A Strong Start to the New Year

After a challenging year in 2022, global stock markets were strong out of the gate. In the United States, the S&P 500 was up 6.2% while the Nasdaq added 10.7% during the month of January. Over in Europe, the Euro Stoxx 600 index gained 6.7% during the month of January while one of Japan’s leading indices, the Nikkei 225, was up 4.7%. The gains for all 3 markets continued into February although a portion of these gains were reversed as markets have pulled back towards the end of the month.

One of the key questions on the minds of investors is whether the strong start to the year will be sustained and whether global equity markets have begun a new bull market. Of course the answer to this question will only be known with the benefit of hindsight. The answer is not clear cut as there are many conflicting signals in the economy which are providing lots of fodder for both the bulls and the bears. The debate for the last few months has been whether the economy is headed for a soft or a hard landing. Given the recent wave of positive economic data, some market pundits are now saying that there will be no landing at all.

The bulls are pointing to an unemployment rate of 3.4%, stronger than expected retail sales in January, and a booming services sector. When the Bureau of Labor Statistics gave its update in January, it reported that the U.S. unemployment rate fell to 3.4%. Not only was this figure below consensus at 3.6%, but it also was the lowest unemployment rate in the United States in more than 50 years. For the month of January, the Commerce Department reported that U.S. retail sales rose by 3%, which was well above the consensus estimate of 1.9%. It’s safe to say that consumers are still spending. Another data point during the month of January came from The Institute for Supply Management, which reported that the ISM Services PMI increased to 55.2. The index had fallen to 49.2 in December, which is below the threshold level of 50 which signals contraction in the economy. The rebound in U.S. services during the month of January should be viewed very favourably given that services make up more than 75% of the U.S. economy.

The bears will argue that unemployment is a lagging indicator, that consumers are simply running down the last of their excess COVID savings, and that one good month of data for the ISM Services data is not enough to say that we are out of the woods. The bears would also point to January’s inflation data, which was hotter than expected. The consumer price index (CPI), which measures a broad basket of common goods and services, rose 0.5% in January and an annualized rate of 6.4%. Both of these figures were ahead of consensus estimates of 0.4% and 6.2% respectively. Excluding food and energy, the core CPI increased 0.4% monthly and 5.6% from a year ago, which were above consensus figures of 0.3% and 5.5%.

So bringing it all together, there are many good arguments from both the bulls and the bears as to why the economy may or may not go into a recession this year. Nobody knows for certain and we will only find out with the benefit of hindsight. We don’t have a strong opinion on the outcome of the recession debate. We believe there is a decent chance that a recession might be avoided but if a recession does materialize, we believe it will be a milder garden variety type recession. Global banks have robust levels of capital so a repeat of the 2008-09 Financial Crisis seems highly unlikely. Meanwhile, corporates and consumers are less exposed to credit risk and leverage risk than they have been historically. In the United States, debt servicing ratios are near multi-decade lows and 90% of U.S. mortgages are fixed, far below levels seen during previous tightening cycles. Similar to consumers, U.S. corporates have shifted to fixed rate debt. Today over 75% of S&P 500 debt is long-term fixed versus 40% back in 2007. For all these reasons, we believe that any recession that unfolds should be a shallow one as opposed to a deep, prolonged downturn. While the recession debate between the bulls and bears continues, we are comforted by the fact that the companies we own in our portfolios are well positioned for any environment that unfolds in the months ahead.

Have a good weekend.


Fourth Quarter 2022 Global Equity and International Review

2022 was a challenging year for investors. Inflation had been percolating in the background when the year began and then the onset of the war in Ukraine served as a catalyst to drive inflation even higher. In response to inflation reaching levels not seen in 40 years, central banks in various parts of the world started hiking interest rates. Against this backdrop, both stocks and bonds lost money in 2022. It is very unusual for this to happen. Since 1926 there have only been two calendar years when stocks and bonds were both down. Those years were 1931 and 1969. According to Ned Davis, 2022 marked the first time on record that both stocks and bonds fell by more than 10%.

Has Inflation Peaked?

Inflation has been a problem for global economies throughout 2022 on the back of supply chain bottlenecks, inventory shortages, as well as rising prices for food, shelter, and wages. In response to the highest level of inflation in 40 years, central banks around the world have been raising interest rates to fight against sticky levels of inflation. For most of the year, it felt as though it would take a very long time for central banks to win their battle against inflation. More recently, we have received some signs which suggest that there might finally be some light at the end of the tunnel. The first positive signal was on November 10th when the U.S. Consumer Price Index (CPI) data was released by the Bureau of Labor Statistics. The Consumer Price Index is a broad-based index which measures the costs for a wide array of goods and services. For the month of October, the CPI index rose less than expected which provided a new sign that inflationary pressures might be starting to cool. As seen in the chart below, the index increased by 7.7% from a year ago, which was better than consensus estimate of 7.9%.

On November 23rd, a few weeks after the encouraging inflation report, the minutes from the Federal Open Market Committee stated that Federal Reserve officials expect to switch to smaller interest rate increases soon. The minutes specifically stated that a substantial majority of participants believed that a slower pace of interest rate increases would likely soon be appropriate. According to the minutes, the justification for a slower pace of rate hikes is related to the lagged effect of monetary policy in terms of its effect on economic activity. This past Wednesday, Federal Reserve Chairman Jerome Powell confirmed what had been stated in the FOMC minutes when he said that the U.S. central bank could scale back the pace of its interest rate hikes as soon as December.

Overall, we received a healthy dose of good news on the inflation front during the month of November. But then on the morning of December 2nd, the U.S. jobs data was released. Nonfarm payrolls in the U.S. grew by 263,000, which was well above the consensus estimate of 200,000. More importantly, average hourly earnings jumped 0.6% for the month, which was double the consensus estimate of 0.3%. On a year-over-year basis, wages were up 5.1%, which was also well above the consensus estimate of 4.6%. At the time of writing, stock markets were trading down on the news given that strong wage data might strengthen the case for the U.S. Federal Reserve to keep raising interest rates.

Although wages remain sticky, there are other areas of the economy that are moderating including commodities and housing. Oil prices have fallen by more than 30% from the peak reached earlier this year. Meanwhile, home sales in the United States declined for the ninth month in a row in October as higher mortgage rates have cooled the market. Pending sales have also weakened according to the Pending Home Sales Index which is a leading indicator for the housing sector compiled by the National Association of Realtors. During the month of October, the Pending Home Sales Index fell 4.6% on a month-over-month basis and declined 37% on a year-over-year basis.

Taking everything together, we believe that inflation is moderating enough such that we are likely in the late stages of the interest rate hiking cycle. If this turns out to be the case, it will have far reaching implications. First and foremost, getting closer to the end of the rate hiking cycle would increase the chances of a soft landing whereby the U.S. economy may avoid an economic recession. Second, it has significant implications for the stock market. Expectations about the possible end of the rate hike cycle will have an impact on the 10- year U.S. Treasury yield. In the last 5 weeks, the 10-year U.S. Treasury yield has fallen from its peak of 4.3% to approximately 3.6%. The 10-year U.S. Treasury yield is a key input for stock market valuation tools and the significant drop in the 10-year can help explain why the stock market has been strengthening in recent weeks. Finally, the end of the U.S. interest rate hiking cycle would have significant implications for the US dollar. The greenback and US-based investments have attracted significant flows from investors in 2022 not only because of higher yields that are available relative to other regions around the world but also due to a flight to safety given the geopolitical situation that evolved between Russia and Ukraine. Since reaching a peak in late September, the DXY has fallen by nearly 10%. The DXY is a U.S. dollar index that measures the value of the U.S. dollar relative to a basket of foreign currencies. On the day of that favourable CPI print on November 10th, the U.S. dollar suffered its largest single day decline since 2009. In previous cycles, a peak in the U.S. dollar has often been followed by stronger returns in Europe and Emerging Markets. We are encouraged by this phenomenon given that we have significant exposure to European equities in our Global and International mandates and many of the European companies we own have substantial footprints in emerging markets.

Notwithstanding the recent data on wage growth, we believe that inflation is on the cusp of reaching its peak and we believe that we will continue to see a moderation in the inflation data in the months ahead. Monetary policy always works with a lag so it takes time for interest rate hikes to impact the economy and this phenomenon plays into our thinking. Despite our view of moderating inflation, some questions remain. At the top of the list of questions; How long will it take to get inflation back towards the 2% level that the US Federal Reserve is targeting? And can the Fed reach this level without inducing an economic recession? These questions are a key source of debate in the market and there are no clear-cut answers. At this juncture, it is too early to declare victory and say that we are completely out of the woods. Despite this uncertainty, we are comforted by the fact that we own high-quality companies with significant competitive advantages, strong balance sheets, and proven management teams. Even if we face a recession, these types of companies can withstand challenging economic environments and they typically emerge stronger on the other side as they are well positioned to gain market share during economic disruptions.

Have a good weekend,


A Challenging Market Environment

Well, it seems like bad news all around as the U.S. Federal Reserve continues its fight against inflation. The 10-Year U.S. Treasury yield has recently climbed above 4%, a level that is significantly higher than anything we have seen in recent years. The economy is slowing and consumer sentiment measures are at depressed levels. Consumer sentiment indexes are leading economic indicators that measure changes in the outlook for the economy. They are based on how shoppers feel about their interest and willingness to buy things in the future. As seen in the chart below, the University of Michigan Consumer Sentiment index is near 50-year lows.

In the first half of the year, corporate earnings had held up well, but in recent weeks the cracks have started to emerge. In the most recent earnings season, management teams have become increasingly cautious and guidance has fallen short of expectations. And this is happening to large blue-chip companies across various sectors including Technology, Industrials, Consumer, and Healthcare.

When it comes to company guidance, disappointment is a problem because the attention span for investors has become shorter and shorter in recent years. Investors tend to obsess over near-term prospects whether it’s the next economic data point or the next quarter for a company. A focus on the short term leads to active trading and volatility in stock and bond markets. And that’s exactly what we are seeing today.

Inflation remains uncomfortably high and the Fed won’t stand for it so U.S. Federal Reserve Chairman Jay Powell continues to increase interest rates. The result of this is that it will continue to slow the economy. One of the unintended consequences of the rapid rise in interest rates has been the big move in the value of the U.S. dollar as seen in the chart below which shows the jump in the DXY. The DXY is also known as the U.S. Dollar Index, which is an index of the value of the US dollar relative to a basket of foreign currencies.

Significant U.S. dollar strength has negative implications for domestic U.S. companies because their exports are more expensive and therefore less attractive to foreign buyers. It’s also challenging for US-based companies which have large footprints outside of the United States as profits earned abroad in other currencies translate back to fewer dollars and therefore lower reported earnings. This has been a key factor in the recent guidance downgrades.

A strong U.S. dollar also has negative implications for countries around the world who have high levels of debt that are denominated in U.S. dollars. Furthermore, commodities are priced in U.S. dollars so the cost of consuming commodities such as energy and agriculture for countries outside of the U.S. has gone up significantly. It’s no wonder that inflation has been stubbornly high.

So, the headwinds for stocks are real……but…the value of a stock is always calculated by taking the present value of the future cash flows generated by the company. A temporary slowdown in the economy and lower earnings for a few quarters does not impair the business value of a strong company. We own several world-class leading businesses that have seen their share price decline by 30% or more. I am fairly confident that the business value for these great companies has not been impaired by 30%. In fact, many of the great businesses we own are taking actions that will increase the future value of their business.

As this bear market plays out, our companies are investing in their businesses, they are generating substantial free cash flow, and they are taking market share from weakened competitors. Some will make acquisitions and buy assets on the cheap from distressed competitors that need the money now. We are highly confident that our companies will come out on the other side even stronger when the current bear market reaches its conclusion. When we get to that point we think it’s highly likely that our companies will be more valuable, not less valuable, as today’s share prices may lead some investors to believe.

As we all know, market drawdowns are very painful while we are in the moment. But over the long history of the stock market, bear markets eventually run their course and new bull markets begin. And the gains that are generated during bull markets are significantly higher than the losses made during the bear markets as seen in the chart below.

During this period of market dislocation, we are actively searching for the babies that are being thrown out with the bath water, so to speak. Opportunities are being created and we are going to take advantage of them as they come our way.

Have a good weekend,


Third Quarter 2022 Global Equity and International Review

Market volatility remained elevated during the third quarter of 2022. After experiencing the largest first half decline since 1970, the S&P 500 started Q3 on a strong note by climbing nearly 14% during the first six weeks of the quarter. This rally created a lot of optimism for investors with market experts starting to believe that a soft landing in the economy had been achieved.
However, this optimism proved to be short lived as the S&P 500 fell by nearly 17% during the last six weeks of the quarter. The challenging market conditions during the third quarter were global in nature as equity markets throughout Europe and Asia experienced significant bouts of volatility just like the S&P 500. Market volatility during Q3 was driven by the same factors that
led to market weakness in the first half of the year. These factors include persistent inflation, tightening by central banks around the world, and the war in Ukraine.

Is This a Bear Market Rally?

Is this a bear market rally? A good case can be made that it is and an equally good case can be made that it’s not a bear market rally. What do we think? We do not have strong opinions either way. Trying to figure this one out is like trying to predict if we are going into a recession. It’s very difficult to do and we’ll only know for sure with the benefit of hindsight. Therefore, we are not trying to guess whether it is a bear market rally. Instead, we continue to own a collection of fine businesses that can thrive in an economic recovery but can also hold their own should we be headed for an economic downturn.

Let’s put the bear market rally debate aside for a moment and discuss the strong market performance of the last 2 months. Since reaching a bottom on June 16th, several equity market indices around the world have rebounded anywhere from 10-20%. Despite this powerful market rally over the last 2 months, year-to-date equity returns remain in negative territory with many global equity markets down double digits for the year-to-date period. The reasons are well known. It’s been a perfect storm with record inflation that has caused central banks to raise rates faster than expected, a conflict between Ukraine and Russia, and new outbreaks of Covid-19 that have led to lockdowns in China.

While we are never happy to see our returns in negative territory, we believe investors should keep in mind a famous quote from a legendary investor. “In the short term the stock market behaves like a voting machine, but in the long term it acts as a weighing machine”. The phrase was coined by a British economist named Benjamin Graham. He is considered the father of value investing and was a key mentor for Warren Buffett. What Graham was trying to say with this famous quote is that in the short run, the market votes on which firms are popular and sends stock prices up and down accordingly. But in the long run, the market will assess the underlying fundamentals of a company to give its true weight, or value. On this note, we believe that the underlying fundamentals for our holdings remain highly attractive.

Thus far in 2022 it’s been the energy stocks that have been popular while quality stocks have been very unpopular. We own quality companies and it’s one of the reasons why the share prices for many of our companies have been weak. However, we believe it’s important to separate share prices from fundamentals. During a period of time when the global economy was slowing and facing severe disruptions, during a time of war and soaring inflation, with Europe on the brink of a recession and the United States posting two consecutive quarters of negative GDP growth…the majority of our companies delivered stellar results. Here are the results that some of our larger holdings in our global portfolio delivered during their most recent reporting periods:

• LVMH generated revenue growth of 28% or organic sales growth of 19% in Q2 2022
• Diageo delivered 28% sales growth in the first half of calendar year 2022
• First Republic had revenue growth of 22.6% in Q2 2022
• Visa had sales growth of 19% in the April-June quarter of 2022 (their fiscal Q3 of 2022)
• Costco had sales growth of 15% in the April-June period of 2022
• Microsoft has revenue growth of 12% in the April-June quarter of 2022 (their fiscal Q4 of 2022)
• Google had sales growth of 13% in Q2 2022
• UnitedHealth Group delivered 13% revenue growth in Q2 2022
• Thermo Fisher had organic growth of 3% in Q2 2022
• S&P Global was a notable laggard with an organic sales decline of 5% during Q2 2022

Most of the above cited figures would be considered very strong results in a booming economy but to deliver these types of results in a slowing economy that is dealing with significant dislocations is truly remarkable. We continue to have high levels of conviction in the companies we own and believe that they are well positioned to compound in value in the years ahead despite what may transpire in the economy in the near term.

Have a good weekend,


Is Quality Making a Comeback?

Global equity markets have rebounded over the last several weeks. The leading indices in the U.S. are up more than 10% and several indices across Europe are up nearly 10% from the July lows. Earnings season is now in full swing and although the results have been somewhat mixed, it’s been pretty good with approximately 70% of companies having reported earnings that were above consensus expectations. As we think about the second half of this year, we expect volatility to continue given persistent inflation which has raised the probability of a recession.

One of the surprising trends thus far this year has been the significant underperformance of the Quality factor. As seen in the chart below, Quality has significantly outperformed during stock market drawdowns over the last 2 decades. In 4 of the last 5 drawdowns, the Quality factor has outperformed the MSCI All Country World Index by approximately 600 basis points or more. However, this was not the case during the first half of 2022. In fact, the Quality factor underperformed the MSCI All Country World Index by more than 400 basis points during the first half of 2022.

Source: Bloomberg

One of the reasons for the underperformance of the Quality factor is that there was a significant reset for valuations during the first half of 2022. Given their attractive characteristics (high ROE’s and stable cash flow generation), quality companies trade at higher valuations. When the 10-year U.S. Treasury Yield more than doubled from 1.5% at year-end of 2021 to nearly 3.5% during the first half of 2022, it caused a significant reset in stock market valuations. Given that high quality companies trade at higher market valuations, they were the hardest hit by this reset in valuations as investors started using higher discount rates to value companies. In addition to this valuation reset, another reason for the significant underperformance of the Quality factor has been the dominance of the Energy sector. This sector has been the best performing sector in the S&P 500 on a year-to-date basis. As seen in the chart below, Energy is not only the best performing sector, but it was the only sector that was up among the 11 sectors in the S&P 500 as of July 25th, 2022.

The Quality factor has started to improve significantly in recent weeks and that is good news for us given that our portfolios that follow our global and international strategies are largely constructed with high quality companies. We invest in quality businesses because we believe that they are more likely to create the most value for shareholders over the long term and they have typically been more resilient during periods of market adversity. Although we are disappointed that quality companies have not been as resilient in the first half of 2022, we are very encouraged to see that they have been performing much better in recent weeks. Importantly, we expect this trend to continue as we believe that investors will gravitate towards high quality businesses as they seek shelter in companies with stable free cash flow generation.

While we are very encouraged by the recent stock market rally, our portfolios continue to have a defensive tilt with significant exposure to stable sectors such as Consumer Staples and Healthcare. Given the ongoing tail risks associated with inflation and the war in Ukraine, we believe it is prudent to maintain a somewhat defensive posture. We also believe that our exposure to high quality companies will serve us well given the current market backdrop and that we own the types of companies that can weather the volatility that may lie ahead.

Have a great long weekend.


Investing for the Long Term

Year to date, stock price performance has felt extremely painful given that so much damage has been packed into a 5-month period. There’s a lot for investors to worry about these days including the highest level of inflation in 40 years, an aggressive US central bank that’s trying to tame inflation by hiking interest rates, and Russia’s invasion of Ukraine.

Taken together, these factors have created a lot of chaos in the market. The weakness is especially pronounced in the Technology sector but has also been evident in other sectors such as Consumer Discretionary, Healthcare, and Industrials. To illustrate the carnage out there, Ecommerce stocks (as measured by the ProShares Online Retail ETF) were down more than 60% from last year’s peak. Fintech stocks (as measured by the Global X FinTech ETF) fell more than 50% from last year’s peak. Looking at the NASDAQ, more than half of the companies in the index were down more than 50% from their prior peaks.

We have felt the pain in our portfolios with share prices for our companies down significantly thus far in 2022. Our global and international portfolios declined by more than 20% at the height of the recent selloff. While it’s always disappointing to see our portfolios decline in value, it seems less painful when viewed in the context of the huge gains that were made since the COVID lows in March of 2020. After all, several stock market indices in the US and around the world more than doubled in value in less than a 2-year period.

What’s more important than short term gyrations in stock prices is the long-term fundamentals for the businesses we own. On this front, we are very encouraged as we believe that the long-term fundamentals for our companies remain very attractive.

At times like this, I like to remind myself that historically the market rises about two-thirds of the time. But one-third of the time the markets go down, and sometimes the markets go down a lot. In fact, over the last 15 years the S&P 500 has fallen by approximately 20% or more on 5 different occasions. During the Financial Crisis in 2008-09, the S&P 500 experienced a peak to trough decline of more than 50%. In 2011, the S&P 500 had a drawdown of 20% during a period when the rating agencies downgraded the credit rating of the United States. Toward the end of 2018, the S&P 500 fell by approximately 20% and in early 2020 the S&P 500 fell by more than 30%. And here we go again with the latest market sell-off reaching a 20% decline albeit on an intra-day basis. Living through these periods of market turbulence is one of the most difficult parts of investing. But, if one wants to reap the rewards of long-term investing, there is no practical way to avoid these occasional stock market dislocations. The best way to compound wealth over the long-term is to invest in winning businesses and own them for the long run. Staying the course has been critical to realizing the powerful compound returns of the best companies. And investors must do this knowing that from time to time, they will experience large drawdowns.

In July 2020, Hendrick Bessembinder, a finance professor at Arizona State University, published a series of papers with an important and surprising conclusion. Even the stocks of companies that have created the most wealth for shareholders experience deep and protracted share price reversals along the way. Apple, Amazon, and Berkshire Hathaway are good examples of remarkable companies with exceptional long-term stock performance that have gone through huge drawdowns.

Of all the companies in the study, Apple created the most wealth in the decade from 2010-2019 adding $1.5 trillion of shareholder value. However, there were large retracements along the way. For example, Apple’s share price fell by 40% over 9 months in 2012. Looking back further, Apple shareholders have earned a compound annual average return of 20% since Apple’s IPO in 1980, but they have experienced drawdowns of more than 70% on three separate occasions.

Amazon is another success story and was the fourth-best performer in the Bessembinder study, with shareholder wealth growing by more than $600 billion between 2010 and 2019. But like Apple, Amazon’s stock has not been immune to large drawdowns. Although Amazon shareholders made compound annual average gains of 36% from the 1997 IPO, they also suffered through the dot-com crash of the early 2000’s when Amazon’s share price fell by a whopping 91%.

Large drawdowns also happen outside of the Technology sector. Warren Buffett’s company, Berkshire Hathaway, provides yet another example of this drawdown phenomenon. Even The Oracle of Omaha has also been unable to escape significant drawdowns. From 1980 to 2016 Berkshire Hathaway’s stock price appreciated at an average annual rate of 20%, far outpacing the 10% achieved by the S&P 500 index. Despite the massive outperformance, Berkshire’s stock pulled back by at least 30% on 4 separate occasions during that 36-year period. In one instance, Berkshire’s losses were shocking relative to what the stock market was doing. During the dot-com boom in the late 1990’s, Berkshire’s stock price fell by 44% at the same time as the stock market advanced by 23%, representing 67% underperformance. This led to a plethora of articles that suggested Warren Buffet had completely lost his way. As we all know, this was simply not true.

Market selloffs and drawdowns are difficult. But if investors take a longer term view, as we do at Cumberland, market drawdowns should be viewed as the price you pay in order to receive the wealth-building, compounded returns from exceptional companies. We own a collection of outstanding businesses in our portfolios, and we believe that the long-term fundamentals for these companies remain highly attractive.

Phil D’Iorio

First Quarter 2022 Global Equity and International Review

The surge in volatility at the beginning of 2022 was caused by several factors including persistent inflation which led to a more hawkish tone from the U.S Federal Reserve. The outbreak of the war in the Ukraine was also a contributing factor to market volatility. A spike in COVID cases in certain parts of the world also rattled global markets and led to a new round of lockdowns in certain countries such as China. In addition to these factors, some parts of the U.S. Treasury Yield have recently inverted. The yield curve inversion adds another layer of confusion for investors.

Pandemic to War

While writing this commentary, I learned that Russia initiated an official attack against the Ukraine. After Putin announced a special military operation through a televised address, explosions and gunfire were heard in Kyiv. The assault is being mounted by air, land, and sea, and it represents one of the largest attacks on a European state since World War Two. This is obviously a very sad situation and a difficult one given the hardships we have already suffered from fighting the global pandemic over the last 2 years. In terms of the impact, these types of regional conflicts have not had a significant impact on the global economy. People will continue to travel and businesses will carry on assuming this remains a regional conflict. Remarkably, these types of conflicts tend to have short-lived impacts on the stock market as we’ll discuss later in this piece.

After a very strong year in 2021, global stock markets have started this year on a very weak note. Both the MSCI World Index and the S&P 500 have declined by more than 10% from their highs. While this is disappointing for investors, stock market corrections have been a normal occurrence throughout history. In fact, over the last 30 years, the average annual peak to trough decline for the S&P 500 has been approximately 15%. In addition, it’s very typical for the stock market to eventually go through a period of consolidation after emerging from a recession. Looking back at previous market cycles can provide some context in this regard. In both 2003 and 2009, the S&P 500 generated substantial gains as the economy exited the recession. And this is exactly what happened in the economic recovery following the COVID-induced recession of 2020. The economic recovery has not only been one of the fastest on record, but it has also been one of the strongest recoveries from a stock market perspective. Both the MSCI World Index and the S&P 500 more than doubled in value from their March 2020 lows. And this happened in a span of less than 2 years, which is remarkable when you consider that average annual stock market returns have been in the high-single digit percentage range over the last 100 years.

Throughout history, the stock market has typically generated outsized gains in the aftermath of a recession. This is what happened in the last 2 recessions that occurred in 2001-02 and 2008-09. However, after large snapback rallies, the S&P 500 moved to a choppier phase in 2004 and 2010 as the market consolidated its gains as seen in the charts below.


We believe the current market weakness that we have experienced thus far in 2022 is reminiscent of what happened in the last 2 downturns and almost every downturn that preceded those. The good news is that despite the choppiness that ensued in both 2004 and 2010, the bull market in both time periods still had several years remaining.

Returning to the situation in the Ukraine, stock markets tend to overreact to geopolitical events. After the Iraqi invasion of Kuwait in 1990, for example, the S&P 500 initially fell by 17% but later regained its previous high within about six months. While any military conflict is always a concern, the reality is that unless this develops into a much larger conflict, it is unlikely to be a long-term issue for the stock market. As seen in the chart below, geopolitical conflicts tend to have short-lived impacts on the stock market.

In terms of our actions, we are diligently looking for opportunities in the current market selloff and we believe it will prove to be a good buying opportunity for long-term focused investors such as ourselves. The level of bearishness in the stock market has increased significantly as per the surveys from the American Association of Individual Investors. This sentiment survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market in the short term. As seen in the chart below, the current level of bearishness now (19.3% bullish) rivals the levels reached during the Great Financial Crisis (2008) and the height of the COVID Pandemic (2020). Both of these periods proved to be good buying opportunities.

From a contrarian perspective, we view this development as a bullish signal. When the AAII Bull/Bear Ratio has reached these depressed levels in the past, it has historically created an attractive buying opportunity. This doesn’t mean that the stock market can’t fall further in the near-term, but it does send a strong signal to us that we should be hunting for bargains.

Looking forward, we believe that stock market gains will moderate from the robust levels of the last 2 years and we expect there will be more volatility in the near term. Given the current level of uncertainty, forthcoming interest rate hikes, and the fact that we are moving later in the economic cycle, we believe that quality will become increasingly important. Companies with strong balance sheets that can generate substantial free cash flow throughout the economic cycle should be rewarded in the current environment, even if their stock prices have retraced some of last year’s strong gains in the year to date period. Investing in high quality companies is right in our wheelhouse so we are confident that our portfolios are well positioned for today’s stock market environment and as it evolves with the passage of time.

In summary and with the above said, the current environment is complex and there is much more to say. As such, we invite you to join a live meeting on Monday, February 28 at 4.30PM EST to hear more from our investment team about how we see the current situation unfolding, our portfolio positioning, and our current views on the market. We will also open the session to your questions at the end.

Have a great weekend,