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Market Update: Valuations

By Deron T. McCoy, CFA®, CFP®, CAIA®
Chief Investment Officer

Inflation changes everything. So much so, that we suggested a year ago that markets might chop around throughout the back half of 2021. In short, our overstimulated economy needed to digest a fairly radical shift in monetary policy—and sure enough, the selloff continued into 2022 after the Fed’s hawkish pivot in early January.

Both U.S. and International equities are now down double digits (-17%) year-to-date, with the real pain concentrated in both Small Caps (-22%) and the Nasdaq (-27%). Bonds (-10%) are also in correction mode with U.S. Treasuries suffering the worst start to a year since the days before George Washington was president!

But selloffs in a growing economy present opportunity! Yes, the latest GDP print was indeed negative, but recall that was Real GDP (after inflation). In nominal terms, Q1 GDP growth was actually quite robust, and corporate earnings are both calculated and reported in nominal terms.

Long-time readers will recall that the primary concern for stock investors in a high inflationary environment was last year’s high Price/Earnings valuations. But with a 16% decline in the numerator (Price) alongside a 6% increase in the denominator (projected 2023 earnings have moved higher), valuations have become much more reasonable. So much so, that the back half of this year now looks to be much more promising. While stocks may continue to chop around here for a bit as investors digest and react to the latest Fed musings, the risk-to-reward ratio (potential upside versus potential downside) appears to be setting up in favor of long-term equity investors.


The information contained herein is for informational purposes only and should not be considered investment advice or a recommendation to buy, hold, or sell any types of securities. Financial markets are volatile and all types of investment vehicles, including “low-risk” strategies, involve investment risk, including the potential loss of principal. Past performance does not guarantee future results. For details on the professional designations displayed herein, including descriptions, minimum requirements, and ongoing education requirements, please visit seia.com/disclosures. Signature Estate & Investment Advisors, LLC (SEIA) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Securities offered through Royal Alliance Associates, Inc. member FINRA/SIPC. Investment advisory services offered through SEIA, 2121 Avenue of the Stars, Suite 1600, Los Angeles, CA 90067, (310) 712-2323. Royal Alliance Associates, Inc. is separately owned and other entities and/or marketing names, products, or services referenced here are independent of Royal Alliance Associates, Inc.

 


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