Historically Challenging Year
The first three quarters of 2022 have been difficult to navigate. Stocks and bonds have both experienced broadly negative returns. Even within the respective markets, almost all allocations have struggled year-to-date. The only standout allocations that have been able to notch positive returns are energy and commodities, and since mid-year, commodities have given back some of their gains.
Equity Revaluation
The equity indices below show the trend through the first three quarters. Globally, stocks have moved lower each quarter, ending September down roughly 25%. We have experienced significant rallies along the way, but each has failed as the move again turned lower.
The general reset in equity markets does point to better opportunities ahead. Current P/E ratios have begun to look reasonably attractive. We have seen this revaluation in U.S., Developed International, and Emerging Markets.
Regions/Styles: Current NTM P/E vs. 10-Year High, Low, Average
To our eye, given the tenuous geopolitical backdrop and its implications, domestic equities have an advantage over their peers in parts of the world facing greater uncertainty around security, energy, and growth.
Geopolitical Stress in the System
The uncertainty, exacerbated by the pandemic and certain countries responses to it, have fueled a deglobalization movement. While securing supply chains was perhaps the initial driver of the movement, the impetus has broadened. The U.S. government has begun to encourage re-shoring or friend-shoring, bringing supply chains back to the U.S., or at a minimum, to countries that are allies of the U.S. This push is likely to benefit companies whose earnings are domestically focused, providing a tailwind for small-cap U.S. companies.
There is also a growing national security concern. We can no longer blindly depend on suppliers based within countries that seek to undermine the U.S. and its allies, to deliver the inputs that are necessary for essential infrastructure and existential defense. This can be seen in President Biden’s technological decoupling push in the export controls recently placed on semiconductor technology, attempting to limit China’s access to the most advanced chips. Use of force to reunite Taiwan and subjugate its people would likely drive a broader break between democratic nations and the Chinese Communist Party (CCP).
Timothy Calkins, CFA
Co-Chief Investment Officer
Timothy serves as a member of the Nottingham Investment Policy Committee. He brings over 22 years of investment experience to the team. Timothy is responsible for corporate and municipal credit research & trading, as well as contributing to our economic outlook and interest rate expectations. He also leads our alternative investment research and custom allocations, with a focus on private credit and liquid alternatives. Timothy’s membership and active participation with the Buffalo Angels group keep him connected to the local start-up community.
Nottingham Advisors offers both institutional and individual clients experience, sophistication, and professionalism when helping them achieve their goals. With over 40 years of serving Western New York and clients in more than 30 states, Nottingham tailors each solution to fit the specific needs of each client.
For more information about Nottingham’s offerings, visit www.nottinghamadv.flywheelstaging.com or call 716-633-3800.
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