For all the market and economic developments in the first quarter, both bonds and equities have posted modest gains on the year. While the financial media breathlessly reports on bank turmoil and impending recession, equities and bonds have quietly enjoyed higher stock prices and lower yields. Granted, the combination of sticky inflation and slowing growth gives rise to the fear of stagflation. However, with growth slowing and inflation continuing to decline, the Fed is likely to conclude its rate hikes this year. The combination of more stable rates and a mixed economic outlook is conducive for a more positive year in the markets.
Over the last month, bank volatility has eased, while wage growth and inflation data have cooled more than expected. There are growing signs of slowing economic activity. Meanwhile, U.S. equity and fixed-income markets have rallied as the dollar has fallen in value. As a result, investors seem to have growing expectations for a pause in the Federal Reserve’s interest rate hikes as the year progresses. However, it is essential to note that the Fed’s decisions are based on various economic and financial indicators and are subject to change based on evolving conditions. For example, if the Fed announced a pause in tightening or a slower pace of interest rate hikes, it could potentially boost equity and fixed-income markets.
Overall, predicting what the markets will do in the short term is difficult. Still, over the long term, historical trends suggest that investing in a diversified portfolio and staying the course is usually a good strategy. Investors want to “buy low.” Markets ebb and flow, and styles come in and out of favor, bringing the inevitable recession and drawdown. As in life and relationships, investing success typically comes down to a few key principles – patience is likely one of the most important. As Warren Buffett’s partner, Charlie Munger, is fond of saying, “The big money is not in the buying and selling but in the waiting.”
One question asked recently, are bank equities a sound investment? Generally, banks often provide stable dividend yields and can be an attractive investment for income-seeking investors. However, as we’ve seen recently, macroeconomic factors and regulatory changes can impact the banking industry. Over recent weeks, bank earnings in general have been better than feared. There has been some dispersion between large national banks and smaller regional institutions as deposit costs have increased. As always, quality matters. For example, we prefer JPMorgan, with a market-leading position in the U.S. and a dividend yield of 2.9%. Although our portfolios are underweight financials, we maintain a diversified balance that includes high-quality financials that are fundamental to expanding our country’s economic growth.
It is important to understand that equity investments, including those in the banking sector, can be subject to volatility and short-term fluctuations. However, the historical trend is generally positive over longer periods. Additionally, patience and discipline are critical factors in successful investing. Therefore, it’s important to stay focused on your goals and avoid making hasty decisions based on short-term movements.
We sincerely thank you for your continued confidence and support of Cardinal Capital. Cardinal Capital is committed to our underlying goal of delivering superior risk-adjusted returns over time through changing market environments. Once again, thank you for your support, trust, and confidence in Cardinal Capital.