CIO Update Q3 2022

CIO Update Q3 2022

October 14, 2022

As we move into the final quarter of 2022, our Chief Investment Officer, Andy Adams, provided an update on the state of the economy, his expectations for the next few months, and where we’re looking for investments in the current environment.

Executive Summary

The market and our Funds have experienced a difficult 2022. The market environment at the end of September is almost identical to the end of June. Back then, a large sell off had the market down 23% and the economy seemed to soften, particularly in the Housing sector. Inflation was a huge worry with the June Consumer Price Index up 9.1% year-over-year. Then, in July, the inflation rate decline and we saw a market rally.

Now, at the end of September, we’re seeing a mirror image with bad inflation data, the Federal Reserve aggressively raising the Federal Funds rate and communicating an aggressive stance on inflation, mortgage rates back up, and the market falling again to the low point we saw in June.

Despite the negatives, much of the data suggests the economy is holding its own. Household spending continues to increase, rising 0.4% in August after a 0.2% drop in July. While consumer confidence fell earlier in the year, declining gasoline prices helped sentiment recover in August back to the highest level since May. After reaching $5 per gallon in mid-June, the average price of regular gasoline was about $3.80 a gallon nationwide at the end of September. The labor market also remains healthy. Job growth continues at a steady pace, with the September unemployment rate falling to 3.5% from 3.7% in August. The amount of job openings is still high despite a recent decline from a record level. Initial claims for unemployment have remained low, implying that companies are reluctant to let employees go. The current labor shortage may prevent the unemployment rate from moving sharply higher, even in the face of a recession.

In addition, corporate earnings data has stayed steady. While the estimates have come down, there is still expectation of growth. While growth, earnings, and the general economy may be slowing, there clearly hasn’t been a contraction.

We still anticipate a recession in the near term, but the strength of the banking sector, consumer balance sheets, and the demand for workers indicate it could be relatively mild. There’s no guarantee of a short downturn, but the general expectation shows the next recession should be neither prolonger nor deep.

Looking at third quarter and year-to-date, absolute returns are down almost across the board for all sectors, with a key outlier in Energy. But relative performance of the Funds is a little more mixed. The Growth Fund is trailing the S&P 500 slightly year-to-date, but both the Balanced and Small Cap Funds are both outperforming their indices.

However, all three of the Funds have zero exposure to Energy stocks, which has proved a significant headwind this year. In the S&P 500 index, the Energy sector is up 35% year-to-date and while it’s a small portion of the major indices, the Energy boom has led to major relative outperformance considering the S&P 500 is down 24% during the same period.

Despite those numbers, we still believe that in the long term, Energy is likely to become an underperforming sector. Oil companies and producers have little barrier to entry and no pricing power, in addition to our expectation that fossil fuel demand will go down due to alternative energy sources. The process has taken a little longer than we thought to overcome supply constraints and build necessary infrastructure, but we still believe the demand will slow soon.

Finally, our investment philosophy focuses on companies with durable competitive advantages. We invest in companies with scale and market position to negotiate pricing with their suppliers and their customers, and these characteristics allow the companies to maintain profitability in an inflationary environment, to grow revenue, earnings, and dividends at or above Inflationary levels.

This philosophy should position us well for the current environment and into the future.

 

Growth Fund Performance

Balanced Fund Performance

Small Cap Fund Performance

Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance as of the most recent month end is available by calling 800-304-7404.

The statements and opinions expressed are those of the speakers and are as of the date of this call. All information is historical and not indicative of future results and subject to change. Characteristics and other statistical measures refer to underlying stocks in the portfolio and do not represent or predict the performance of any fund.

S&P 500 Index is an unmanaged index of 500 common stocks that is generally considered representative of the U.S. stock market.

Scott Howard is a registered representative of Foreside Fund Services, LLC.