INDEPENDENT INSIGHTS Market insights from an independent perspective


May 10, 2022

Malcolm Cowen II

“Let our advance worrying become advance thinking and planning.” Winston Churchill
A lot has changed in the world since the start of the year. It feels necessary to provide an update on the market climate and the issues that may impact investment performance over the next several months. The two geo-political events that have captured global attention are the war in Ukraine and China’s continued enforcement of a Zero Covid Policy. Both events are creating complexity for Central Bankers around the world who are tasked with fighting inflation and maintaining full employment. Russia’s invasion of a sovereign country has caused inflationary spikes in the cost of certain commodities, mainly oil and wheat; China’s Covid driven lockdowns continue to pressure global supply chains. Together, these issues complicate the Federal Reserve’s desire to normalize interest rates, cool inflation, and shrink the size of its balance sheet.  
In response to these events the markets have reacted appropriately, resetting prices in light of changing circumstances namely, higher interest rates and potentially slower global growth. This is normal and is what investors should expect properly functioning markets to do. That being said, it doesn’t make things easier for families or institutions that own financial assets. As of the writing of this commentary, the markets are mostly in correction territory and a case can be made that more uncertainty lies ahead. While year-to-date returns in stocks have yet to reach “bear market” territory, they do feel unusually painful because down equity markets are often accompanied by rising bond markets. That has not been the case in 2022. 
On May 4th, the Fed raised rates by half a percentage point, the biggest hike in two decades. The markets seemed to be anticipating this move and responded quite favorably. That response was short-lived. One day later, on May 5th, concerns of stagflation crept into the macroeconomic equation. The Dow tumbled 1,000 points for the worst day since 2020 and the tech-heavy NASDAQ dropped 5%. Stagflation is an economic scenario that occurs when high inflation is paired with slow or no economic growth. This creates a dilemma for Central Bankers because continued rate hikes help quell inflation, but doing may also lead to declines in economic growth.  
During periods of volatility, investors often ask what they should be doing. The answer is usually very little. Anything you would do to protect the portfolio has to have been done prior to the volatility, not in the middle of it. It’s worth noting most investors enter this period of market turbulence from a position of strength having earned returns above expectations the last several years. The typical Cornerstone client currently maintains an overweight to US stocks relative to international equities and a bias toward quality. Bond sleeves are well-diversified and alternative baskets are in place to provide a risk/return profile between equity and fixed income. Cornerstone will continue to monitor global events and constantly endeavor to have our clients properly positioned and prudently diversified to achieve their long-term objectives.  

Malcolm Cowen II, President

Skip has over 40 years of industry experience and is a co-founder of Cornerstone Advisors Asset Management, LLC and Cornerstone Institutional Investors, LLC. As Cornerstone’s President, Skip works with institutional clients and wealthy families to help design, implement, and monitor portfolios on their behalf. He is the Chair of Cornerstone’s Investment Policy Committee, which oversees all client assets. Skip has direct responsibility for client relationships as well as the overall direction of the firm. He became President in 2002 and before that served as Chief Compliance Officer. Skip loves to golf, fish and vacation in the Bahamas. In 2012, Skip was elected to Gettysburg College's Board of Trustees. He is also on the Board of Directors of M Financial Investment Advisers, has been nationally ranked by Barron’s, spoken at several industry conferences and is an active member of various advisory groups. Skip received a B.A. in Business Administration from Gettysburg College, a MBA in Business Administration from Lehigh University and a Masters in Taxation from Villanova Law School.

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