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The DDK Group

News & Insights

Market & Policy Mid-year Outlook Thumbnail

Market & Policy Mid-year Outlook

It’s been a tumultuous first half of the year, and there are several unknowns ahead— including the midterm elections in November. To help us make sense of the interconnected variables at play, Baird’s market strategy experts at Strategas sat down to address several questions on inflation, corporate profits, consumer health, and more.

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Q1 2022 Review & Outlook Thumbnail

Q1 2022 Review & Outlook

The new year saw markets peaking in the first couple of trading days with the volatility of the latter part of Q4 2021 continuing throughout the quarter. All asset classes, except for supply constrained commodities, showed remarkably consistent returns to the downside. The Federal Reserve, having just begun its rate hiking and quantitative tightening, is clearly playing catch-up to realized inflation. The risk now is whether demand in the economy is sufficiently strong to overcome higher interest rates such that the economy does not fall into recession. The hope is that the Fed will engineer the proverbial “soft landing.” We believe that recent volatility will continue through most of the year. Inflation should ease over this year and next, in line with the Fed tightening cycle, without an adverse effect on employment as there remains 1.8 open jobs for every person on the unemployment rolls.

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Q4 2021 Review & Outlook Thumbnail

Q4 2021 Review & Outlook

Last quarter, we observed that the Fed would likely normalize rates faster than some expected as to not let the economy overheat. The early January markets seem to be proving that out. The knock-on effects of higher rates are being felt in the equity markets. Growth companies have been most affected when measured by fundamentals such as earnings as well as the discounted present value of future earnings. Until corporate earnings show the ability to outpace the effect of interest rates on stock prices there will be increased volatility in the equity markets. Value should continue to outpace growth over the near term; a trend that began late in 2021 and has accelerated in early 2022. It is against this backdrop that we attach Baird’s 4Q21 Market Update and Rolling Asset Class Returns for the past 20 years along with quarterly 2021 asset class returns. It does not appear that Large Cap Growth is in a position to continue its streak of three years and four of five years as the best performing asset class. As we invest on behalf of clients, we will continue to favor value over growth and short term fixed income over longer duration. We continue to advise clients to be at or below strategic maintaining surplus cash for near-term needs. The DDK Group is excited to announce that Tiffany Kowieski, along with her husband Matt, welcomed their daughter, Quinn Elizabeth Kathryn on December 20th, 2021. Mom and baby are both doing well, and big brothers Theo and Wes are so excited! Tiffany will be on family leave through mid-March.

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Q3 2021 Review & Outlook Thumbnail

Q3 2021 Review & Outlook

The third quarter was a test of equity market resolve. Only large cap growth and commodities managed a positive return as geopolitical factors, together with continued supply chain interruptions, brought resurgent prices in all parts of the energy sector. Price inflation was driven by a rise in all input costs including materials, labor and transportation. This caught the attention of lawmakers and the Federal Reserve causing Fed Chairman Powell to recently concede that inflation appears to be less transient than originally thought. Most economists are seeing inflation in the 4-6% range for 2022 before returning closer to the Fed target of 2% in 2023. For now, the Fed seems committed to begin tapering its $120 billion in monthly bond purchases without any immediate change to its policy rate. Fiscal changes and tax policy remain in flux. Instructive is that both of the previous administrations were able to pass just one signature piece of legislation during their tenures – The Affordable Care Act (Obamacare) and the so-called Trump tax cuts. The Biden Administration’s Infrastructure bill and Build Back Better bill will test the “one and done” nature of legislation in a first-term president with his party in control of Congress. Will these proposed bills pass as is? At this point, we cannot say. We would recommend that clients call us to discuss what action MIGHT be available IF some or all of the proposed federal income tax and estate tax changes become a reality. From an investment perspective, we continue to recommend keeping at or slightly below equity targets given current valuations. Attached is Baird’s Q3 2021 Review and Outlook which highlights several of the above themes. In recent team news, we are excited to introduce some new faces to the DDK Group! You may recognize Connor Allen, as he has been working with our team through Baird’s Foundation Program since the beginning of 2021. He has recently officially joined the team as an Associate Financial Advisor. We also have Myles Murray joining our team through early 2022. Myles is a member of Baird’s Foundations program, and he will be spending 6 months with the DDK Group as part of the rotational program. Please join us in welcoming both Connor and Myles!

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Q2 Review & Outlook Thumbnail

Q2 Review & Outlook

The latter half of 2020 and the first quarter of 2021 saw a fairly clear rotation toward a higher, long-term interest rate environment; or at least the expectation of such. We saw in the second quarter an appetite for traditional value stocks, as well as small caps over large cap, reverse once again as treasury yields fell and bonds rallied, while the headline growth stocks re-established their leadership. Fans of the FAANG names, bolstered by re-opening economic metrics, pushed these megacaps to all-time highs, while the industrial and financials names were either flat or retreated slightly. Real estate (+13.1%) and energy (+11.3%) bucked the growth bias and had returns in-line with Technology (+11.6%). International equities continued their positive performance, though still struggling to keep up with US equities, were no doubt hurt both by dollar strength and a slower re-opening trade. Despite the most recent moves in bonds, we continue to favor shorter duration fixed income as we believe short-term moves in interest rates are transitory and that the Fed is likely to move short-term rates closer to its policy rate over the next eighteen to 24 months. We encourage our clients to be at or near their strategic allocations while keeping short term cash needs available in cash or short-term fixed income.

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Q1 Review / Q2 2021 Outlook Thumbnail

Q1 Review / Q2 2021 Outlook

The strong performance of equity markets that closed 2020 continued through the first quarter of 2021 with outperformance by value and cyclical stocks. Fiscal stimulus of over $3T finding its way into the economy provided the fuel for a continued appetite for risk assets. The strength in bonds experienced in 2020 reversed in 2021, as the Barclay’s Aggregate Bond index lost 3.4% and the 10-year Treasury yield rose from less than 1% at the start of the year to close the quarter at 1.74%. The combination of even more fiscal stimulus when paired with an accommodative Federal Reserve provides a sturdy short-term tailwind for risk assets. We continue to recommend that clients stay at or near their long-term strategic asset allocation.

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