommodation. These “regime changes” are typically volatile where the market will be choppy as it resets for higher rates and a new assessment of terminal Fed funds. That said, typically markets do settle into a “late-cycle” dynamic, and equity gains typically resume after that, following higher earnings into the end of the cycle. They expect this cycle to continue for a few years as, ultimately, inflation will be manageable.
Both their balanced and tactical strategies remain pro-risk, as they believe the returns from equities will outpace that from bonds for the remainder of the cycle. The expected volatility is likely too short lived to deal with tactically, but the strategy has room to add risk should a meaningful correction arise.
Eric Mueller, Director, Model Portfolio Strategist
BlackRock remains positioned as risk-on and believes equity markets are poised for growth in 2022. They continue to lean more heavily into developed markets over emerging markets stocks, though they have begun to see modest improvements in analyst estimate revisions in emerging markets which was not present throughout 2021. This is something that BlackRock will continue to monitor going forward, as trends in analyst estimate revisions have shown to be strong indicators of relative performance across regions over time.
Stephen Kolano, CFA, Chief Investment Officer
BNY Mellon breaks inflation into two categories: supply chains related and wage pressure. The supply chain pressure is anticipated to get worse before it gets any better in the first half of 2022. They expect that this pressure will start to alleviate later in the second half of 2022. Wage pressures are expected to remain persistent and result in an ongoing higher level of inflation than seen in the past. BNY continues to be positioned towards inflation/real return on a 2:1 ratio within their portfolio.
BNY has begun to pull back on their real asset positioning as high inflation expectations have been priced into markets. As a result, they expect to add weight to real return assets in the portfolio, but retain an overall preference for inflation/real return over deflation/duration. They also continue to like floating rate credits, as they have not yet seen any signs of disturbance in the credit markets and spreads remain compressed but calm. At this point, credit markets aren’t seeing the volatility being seen in the equity markets. This indicates that the equity market volatility is more of a reflection of repricing of higher interest rates and potentially reduced earnings expectations on the back of cost pressures as a consistent theme in management calls from earnings season.
Capital Group – American Funds
Stanley Moy, CFA, CAIA, Multi-Asset Investment Product Manager
American Fund’s growth portfolio presented positive returns for 4Q21, even though it trailed the S&P 500. Weakness was seen in more growth-oriented sectors such as information technology, health care, and consumer discretionary. International and emerging markets equities lagged for the quarter and the year, relative to the S&P 500. Large-cap investments also outperformed small-cap.
American Fund’s Conservative Income portfolio also performed well throughout the quarter, with positive absolute and relative returns for the quarter; yield and volatility were in-line with its benchmark. From an attribution perspective, exposure to inflation-linked bonds and security selection within emerging market debt was beneficial. The portfolio’s positioning aligns with its objective of delivering current income while preserving capital.
Invesco – ESG Theme
Rene Reyna, CFP®, Head of Thematic & Specialty Product Strategy, Invesco ETF and Indexed Strategies
The ESG picture remains very similar to what has been seen throughout 2021. Broader struggles in both small-cap and growth stocks have worked against clean energy since the space is full of high-growth, emergent technology names. The theme itself remains intact, with Bloomberg forecasting 15-30% growth in solar energy installations next year. Despite strong fundamentals, however, the trade is still very much dominated by technology trends. The space faces headwinds from the Omicron variant, Fed tapering, ongoing supply chain issues, and an announcement that California would lower benefits for rooftop solar.
On the positive side, the losses in clean energy in 2021 brought valuations to very manageable levels. Matched with strong fundamentals, sentiment could potentially turn positive in 2022. Lastly, the final Build Back Better legislation in the US could dramatically improve support for clean energy in the US, reflects an ongoing shift globally.
Disclosure: The information provided herein is the opinion of The Pacific Financial Group (“TPFG”), a registered investment adviser, and may change without notice at the discretion of TPFG. Market Data is as of the time period noted and TPFG makes no warranties as to the accuracy of the information or any representations made or implied at any time given. The information should not be construed or interpreted as an offer or solicitation to purchase or sell a financial instrument or service. The information is for informational purposes only and should not be relied on or deemed the provision of tax, legal, accounting, or investment advice. Past performance is not a guarantee of future results. All investments contain risks to include the total loss of invested principal. Diversification does not protect against the risk of loss. TPFG is not affiliated with any of the companies mentioned herein.
Capital Group® | American Funds® are registered marks of The Capital Group Companies, Inc. BlackRock® is a registered mark of BlackRock, Inc. MFS is a registered mark of MFS Investment Management. JPMorgan is a proprietary mark of JPMorgan Chase & Co. Fidelity Institutional AM® and the Fidelity Investments logo are registered service marks of FMR LLC. PIMCO is a proprietary mark of Pacific Investment Management Company LLC. BNY Mellon is a proprietary mark of The Bank of New York Mellon Corporation. Meeder is a proprietary mark of Meeder Investment Management. Janus Henderson Investors is a proprietary mark of Janus Henderson Group PLC. Counterpoint is a proprietary mark of Counterpoint Asset Management, LLC. In each instance, the mark is used with permission. No representation is made by The Capital Group Companies, Inc., BlackRock Inc., MFS Investment Management, JPMorgan Chase & Co., Fidelity Institutional Wealth Adviser, LLC (“FIWA”), Pacific Investment Management Company LLC, The Bank of New York Mellon Corporation, or Meeder Investment Management, or by anyone affiliated with such entities, regarding the advisability of investing in any investment product offered by Pacific Financial Group.