The coronavirus came to America’s shores more than 2.5 years ago, and the economy and financial markets are still feeling the impact. As active, fundamental investors we are focused on what businesses are doing and how they can and will grow for the long term. Here are our thoughts on the current market climate and why we believe it’s more important than ever to remain focused on a long-term strategy.
Inflation, Its Impact and The Fed:
In 2022, the largest impact to our financial markets is a resurgence of inflation to a level not seen in over 40 years.
As we started 2022, stimulus created consumer demand combined with a supply constrained economy which began to push up prices. Then in February, just months into this push, Russia invaded the Ukraine which caused a spike in energy prices worldwide. This combination of events has had a powerful impact on our economy, with consumer prices experiencing a year over year increase of 8%.
Our country’s central bank, The Federal Reserve, is charged with two jobs: maintaining high employment and low inflation. When leaders at the Federal Reserve see the increase in inflation it’s their job to bring it down. The primary tool they have for doing that is increasing short term interest rates.
The Impact of Rising Interest Rates:
Since interest rates are the key variable in valuing financial assets like stocks, bonds, and real estate, higher interest rates can mean lower asset prices. Of course, this is exactly what investors are experiencing this year. Over the last 12 months US stocks represented by the S&P 500 index have declined over 14%. The primary measure of bond returns is down 13% and publicly traded real estate has declined 20%.
The other impact of higher interest rates is to slow economic activity. The simplest example is housing. The typical home buyer gets a mortgage to buy a home. The monthly payment is based on the amount borrowed and the interest rate. Higher rates mean less buying power, fewer qualified home buyers, and a slowdown in sales. We are seeing exactly this phenomenon: a slowdown in housing related companies. We expect other industries to follow with slower sales.
The Value and Necessity to Staying the Course:
As always and especially in this very dynamic environment, we continue to closely monitor the companies where we choose to invest by:
- Talking to management teams on the phone
- Face-to-face visits including meeting with management, customers, and suppliers as well as on-site visits to facilities
- Reading financial statements continuously for changes
This gives us the confidence we need to execute our long-term strategy:
Investing in quality businesses that meet our rigorous financial standards, demonstrating strong leadership teams that have a proven track record of creating value for investors over time.
It is with this strategy in mind that we continue to monitor the conditions in the short-term environment, while gaining the knowledge and confidence from business analysis and engagement needed to focus on long-term growth.
Our Funds are Beating Benchmarks and Remaining Focused on the Long-Term
So far this year each of our three mutual funds, FAM Value Fund, FAM Dividend Focus Fund and FAM Small Cap Fund, have declined less than their respective benchmarks, so while our funds are down for the year, they are down less. We remain committed to the businesses we have invested in, carefully monitoring them on a day to day basis on behalf of our investors to ensure they continue to demonstrate the long term growth characteristics, strong management, and value creation we believe differentiates our portfolios.
Learn more about our solutions and our market-tested investment approach:
*FAM Value Fund and FAM Dividend Focus Fund Benchmark = Russell Midcap Index
The Russell Midcap Index is an unmanaged index that measures the performance of a mid-cap segment of the U.S. equity universe. This benchmark is used for comparative purposes only and may not reflect the risk or investment style of the investments reported. Additionally, you cannot invest directly in an index.
FAM Small Cap Fund Benchmark = Russell 2000 Index
The Russell 2000 Index is an unmanaged index that measures the performance of a small-cap segment of the U.S. equity universe. This benchmark is used for comparative purposes only and may not reflect the risk or investment style of the investments reported. Additionally, you cannot invest directly in an index.