Accretive Q1 2022 Client Letter

Dear Clients and Friends of Accretive,

At the end of the first quarter, billable assets under management at Accretive totaled approximately $243 million.  As a result, we are waiving 7.5% of our management fee for the second quarter of 2022 under our Client Alignment Program™ (CAP).

First Quarter Recap

It was a rough quarter.  The broad equity indices all experienced mid to high single digit declines.  Emerging markets were the weakest, down 7.53%, while the S&P 500 was the relative leader, off 4.60%.  

More conservative bond investments suffered a near 6% decline as interest rates rose sharply, and more risky bond investments fell more or less in tandem.  Despite the rise, credit markets have held up reasonably well with only modest pressure on spreads thus far.  

To date, the trends we experienced in the first quarter remain intact during the second quarter.  Day to day the market wrestles with inflation, the war in Ukraine, increasing Fed hawkishness, and, depending on the country, the ongoing pandemic.  The overall market environment can be described with two words: “tough times”.  

The Current Environment

The Covid pandemic, and the massive global response, have resulted in numerous disruptions in both the economy and markets.  Many of these have persisted due to waves of various variants and certain countries pursuing a “zero-Covid” policy.  We also got an exogenous source of uncertainty in the quarter, the Russia-Ukraine conflict.  The disruptions have collectively contributed to a supply shortage in many goods and commodities.  

Governments around the world stimulated their economies to weather the pandemic, and central banks stimulated markets through lower rates.  The combination of wealth effects from higher asset prices and transfer payments from governments stimulated demand for goods.  The combination of increased demand and decreased supply resulted in higher prices.  

The phrase “fog of war” is an expression that could be applied to markets these days.  The US Federal Reserve began a tightening cycle in March and plans to aggressively address the inflation pressures through interest rate hikes and reducing the size of its balance sheet.  In response, or perhaps in anticipation, the yield curve has been moving upwards.  We also note that fiscal support from the US Federal government has been waning and the appetite for more stimulus today seems non-existent, particularly considering the inflation risks it could create.  

The Fed seems credible in its desire to combat inflation and appears willing to do what it takes up until a point.  With that said, it is important to note that their tools primarily address demand, and many issues are supply related.  Usually, capitalism is pretty good at dealing with supply-side issues, but these remain unusual times.  It seems reasonable to expect demand to wane some due to high prices and a tighter Fed, and for supply to improve over time.  However, absent an economic bust, we would expect some markets where supply is dictated more by social policy than the free market to remain tighter over the long run.  Examples of those markets are housing, energy, and possibly labor.

Right now, there are a lot of mixed signals in markets.  The yield curve has steepened, but the back end of the curve is flatter.  Bonds have sold off, but stocks that we would consider “bond proxies” have done well.  The interest rate environment is improving, but rate-sensitive financials have fared poorly.  The Fed is getting increasingly hawkish, but gold is one of the few assets that have appreciated in value.  

It is a challenging environment, and there’s a lot of noise.  The noise tends to extrapolate the present far out into the future, and this is something we try to avoid.  Paying too much attention to noise increases the risk of short-termism and may jeopardize the achievement of long-term goals.

When we make investment decisions, we do so with a long-term focus.  While the near-term outlook is difficult and the crystal ball is cloudy, as is often the case, we remain modestly optimistic on the long-term.  While the long-term view may change, introducing more short-term decisions increases the risk of making a mistake.  Market timing is not our forte and sometimes the right thing to do is wait it all out.    

Accretive’s Portfolios

Overall, our allocation strategies were reflective of the broader markets.  Conservative and aggressive portfolios fell by similar amounts, as it was an equally difficult quarter for both equities and fixed income.  

In our individual equity portfolios, we feel good about the quarter we had in the equity income portfolio.  We felt less good about our equity growth strategy, but growth stocks in general have been more difficult to own lately.  However, we made a handful of changes to that portfolio in the quarter that we believe should better position it going forward.  

Given the environment, there will be some incremental activity from tax loss selling throughout the year.  We began to do some of this in April but would expect some more over the coming weeks and months.  With tax loss selling, our normal goal is to maintain an economically similar position while generating a tax-asset for clients.  

Concluding Thoughts

The market environment has gotten more and more challenging over the past couple of quarters.  To a certain extent, it is always challenging, but there are times when it is more apparent than others.  We like to remind ourselves that the future is uncertain; it is always a difficult time to invest.

As always, we appreciate the trust and confidence our clients have in us. If you have any questions or concerns, please feel free to contact us.  We would welcome hearing from you.

Sincerely,

Gary C. Ribe, CFA, CFP®

Chief Investment Officer, Managing Partner

gary@accretivewealthpartners.com

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