Pomona Wealth Market Comment June 2022 - What do you do when the bears enter the room?



Equities markets have remained volatile as investors digest conflicting signals on the outlook for growth, central bank policy, and geopolitical risks. US economic data has been encouraging, while retail earnings have pointed to emerging weakness. Market gauges for the pace of Federal Reserve policy rate hikes have declined, despite relatively hawkish comments from Fed Chair Jerome Powell. China has moved toward phasing out lockdowns in Shanghai, while rising cases in Beijing have raised concerns of curbs in the capital city. The conflict in Ukraine also remains a source of uncertainty. Until greater clarity emerges, we expect markets to remain choppy. After inching closer and closer for weeks, the S&P 500 finally dipped into bear market territory Friday, as defined as a 20% drop from previous high. But a strong late-day rally wiped out most of the losses from earlier in the session. The broad market index closed slightly higher Friday — finishing less than 20% lower than its January record high. Wall Street semantics about what constitutes an official bear market aside, the seventh straight down week for both the S&P 500 and the Nasdaq has been brutal. The tech-heavy Nasdaq has been down more than 20% from its previous highs since early March. The Dow Jones Industrial Average, still only in a deep correction as defined by a decline of 10% to less than 20% from prior highs, logged its first eight-week losing streak since 1923. The main culprit of the continued market sell-off remains US inflation, and concerns the Federal Reserve is not doing nearly enough to stamp it down quickly enough. It was this past week’s one-two punch of disappointing quarterly results from retailers Walmart and Target that really sent the market over the edge. Despite top-line beats for both companies, earnings greatly missed expectations and forward guidance was revised lower. The reports put on full display that even the best operators have been caught off guard by the rapid rise in fuel and logistics costs. In addition, the quick shift in consumer preferences to trade down in certain goods — and the reallocation of discretionary funds from goods to experiences — dragged on earnings. With all of that in mind, we want to reiterate that it is our intention to ride out this storm and high-grade portfolios whenever an opportunity arises. That means focusing on adding high-quality, cash-generating businesses with pricing power as their stock prices go lower. While it may not feel like it right now, this is where the money is ultimately made. The entire market is on sale right now. The best names in the world are selling at a discount. If we can identify those high-quality names we want to be looking at this drawdown the same way wedo any other sale: as an opportunity to scoop up something great at a cheaper price than you otherwise would have. Of course, it is painful —it is incredibly painful, one of the worst markets we have seen in over a decade. Covid was bad but the Fed acted swiftly in support of the market, versus now acting too slowly against the inflation. If we can take the pain and shut out the emotion for a moment, we will recall that earnings season was largely better than expected for many companies. We saw some massive buyback announcements. That combination of huge share repurchase authorizations and a bear market means that those willing to weather the storm, will come out on the other side owning a greater share of these fantastic companies. That is because the buybacks will take more shares out of the market as companies buy more shares at lower prices. For example, Apple’s USD 90 billion buyback will pull 18% more shares out of circulation if they can deploy it at USD 135 (where shares are today) instead of at USD 160 (about where shares were when it was announced). Fundamental dynamics such as this are important to remember when markets test our pain tolerance on a seemingly daily basis. Also keep in mind the simple fact that whether you want to talk about cloud computing, automation, artificial intelligence, or any of the other secular growth trends that remain very much intact, it all comes back to names like Qualcomm (QCOM), Advanced Micro Devices (AMD) or Nvidia (NVDA) because semiconductors are the bricks-and-mortar of the digital age. While we cannot call a bottom and do not expect a V-shaped recovery, we do believe that many names are becoming more valuable as their stocks go lower, and that patience will ultimately be rewarded. Therefore, we intend to stay the course, maintain our discipline, focus on the highest-quality names, reduce the cost basis of our holdings when opportunities present themselves, and keep our sights on the long term. This too shall pass. We want to remain nimble and act on opportunities that the market will throw at us. Here are some examples: We are looking at Cisco which reported quarterly earnings negatively impacted by supply chain issues in China. As the stock dividend yield reaches 4%, the stock becomes very attractive. We are closely monitoring the price evolution of Pioneer Natural Resources with a dividend yield approaching 9% based on the distribution of 75% of free-cash-flow Salesforce has dropped to levels where it is now dubbed ”too cheap to ignore” Johnson & Johnson is the type of stock we believe can weather the current market volatility and macro uncertainty because its pharmaceutical, medical device, and consumer product businesses have defensive qualities and should remain resilient If you wish to have a chat about the current market sentiment or discuss some ideas, we will be delighted to jump on a call with you. Let us know and we can organise a time both Pascal and I are free.

Geneva, May 23rd, 2022

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