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Y H & C Investments January 2023 Update- Edition 172

 

IndexDecember 2022 Return4th Quarter

2022 Return

2022 Year Return (1/1/2022-12/31/2022) 
Dow Jones

 

-3.73%+15.39%-8.78% 
S& P 500-5.70%+7.08%-19.44% 
Nasdaq-8.68%-1.03%-33.10% 
Russell 2000-6.64%+4.38%-21.61% 
Oil+.21%+.97%+6.71% 
Gold+1.03%+9.70%-0.02% 
Silver+3.53%+27.16%+3.53% 
10 Yr. Treasuries- Yield-3.88%+38.6 Bp

1Bp=1/100%

+5.1 Bp+236.6Bp 
WSJ/US Dollar Index-.74%-7.11%+7.82% 
Bitcoin

16, 555

-2.74%-14.78%-64.27% 
Y H & C GARP Portfolio

(Returns not GIPS Certified )

-3.0%+3.4%-34.9%Data comes from Interactive Advisors
Y H & C Concentrated GARP Portfolio

(Returns not GIPS Certified)

-6.7%+1.0%-19.6%Data comes from Interactive Advisors

U.S Economic & Financial Markets Outlook-Retailers Loaded with Inventory as Markets Anticipate the Fed! (Return figures in this section come from December 30, 2022, edition of the Wall St. Journal. Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

In December, the Dow Jones Industrial Average lost 4.17%, the S&P 500 lost 5.70%, and the Nasdaq fell by 8.68%.  Interestingly, the fourth quarter offered more hope for investors as both the Dow and the S&P 500 were positive.  As for the full year, clearly surging inflation and the rapid rise of interest rates took much of the froth out of an overstimulated market.  On the economic front, the prime focus for the country’s financial leadership is the effort to reduce inflation.  Many investors believe important components of inflation, especially housing and energy, have already dropped dramatically.  With many economists predicting a recession early in 2023, spending totals don’t indicate a spending problem, yet.  Consumers are still flush as bank account balances show cash levels holding up nicely.  Some believe the next few quarters will have those cash cushions whittled down because of the imbalance between income and costs.

Traditionally, the first quarter of the year is seasonally the weakest.  On the monetary policy front, it is well baked in the cake that the Federal Reserve will use February’s Open Market meeting to raise short-term interest rates another twenty-five basis points.  After that, a pause that refreshes is the consensus view on how the Federal Reserve will approach the spring and possibly summer.  What many investors are really waiting for is for Jerome to reverse course and lower interest rates.  I believe the more probable scenario is one-and-done with a three to six-month lull of watching and waiting.

On the investment climate, by most historical metrics (absent inflation) conditions aren’t oppressive.  A 3.88% Ten- year treasury bond, $80 per barrel oil, and 6.75% mortgage rates are all manageable for businesses, with the caveat that much depends on the specific enterprise and industry.  With China taking off the wraps on its zero Covid policy, supply chain bottlenecks should begin to ease over the next few quarters.  Relatedly, energy prices could regain momentum, although continued weakness in Europe would offset the China reopening.

From an investment standpoint, most prognosticators believe the first half will be turbulent in the equity markets, with a nice recovery possible in the latter six months.  Most sentiment surveys indicate pessimism has never been higher.  It is exactly the kind of situation which is ideal for capital allocation.  Yes, there are pockets of excessive valuation, but that is always present.  With many entities down 50% or more over the last year, if now is not the time, it probably never will be.  Could markets get cheaper?  Yes.  Let the buyer beware.

Global Economic & Financial Markets Outlook-2022 Was the Year Energy Producing Countries Attracted Capital as Everything Else Was Shunned! (All country index data provided by countryeconomy.com, December 30, 2022)

The clear beneficiary of the global risk-off appetite were countries that produce and export energy.  The Russian invasion of Ukraine helped global investors realize the importance of energy security.  As a result, money flows gravitated toward Middle East producers and any country with abundant energy resources, sans Russia.  Looking forward, the dominant global themes for 2023 are the re-opening of China with the relaxation of Covid restrictions and the continuing energy challenge across the globe because of the Russia-Ukraine conflict.

In looking at China, the time horizon for economic improvement should be somewhere around the halfway point of the year.  The first quarter will be a challenge to navigate the rising number of Covid infections across the mainland.  Countries that should benefit tangentially from an improving China are large exporters of commodities and natural resources.  Neighboring countries should also see increased trade and better tourism flows.  Turning towards Europe, the European Union, and North America’s $60 per barrel price cap on Russian oil exports creates a new dynamic in global energy markets.  Russia’s largest customers, China, and India, clearly gain a negotiating advantage in securing energy supplies.  How Europe handles the next quarter of cold weather will also challenge the continent, especially on the cost side.

As for specific country results are concerned, Oman (+17.63%), Kuwait (+6.24%), the United Arab Emirates (+20.30%), Jordan (+18.08%), and Norway (-1.03%), highlight the energy country strength.  A nice standout down in South America is Chile, whose free market and private retirement system stand out even with a newly elected Socialist leader.  Chile was up 22.38% in 2022 as investors realized the free-market system remains solidly in place.

The Art of Contrarian Thinking-2022 Emphasized Why Risk vs Reward Remains at the Center of the Investment Question! (YH & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

2022 was a year when investors in the major asset classes of stocks and bonds experienced losses they did not imagine.  In contrast to zero percent interest rates, a 3.8% Ten-year treasury, and 4.25% two-year note compressed both bond prices and multiples on stocks.  Froth has been wiped from assets that probably never should have been extremely priced in the first place.  All it took was inflation and appropriate monetary policy, which was clearly very late in addressing the underlying problem.  Now, the concept of risk is at the top of investors’ minds.  So much so that sentiment has been negative for twelve months in a row, the longest-ever recorded reading.  Interestingly, the persistent selling may be the best thing that could have happened for an equity market that clearly was structurally imbalanced.

For many years, large technology leaders constituted most of the value in equity markets.  The tech leaders’ loss of value should now help capital flow to many other areas which were badly neglected, especially energy.  It was too easy to just buy Amazon or Microsoft and earn excessive returns.  The same thing holds true for owning large indexes in a passive vehicle.  It is only appropriate investors are now faced with the crucial question of evaluating risk versus reward.  It remains the central issue of every investment decision.

Y H & C Investments- January Update

December is always an interesting time in the financial markets; the same was true for my company.  We had a buyout finally close, and our investors were able to gain liquidity from the deal.  Over the last decade and longer, investors have benefited from the urge to merge, and thankfully we have as well.  Hopefully, 2023 will be a better year for merger and acquisition activity.

In looking at the year, we did not anticipate the dramatic selloff in technology would be as severe as it turned out to be, which was an unforced error.   On the positive side, our exposure to energy served us well, and taking advantage of some unique real estate opportunities should be beneficial for many years.  Finally, the year highlighted why management quality and integrity are crucial and doing due diligence on every aspect of a potential investment needs to be part of a well-thought-out investment process.

Thanks for reading the newsletter this month, and if you think it is worthy, recommending it to a friend or family member would be greatly appreciated.

(Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

 

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