Quarterly CIO Letter: Fourth Quarter 2022
We believe the outlook for the economy remains highly uncertain and the risks to the market and economy remain to the downside. There are a growing number of potential black swan events, the fruition of any of which would be catastrophic.
However, the market seems to whole-heartedly disagree. The rally in October and November was fueled by investors hanging on every shred of hope the Federal Reserve will stick the landing and be able to pivot. In the same tune, bad news has become good news again and the market is discounting none of the fat tail risks. The markets aren’t even discounting the risks with higher probabilities today—a recession or persistent stagflation. Reality began to set back in for December, but January has been off to the races. Thus, the title of this letter, “Betting on Nirvana”. We continue to believe that eventually the bill comes due.
You Would Not Go to the Cardiologist for a Cavity
SCA was founded on a mutual conviction that the client should always come first. Being a small, independent advisor was appealing for the flexibility and customization it allows, but also the alleviation of many conflicts of interest. One of the largest conflicts of interest we sought to minimize was capturing the whole of someone’s wealth in products managed by only one manager. Asset managers have certain areas of the market, asset classes, and strategies they focus on and excel at investing in. We believe it is in our clients’ best interest to find the best solution in the area we are seeking to allocate capital. This led to our conscious decision not to have our own proprietary products.
Quarterly CIO Letter: Third Quarter 2022
The third quarter was quite a ride, adding to a painful year for investors. The market was strong in July and the beginning of August on a misreading of Federal Reserve Chairman Jerome Powell’s remarks. Investors were hoping for a Fed pivot, and were beginning to price it in. We saw it as a head fake and took advantage of the strength to take risk off the table. In mid-August the market started selling off as Powell confirmed at Jackson Hole that his stance remained decidedly hawkish and the Fed was committed to continuing to fight inflation.
Dynamically Navigating the Changing Currents
Our investment process was built to navigate the twists, turns, and surprises of a more volatile investment landscape. The world has fundamentally changed. The long economic cycles of the past are just that, a thing of the past. Going forward we believe cycles will be more muted and shorter. In this new environment, being dynamic, diversified, disciplined, focused on risk and armed with a broader set of tools will be imperative.
A Solid Rock in Turbulent Waters
Our favorite summation of SCA so far was in an e-mail from one of our new clients: “I’m coming on board with Stone Creek, a solid rock in turbulent waters.” Marc and I immediately looked at each other and said, “I think she just gave us our tag-line”. Much easier to roll off the tongue than “Strength and dynamism in a changing world.”