When It Pays to Be a Contrarian


Michael Santelli, CFA, Managing Director, Portfolio Manager

The markets so far in 2022 have been very choppy. After a 12-year bull run from the March 2009 bottom of the global financial crisis (notwithstanding a sharp but very brief pandemic-induced bear market in early 2020), we are now facing some significant headwinds. The main event in this episode of market volatility is the battle between the Federal Reserve and inflation. The Fed has been raising interest rates and threatens to continue doing so until inflation is subdued. It has also embarked on “quantitative tightening”, i.e., a reduction in the size of its bloated balance sheet from past liquidity binges. The Fed’s previous quantitative easing policy, which occurred following the global financial crisis, was nectar to the markets. Now it is reversing course and tightening conditions, what is an investor to do?

First, it is important to be able to make it through any short-term period without forced selling. Consider whether you are comfortable with the amount of liquidity at your disposal to fund any near-term spending needs. If not, it could still be the right time to make any necessary changes to become more comfortable.

Second, keep an eye on the long-term. After your short-term liquidity needs are comfortably met, it makes sense to remain invested in an appropriately diversified portfolio that is designed to meet your long-term goals. Here it is important to note the obvious: we are all thirteen years older than we were in 2009. Has your risk tolerance changed? How close are you to retirement now? Is it appropriate to change your asset allocation target? All valid questions. We are always prepared to discuss these questions with our clients and include both our investment and planning teams in the analysis.

Third, as we build portfolios, we look for opportunities that offer attractive risk-adjusted returns. Oftentimes these opportunities are found in “unpopular” areas. Who wants value stocks when disruptive growth stocks are posting huge returns? Who wants energy stocks when seemingly everyone is at war with fossil fuels?

There is a time for almost everything in a diversified portfolio, especially if a period of underperformance has left an asset class or sector attractively priced on a relative basis. For example, after a multi-year period of underperformance, value stocks have held up much better than growth stocks during the 2021-2022 period. Energy stocks, which were being thrown out of portfolios by many institutional asset owners just a few years ago, posted a 24.5% return (measured by the S&P Global 1200 Energy sector year-to-date through June 30, 2022), while the S&P 500 posted a -20% return over the same period. It was less than 3 years ago, in April 2020, that crude oil traded at negative $37/barrel as investors wondered when people would travel at pre-pandemic levels again. This year, crude has spent much of the year above $100/barrel and energy companies are booking record profits.

Sometimes it pays to be a contrarian.

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