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Market Update: February 2022

January turned out to be one of the most volatile months for equity markets since March of 2020, as 2021 went out like a lamb, and 2022 came in like a lion. The S&P 500 fell by roughly 11% in the first few weeks of January, before partially rebounding as the month came to a close. The driver of the decline was widely cited as concern over Central Bank tightening as the Fed and the European Central Bank (ECB) try to reduce inflation in their respective economies. The rise in yields that accompanied the more hawkish Central Banks communications particularly impacted the technology and growth areas of the equity market, while energy and more value-centric parts of the market were less affected.

 

While it may be too early to say whether the ratio between growth and value has finally titled decisively in favor of value, the chart below from Bloomberg does a good job of showing that if indeed its value’s time to shine, it could have quite a bit of room to run in the years ahead.

 

While the Nasdaq is only 12% off its all-time high, the damage beneath the surface has been more pronounced, with companies in the index trading at 52-week lows at the highest level since March of 2020. For this reason, we have strongly encouraged clients to move up the quality ladder over the past six months, as well-established tech companies with strong revenues have outperformed tech companies with weaker financials.

Portfolio diversification, another theme we have touched upon in prior pieces, has also been important, as commodities, particularly energy, continue to outperform for a wide variety of reasons. The lesson from the past few weeks is that investors with a diverse portfolio of high-quality, value-centric equities, in conjunction with commodity exposure and short-duration fixed income, were much less impacted than those who were heavily concentrated in the more expensive areas of equity markets, as measured by various valuation metrics. We expected this dynamic to continue to resonate throughout the year as policymakers look to find a healthy balance between supporting the economy and taming inflationary pressures.

The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC’s (“Frontier”) investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.