Vista's Approach to Upcoming Market Changes
As you all are likely aware, there has been a significant uptick in market uncertainty over the last few months. We have been monitoring the recent volatility as well as the metrics likely to drive the market in the coming quarters. While the conflict in Ukraine is headlining the news, the primary drivers of inflation, Gross Domestic Product growth and Fed tightening, will dictate where the market goes from here. Those factors are not likely to have positive impacts in the coming months. A Quad 4 (think March 2020, December 2018) market is not good for stocks or other risk assets, and we see the likelihood of a Quad 4 market in Q2, Q3, and Q4 as 80%, 30%, and 70%, respectively. Said another way, we only see approximately 4-5% chance of avoiding a Quad 4 market between now and the end of the year.
Cause and Effect
This projection is driven by the slowing GDP and the Fed’s commitment to raise rates. Those two factors happening simultaneously have historically been very difficult for stock markets. While the Fed, of course, does not want to punish the market, it is under a great deal of pressure to deal with the elevated levels of inflation. This will be their primary focus for 2022 and we believe that will remain the case until they break something. Once that happens, we believe their approach will change and we may, in fact, see the Fed easing interest rates before the year is over. Given all of this, we have been and will continue to lessen the levels of risk in clients’ portfolios. As always, we will balance the benefits of de-risking with the negative impact of realizing capital gains.
Navigating These Challenges
The particularly challenging aspect of this cycle is the low yields available in public fixed income – yields that will eventually be better after the Fed increases – but as they increase, fixed income principal will likely deteriorate. We may hold more significant amounts of cash in clients’ portfolios over the coming months, something we don’t typically do. The current backdrop puts a greater emphasis on the alternative investments we have brought to each of you, which should drive returns uncorrelated with the public markets.
At Vista, we will continue to use a quantitative process to drive our asset allocation decisions. Leveraging a data-driven, reliable process in times of market uncertainty is the key to making it through turbulent times. As always, feel free to reach out to us with any questions. We will be reaching out to you to discuss this dynamic and the related changes it will require.
Chris Williams, President & Co-Founder