Financial Market Update: May 2, 2022 Stocks, bonds, crypto, and gold all falling in April

April was a bad month for portfolios; however, in the past week, three unbelievably bad days accounted for most of the 9% decline in the SP500. The sharp selloff was precipitated by the comments made by Federal Reserve Chairman Jay Powell about raising interest rates during a period where inflation is extremely high. Investor concerns about the Federal Reserve’s goal to increase interest rates too high and create a deep recession is believed to be the primary factor in the decline in stock prices and the rise in bond yields. The Federal Reserve controls the “Fed Funds” rate which is a short-term yield. At the beginning of 2022, investors were expecting 2%, which is considered “neutral and the long-term average rate.” Some participants on the Federal Reserve have mentioned rate increases to peak between 3% to 3.5%. More recent rumors suggest 5%.

Given the sources of inflation, if the Federal Reserve were to continue to increase interest rates, this action only be partially effective. The problem is that the primary underlying causes of inflation are shortages of commodities and labor initially the result of the pandemic and worsened due to the Russian–Ukraine war. And, yes, greed is a big issue since consumers have cash and are willing to pay more. While raising interest rates will eventually address issues of greed, it will come at a huge cost to the economy. For example, rising interest rates make the commodity shortage worse as businesses need to invest in innovative technologies to improve productivity. Higher interest rates only make capital investments more expensive, although dampening overheated spending by consumers.

With respect to client portfolios, we continue to reduce equity exposure which began in the 4th quarter of 2021. Equity holdings were holding up much better than the SP500 until last week. Earnings reports for the 1st quarter 2022 have been generally “okay.” The biggest challenge is that the companies that reported a strong percentage growth from 2021 versus 2020 is difficult to justify as a comparison measure since many people were staying home and purchasing items during 2020.

In noteworthy reports, Tesla has produced the best financial results so far. Sales, earnings, and profit margins are all positive. Unfortunately, Elon Musk’s pending acquisition of Twitter was considered an unnecessary distraction to Tesla, which led to a sharp decline in the stock price. Other good earnings reports were from Microsoft, Apple, Thermo Fisher Scientific, and Enphase. There were only two bad reports from Align Technologies and Amazon. Costs of fuel and labor are hurting Amazon and Align has raised prices too much in the United States and China is halting business. The Amazon position had already been reduced to zero and the moderate position in Align was sold. Looking forward, if the equity market declines further, there will be few survivors. When investors sell the best performers, that is a good indicator that a market bottom is approaching.

In bond portfolios, the smartest investment so far this year has been the Fidelity Conservative Bond Fund, which is invested in high quality, short-term issues. It is even for the year and should soon start yielding significantly more as the Federal Reserve raises interest rates. While this is not a long-term strategy, once yields in the bond market stop rising, we will begin to purchase corporate and municipal bonds between one to twelve years in maturity.

Gold is providing clues as to what the world economy is doing, weakening. The price of gold has peaked and is now falling sharply. Historically, gold will decline while the economy is still strong, and decline as interest rates rise. Exposure to gold in client accounts is via Newmont Mining, one of the largest gold miners worldwide.
On Wednesday, the Federal Reserve will conclude its meeting and is expected to increase Fed Funds by 0.5% to 0.75%. The real story will be the commentary towards future increases. Given the recent sharp selloff among all financial assets, a short-term rally may be possible.

For the short-term, the general investment strategy remains defensive favoring high cash balances and underweighted equity exposure to most clients’ target allocations. We will continue to favor companies with strong financial resources to manage the forthcoming challenges. Keep in mind that the three of the top ten holdings, Johnson & Johnson, Apple, and Microsoft have credit ratings of AA+ or higher. We continue to hold material positions in equities and bond while holding a significant portion of client portfolios in cash and money like investments so that we have the option to invest in longer term opportunities overtime.


Business Continuity and Succession Plan Disclosure Statement

Andrew Hill Investment Advisors, Inc. (“AHIA”) maintains a Business Continuity and Succession Plan (“BCP”) that has been developed with the goal of protecting the health and safety of our employees and maintaining continuity of service for our clients. Our Plan is designed to ensure that we are prepared to operate through significant business disruptions, so that our clients can access their accounts without significant interruption under most circumstances.
Key elements of our BCP include the following:

  • Critical data from our computer systems is backed up daily to geographically remote, secure facilities.
  • All AHIA employees can access its computer data remotely via secure connection. If AHIA’s primary network is not accessible, AHIA maintains replicas of all files and database servers in a geographically remote disaster recovery network available to all employees over a secure connection.
  • We maintain an office evacuation plan and emergency procedures in the event of a disaster affecting our primary office facilities or surrounding area.
  • We maintain an emergency contact list and procedures updated and distributed on a regular basis.

If your account requires servicing during a significant business disruption and we are unable to assist you, please call Fidelity Investments at 1-800-523-1203 and a dedicated team member will be able to assist you. It is impossible for us to anticipate every potential problem that may occur, but we believe our BCP will enable us to conduct business in the event of a variety of possible business disruptions. We review and test our BCP at least annually and it is subject to modification based on changing circumstances and assessment of need.

As a fiduciary, AHIA has certain legal obligations, including the obligation to act in client’s best interest. AHIA seeks to avoid a disruption of service to clients in the event of an unforeseen loss of key personnel, due to disability or death. To that end, AHIA has entered into a succession agreement with The Colony Group, LLC, effective May 24, 2019. AHIA can provide additional information to any current or prospective client upon request to Andrew D.W. Hill, President at 239-777-3188 or [email protected].

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Andrew Hill Investment Advisors, Inc. (“AHIA”) believes it is essential that we maintain the privacy of the nonpublic personal information provided to us and that we obtain in connection with providing our products and services to clients.  AHIA views protecting its customers’ private information as a top priority subject to the requirements of the Federal Gramm-Leach-Bliley Act.  AHIA has instituted policies and procedures to ensure that client information is kept private and secure. 

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AHIA reserves the right to change these Privacy Principles, and any of the policies or procedures described above, at any time without prior notice. However, clients will be promptly provided with a current copy of our privacy notice upon material changes or upon request.  Active clients will receive a current copy of our privacy notice at least annually. These Privacy Principles are for general guidance and do not constitute a contract or create legal rights, and do not modify or amend any agreements.   If you have questions about this privacy policy, or if you wish to amend or rescind your written instructions with us at any time, please call us at (239) 777-3188.