From the Portfolio Management Team
Market recap: Q1 2022
The first quarter of 2022 was an active and difficult one in many regards. Volatility returned to the financial markets, with January seeing a significant downturn that spilled into February before markets staged a comeback in March. Between January 1 and March 31, the S&P 500 was down 4.6% and the Nasdaq down 9%, although the ride throughout the three months was filled with hefty swings up and down, often times in the same day.
For the quarter, only two out of the 11 S&P sectors ended in the black: energy and utilities. Energy catapulted higher on the fear of geopolitical tensions and the possibility of disrupted and reduced supplies—specifically, the consequences of a Russian invasion of Ukraine.
Inflation remained elevated, which also weighed on markets, along with the corresponding fear of how the Federal Reserve will handle inflation.
In March, the Federal Reserve announced a 25 basis point hike of the overnight lending rate (a.k.a. the “federal funds" or "fed funds" rate), the first such increase in three years.
Yields on fixed income rallied, meaning that the resale value of existing bonds went down—i.e., bonds performed poorly as rates rose, and the longer the term of the bonds, the worse the performance. Worth noting, our bond portfolios are very short in duration given our viewpoint that holding longer-term bonds in an extremely low interest rate environment is too risky (resale value) for the reward (interest) provided.
Russia & Ukraine
As we noted in our last written update, Russia invaded Ukraine on February 24. To this day, Russia maintains that it is conducting a “special military operation” to “demilitarize” and “denazify” Ukraine. Just prior to and shortly after February 24, most strategists expected the invasion/operation to be swift, as Russia’s military capacity far exceeds Ukraine’s. What most didn’t expect was the resolve of Ukrainians to defend their land and freedom as well as logistical errors on the part of the Russian military, let alone continued civilian attacks and a spiraling segregation of Russia from the developed world.
The images, videos, and stories we’ve seen from Ukraine in the last 6 weeks defy our capacity to put into words. They are emotion-stirring to say the least. But, as stewards of client money, we continue to try to navigate the markets with the knowledge that markets are generally focused on future profit-making, not on morality or emotions.
Looking forward
As the war continues, and as we put the human suffering aside to focus on our jobs, we see continued risks regarding inflation domestically and abroad, war spillover effects into Europe and beyond, heightened geopolitical uncertainties, the potential for a continued theme of reduced globalization, recurring COVID-related shutdowns (such as what we're currently seeing in China), disrupted supply chains, and a challenged labor market—and the effects all of these risks can have on each other.
We continue to believe that the Federal Reserve has a noteworthy challenge in trying to curb inflation without stifling the economy. Several members of the Fed have recently announced that inflation is their primary concern, and we believe the Fed as a whole is turning more hawkish as it focuses on cooling inflation that is remaining north of 7% (an inflation number not seen in 4+ decades). We expect a 50 basis point increase in the fed funds rate at next month’s FOMC meeting with potentially another 50 basis point rate hike in June (although we note much can happen between now and then). We also expect to hear increased talk of the Fed reducing its balance sheet, also known as tapering or quantitative tightening; regardless of the term used, this is another tool the Fed uses to temper an inflating economy.
Talks of a potential recession have emerged, primarily due to concern that the Federal Reserve will quell the economy in its mandate to reign in inflation. Yet many economists expect the government intervention that has successfully navigated trying times in the past to be successful yet again.
While keeping an intent eye on the risks, we note that economic indicators remain optimistic overall. We also hold the stance that trying to time the financial markets has been the downfall of many investors. For example, those who sold out in early 2020 because they were fearful of COVID felt great pain as they were holding cash on the sidelines during the abrupt U-turn market rally that followed the initial COVID panic. Our goal is to remain alert of the current environment, the biggest risks and biggest opportunities, and to keep our client’s portfolios aligned to their individual circumstances and our outlooks, primarily focused on the long-term. With that said, we have and will likely continue to make tactical shifts in specific holdings. As you see transactions in your account(s), please do not hesitate to call us for further discussion specific to you.
Introducing a New Member of the Team
We recently hired a team of Chartered Financial Analysts® to serve as permanent members of our Investment Advisory Committee and to assist us in performing in-depth and ongoing analysis of our clients' portfolios.
Our primary point of contact on the team is Mike Rivers. Mike holds a Bachelor of Science in Space Operations from the US Air Force Academy, a Masters in Business Administration from the University of Phoenix, and the coveted Chartered Financial Analyst® (CFA®) designation. After a rewarding career as an Air Force pilot, Mike spent 20 years working as an equity analyst and portfolio manager. He now works as an independent advisor to firms such as Cerro Pacific, and we are thrilled to have him and the added resources he brings to our portfolio management team.
Quarterly Reports and Annual Compliance Notification
Please note that your quarterly portfolio reports have been uploaded to your Cerro Pacific client portal. If you don't have or don't recall your password to the client portal then please email Meredith (by clicking on her name), who will in turn send you a system-generated email to reset it.
You will also soon receive an email regarding our firm's disclosure documents. We are required to send this notification annually.
In Personal News
On a personal front, the year kicked off for Jenni with a major medical event. She underwent brain surgery at Stanford to remove a cavernous malformation—or in laymen’s terms, a tangled mess of blood vessels that were likely lurking in her brain unbeknownst to her or anyone else for years if not her entire life. She was home two days after surgery, back on the computer two weeks later and back in the office a week after that. She underwent genetic testing; we’re relieved to know that she isn’t genetically predisposed to cavernous malformations, and this was likely a one-time event with an incredibly positive outcome. After the short disruption, life is back to normal for her, her husband, and their three boys—albeit with a bit more gratitude for each day.
Brianna enjoyed a week away from the office in March, vacationing with her husband and 17-month-old daughter in Kauai. The baby swimsuit with sunhat photos are too cute for words! Shortly after returning home from vacation, the Fergusons welcomed the first Dexter calves born on their Creston ranch. We hear several Nigerian dwarf goats will join the ranch soon (and we can't wait for the photos of their tiny girl with the tiny goats!).
Now that spring is in full swing, Meredith and her husband, Gil (or Señor Braga as his students call him) have been DJ-ing at Saints Barrel Wine Bar, a lively new wine bar in downtown SLO. She is also looking forward to enjoying a relaxing, extended Easter weekend in Portland and Seattle.
In a few weeks, Lyle will spend several days on a 150-mile mountain bike ride and campout through Utah with a group of friends.
Dan and Linda's oldest son, Colin, will graduate from Whitman College next month with a degree in Biology. Their younger son, Duncan, is running the Steeplechase for the Pomona-Pitzer Sagehens, where he currently holds the second fastest time in Division III. Dan & Linda are proud to have taught their puppy, Piper, how to retrieve the morning newspaper.
Sincerely...
Our primary mission is to help our clients achieve their financial goals while enjoying peace of mind along the journey. We don't take the mission lightly and thank you for your continued trust and business. Please contact us any time to discuss your questions, concerns, specific situation, or anything else on your mind.
Sincerely,
Cerro Pacific Wealth Advisors
This report is provided for informational purposes only, is not an offer or solicitation to buy or sell securities, and should not be relied upon to make any investment decisions. This material is not a replacement for your statement or communications with your advisory team. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal. Please contact us at 805-457-3300 at your earliest convenience with any questions regarding this report. Copyright © 2021 Cerro Pacific Wealth Advisors, All rights reserved.
