Good News is Good News

February 22, 2023
Dow: 32,875

In the markets, sometimes good news is bad news and bad news is good news. Stick with us here. Market movements always factor in expectations, or more specifically, changes in expectations. When a company announces good news, sometimes its stock will go down if the news was not good enough relative to expectations. Or a stock may go up even if the company announces bad news, if the news is still better than expectations. For a number of months, the stock and bond markets have shown many instances where they have sold off on stronger economic news and rallied on weaker economic news. Why? It has to do with expectations, specifically expectations of future moves in the Fed Funds target rate.

Market participants fear a Fed-induced recession. The Fed has stated that they want slower economic growth and higher unemployment, so recent stronger than expected economic news has led to higher expected Fed Funds rates and lower stock and bond prices. Conversely, weaker economic news has led to expectations for a lower terminal Fed Funds rate.

It’s time to reframe this tradeoff; good news is good news. As the Fed nears the end of its tightening cycle, economic growth has stayed strong. Recall where we were at June 30, 2022: the Fed had just raised rates from 0.875% to 1.625%, GDP had declined in the first quarter of 2022 and would fall again in the second, trailing year CPI was 9.1% as of 6/30/22, and the S&P 500 Index fell 20% in the first six months of the year.

In the second half of 2022, the S&P 500 Index rose slightly. GDP rose slightly more than an annualized 3% ‒ not too hot, not too cold. CPI averaged less than an annualized 3% in the second half of the year, even with a revision that increased that rate. This economic rebound happened while the Fed raised rates from under 2% to over 4% by year end. In the bond markets, rates increased far more on the short end than the long end, as recession fears were pervasive.

So the question of whether the economy and the markets can outlast the Fed rate increase cycle is not settled, even as we undoubtedly move closer to reconciliation, with higher rates and decelerating inflation. The end game is near, but still not completely clear. Many of our equity strategies have shown solid performance versus their indexes through the second half of the year and into 2023. Fixed income and preferred strategies have shown strong rebounds at the beginning of 2023. The Fed has chosen to move more cautiously of late, with the last increase being 25 basis points. A resilient economy will keep the Fed active, so inflation needs to continue to decline in order to satisfy the Fed.

Generating positive income and providing relative outperformance is possible even in choppy, unclear environments, and that remains our primary goal.


Random thought:  “What do most people say on their deathbed? They don’t say, ‘I wish I’d made more money.’ What they say is, ‘I wish I’d spent more time with my family and done more for society or my community.”       – David Rubenstein



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Playing to Our Strengths in a Fed-Dominated Fixed-Income World

We closed out 2022 with one of the biggest and best sporting events worldwide – the World Cup.    While the game of soccer sometimes catches some flak for its lack of scoring and hard-hitting plays that we are accustomed to seeing in American football, the game of soccer is known throughout the world as “the beautiful game”.  Yes, most of the typical game is spent with the ball being passed around the middle of the field, but it is those special few minutes when the action is confined near the goals where the magic happens.  The last 18 yards on either side of the field or the “tails”, if you will, are the high impact areas that generally determine the outcome of the games.  This analogy is similar to how investment managers create outperformance or alpha for their investment strategies.  Think of the middle of field as the “market consensus” or average expectations as a lot of time and investment discussions are spent in the middle of the field among the majority of market participants.  If you want market returns then play it safe and spend all your time passing the ball around in the middle of the field but if you want to outperform the market then you have to do something different than the market consensus.  You must spend some time in the goal areas or the tails if you want to outperform the market.  At Dana, we are not in the business of trying to predict macro events – stock market moves or interest rate forecasts.  We construct portfolios based on assessing risks and opportunities. When opportunities arise, we send the ball into the goal areas with the expectation to capitalize on the opportunity in order to generate outperformance for our investment strategies. As we look at the bond market today, we have the excitement of playing in a World Cup match and see tremendous opportunities regardless of the next interest rate decision.

Gone are the days of Alan Greenspan’s Fed being somewhat hush-hush and opaque about policy.  Can anyone forget his famously tongue-in-cheek quip, “If I seem unduly clear to you, you must have misunderstood what I said.”  Today, nearly every day outside of Fed blackout periods, some Federal Reserve governor or regional Fed president is talking hawkishly about keeping rates ‘higher for longer’ or waiting for definitive signs that inflation is on the mend returning to the Fed’s target of 2% to 2.5%.  The constant chatter is compounded by the financial media and broad macro strategists endlessly debating the issue.  It may fill airtime on financial networks as the media needs a spin for daily market swings but it’s overwhelming and exhausting for what purpose?

As portfolio managers, we spend our time separating the noise from the signal to anticipate what is going to matter going forward as we begin our run to the goal areas.  At Dana, within the fixed income market, we see attractive yields that have not been present for much of the last 15 years.  We stay committed to our fundamental investment process by positioning portfolios based not only on understanding current market conditions but, more importantly, where the market is going.  The financial markets are discounting machines as they anticipate future actions into today’s present value, and investors will miss taking a shot on goal if they wait for the FOMC to pivot or continue to spend time debating financial information that is already priced into the markets.  To help separate the noise from the signal, it is important to recognize as well as clarify the roles of three different groups on the soccer field – the officials “the Federal Reserve”, the announcers “the media”, and the players “investment managers” such as Dana.


The Fed’s Job

The Fed has a dual mandate to maximize employment and keep inflation in check through stable prices and moderate long-term interest rates.  Monetary policy actions such as raising or lowering the short-term interest rate known as the Federal Funds rate as well as adjusting the money supply are the primary tools the Fed uses to achieve their mandate.  The Fed communicates their actions to the financial markets through “forward guidance” which informs the financial markets about expectations as well as effects of future monetary policy actions on financial conditions in order to achieve the dual mandate.  Ultimately, forward guidance centers on controlling expectations and pricing volatility.  If the Fed issues a hawkish statement on their expectations for the future path of the Federal Funds rate in order to promote price stability then, the bond market will immediately adjust interest rates higher as they anticipate a higher discount rate into security pricing.  The challenge with controlling expectation and pricing volatility is Fed Chairman Powell and the other members must constantly appear in interviews, issue statements, and give speeches that are in alignment with where they want policy to be going forward.  It’s quite the pageantry.


The Media’s Job

The Media’s role is quite simply to fill the stadium seats so we’ll keep this section quite brief.  The recipe for filling the seats – provide insight or elicit an emotion.  The financial media offers a great outlet for insightful guests and commentary; however, the media can spend way too much airtime debating issues just to fill a time slot.  Case in point, what will the Fed do next?  Endless hours and days spent on speculating on whether a 25-basis-point hike is in the cards at the next FOMC meeting or if a larger half-point increase is in the works?  After the umpteeth time and the umpteeth day, you have to ask yourself does it matter?  We do not see investment alpha coming from that back and forth.


Dana’s Job

Let’s start where we left off on debating Fed moves.  If everyone knows that the Fed is going to move then ask yourself “where is your edge or competitive advantage?”  You have none as the participants within the financial markets have already incorporated the information into security prices.  Does Dana have a viewpoint on future Fed actions?  Absolutely and, to outperform the market, we need to get ourselves into the goal area by breaking away from the market consensus.  How do we do that?  We have to act on opportunities that the market consensus has not yet incorporated into the prices of securities.  After a lift of over 400 basis points in the Federal Funds rate in 2022 and more on the horizon for 2023, we are upbeat about the opportunities available in today’s fixed-income market.  Consider that compared with 10-year historical ranges and averages illustrated below, yields across the bond space are offering compelling value.  We have positioned portfolios to take advantage of elevated short-term rates that feature low duration.  After 15 years of earning next to nothing on high-grade, short-maturity bonds, we can own such securities with yields near or even slightly above 5%.  Additionally, our portfolio managers have been able to purchase individual bonds with unique characteristics that offer expected higher total holding period returns without taking on much additional interest rate or credit risk.


Current Yields Are Attractive Relative to History

Source: J.P. Morgan Asset Management


Bonds are Back: Investment Grade, Low Duration Credit Yields > 5%

Source: Reuters, Refinitiv


You Play to Win the Game

Calendar year 2022 certainty was a challenging period as the Federal Reserve spent the year re-normalizing the yield curve but, as we begin 2023, the fixed income opportunities give rise to optimism for investors.  Bond market yields are back to attractive levels, the majority of monetary tightening is behind us, and inflation is likely to continue to soften.  A portfolio of high-quality bonds consisting of U.S. Treasuries, U.S. Agencies, and investment-grade corporate bonds can yield close to 5% without high interest rate risk. Tax-exempt yields in municipal bonds are also attractive for investors in higher tax brackets.  In these uncertain periods, investors need to maintain a well-diversified core fixed income portfolio in an active manner to continue compounding interest rates no matter what path interest rates may follow into the future.  Whether the yield curve flattens, steepens, twists, or inverts investors need to maintain an allocation to fixed income.  Fixed income investments provide important benefits, including income, diversification from equities, lower volatility and the predictability of an income stream.  Granted, it is very uncomfortable and takes a disciplined mindset to break from the market consensus but if investors want to outperform then they need to play in the goal areas – where the magic happens.


APPROVED FOR DISTRIBUTION TO CLIENTS.   Dana Investment Advisors welcomes any comments to their newsletter and is more than willing to discuss or explain any aspect of the letter.  This newsletter is provided for general information only and is not intended to provide specific advice or recommendations for any individual or entity.  This is not an offer, solicitation, or recommendation to purchase any security or the services of any organization.  The foregoing reflects the opinions of Dana Investment Advisors.


Demand is not the Problem

December 28, 2022
Dow: 32,875

We have heard a lot about the demand side of the economy from the Federal Reserve this year. However, we almost never hear about the other side – the supply side. Jerome Powell has said that we have to lower demand in order to bring the economy into balance and bring inflation under control. Powell wants to inhibit demand by slowing growth in employment. He has said economic growth is too high, and he wants the unemployment rate to be higher than it is now to help keep wage pressure low. He essentially wants more Americans to struggle in order to reduce inflation.

“We are tightening the stance of policy in order to slow growth in aggregate demand. Slowing demand growth should allow supply to catch up with demand and restore the balance that will yield stable prices over time. Restoring that balance is likely to require a sustained period of below-trend growth.”   -Jerome Powell, 11/30/22

This is not the kind of help the U.S. economy needs.

Why not try and grow the economy by finding ways to help increase the supply of goods and services? Make it easier for businesses to hire, rather than more difficult. End the Covid emergency declaration at the Federal level, which will end the expansion of support programs that took place during Covid. These measures will increase the incentive to work, and decrease the disincentives to work. Those who are out of the workforce see their skills and habits erode over time, making it more difficult for them to reenter the workforce, at least at a job level that is equivalent to that which they had when they left the workforce. The goal should be to increase incentives to be in the labor force. Child tax credits should not be refundable, which means that you receive the payment even if you don’t have income and don’t pay Federal income taxes. Refundable credits are disincentives to work, they decrease the labor force, and increase inflation.

If businesses know that Powell is trying to slow the economy, they will try and front run the slowdown. Businesses will try and reduce costs and reduce output in anticipation of the reduction in demand. Companies will try and match supply to future expected demand in order to preserve profit margins. Some of this may have happened already, as it appeared that inventories rose to uncomfortably high levels during the summer at some companies, and they were forced to make adjustments.  Powell assumes he can reduce demand and supply will stay the same as he says in the quote above; this is not true. Witness the layoffs announced by many large companies this fall. One ugly possible result of both supply and demand decreasing can be stagflation, a condition where the economy slows but prices do not come down. Less spending on the fiscal side can help avoid this outcome.

There is more evidence that the economy is bending, not breaking. Gasoline prices have moved down significantly, and the housing market has slowed towards more normal levels of price growth. Year over year home price growth has slowed from over 20% to below 10%, and may continue to slide due to higher mortgage rates. Existing home sales have slowed significantly, but new home sales have actually moved back up over the last two months to pre-pandemic levels. Auto sales have actually increased recently, as companies attempt to ramp up production to meet demand. Retail sales ex-gasoline have slowed.

Despite these signs of slowing, GDP for the third quarter was revised up to over a 3% annual rate, and may run stronger than that in the fourth quarter. For the last two months Core CPI has printed at the lowest levels in over a year. All of this is incrementally good news for the stock and bond markets over the intermediate term. Every month where inflation shows signs of slowing while the economy remains resilient looks more like a soft landing, and moves us closer to the end of the Fed rate hiking cycle. It also decreases the chances of a major Fed mistake. The Fed has already said that increases will slow, although they will not comment on any potential rate cuts. Fears of a recession and lower corporate profits in 2023 still run high, which is the main reason the S&P 500 is having a difficult time moving above the 4000 level. The Nasdaq index may be forming a stealthy bottom, as more than two thirds of the members of the index are outperforming the overall index.

In the fixed income markets, intermediate and longer rates have stabilized, providing positive returns for the quarter even as short rates have continued to move up. Most fixed income portfolios can now earn 4-5% annually, which supports total returns and provides a buffer against price volatility.

2022 has followed the uncertainty of the pandemic years of 2020 and 2021, but has been no easier to navigate. We continue to adjust portfolios to current market conditions and work to anticipate future potential scenarios. A 2022 highlight was Dana Investment Advisors once again being named the best place to work in investment management among companies with 50-99 employees. 2022 was our 11th straight year of receiving such National recognition and is a true reflection of the wonderful team and culture you’ve enabled us to build. This recognition and Firm environment have enabled us to attract and retain an amazingly talented and dedicated team here to serve you. It is our privilege to guide our clients’ assets, and it is a responsibility we take very seriously. We thank you for your business, and look forward to our continued partnership in 2023.


We wish peace on earth and a Happy New Year to everyone.


The Pension and Investments Best Place to Work article link is here:


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 November 22, 2022
Dow: 34,098

The faceoff between Jerome Powell and the U.S. economy continues. At this point, just maybe the economy is gaining the upper hand. Despite four consecutive 75 basis point increases in the Fed Funds rate this year to almost 4%, the economy remains resilient. Treasury yields beyond five-year maturities have moved down aggressively after the most recent report on inflation, and the yield curve is as inverted as it has ever been in the current rate increase cycle. The economy was still able to swing to positive GDP of 2.6% in the third quarter. The monthly employment report has continued to show positive, albeit slowing, growth even as the unemployment rate ticked up slightly. Fed Chairman Powell has said he will not blink and vows continued aggressive rate hikes until the inflation rate reverses significantly and moves back towards 2%.

So, is it wise to cast your lot with Jerome Powell, and take him at his word regardless of what happens to the economy? That would probably mean investing in an intermediate or longer bond portfolio, with the expectation that he will continue to raise rates until inflation is vanquished, regardless of what happens to the stock market and the economy. Ultimately, a Powell win would manifest itself in lower long-term rates due to lower inflation, a much weaker economy, or some combination of both.

Or do you believe that the economy can weather the Powell rate hurricane and remain resilient until inflation begins to decline due to some combination of Fed tightening and marginal economic slowdown? This is often characterized as the “soft landing” scenario. Keep in mind that concurrent economic indicators are at a level consistent with GDP of 3% to 4% in the fourth quarter.
Over the last few weeks, we have had a rally in both the stock and the bond markets, as the S&P 500 Index has moved up almost 11% since October 12 and the ten-year Treasury yield has fallen over the same period. So far this year, the stock and bond markets have typically fallen at the same time, not risen, so let’s peel the onion.

The big move in both the equity and the fixed income markets took place on November 10th. On that day, the headline CPI report for October came in lower than expected, the S&P 500 increased 5.5%, and Treasury yields fell 25-30 basis points – huge moves for a single day. So far, that market gain has held up over the following trading days. Many said the market rally was unjustified by such a small move downward in a key inflation measure. Shouldn’t the market demand far more proof that the inflation dragon was slayed? It is important to note that this sign of moderating inflation was happening at a time when the economy was still rather robust. The housing market has certainly slowed, and there is news of layoffs in the tech sector, but consumer spending is still strong, and the employment market has shown resiliency. This combination of factors is the key. If inflation can turn down while the economy continues to grow, that is the goldilocks outcome where almost everyone wins.

It is also difficult to have a recession or a market correction when everyone anticipates it. Some large businesses are trimming employees, and many are managing their affairs in a conservative fashion, as if expecting a recession. Such anticipation can help avoid excesses caused by optimism that usually builds up before a recession. If companies are leaner, any unexpected pickup in economic activity should result in revenue that creates bottom line profits.

The Fed does not believe we can have a persistent cooling of inflation without weakness in the economy. The October inflation report hinted that just such a combination may be possible. It will take more subdued inflation readings to convince the Fed. With commodities prices, implied inflation in the TIPs market, and crude oil prices all stable to lower, there is reason to be optimistic. In the meantime, we can be thankful that the rally spurred by lower inflation has had staying power and that the increase in interest rates has given savers the ability to earn about 5% in short government and agency bonds.

Happy Thanksgiving to all.


Random thought:  “We have two lives, and the second begins when we realize we only have one.” – Confucius



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The Beatings Will Continue Until Morale Improves

September 28, 2022
Dow: 29,684

Ok Jerome Powell and other members of the Federal Open Market Committee, we get it: you are serious about raising rates. Back in July and August, we (the market) suspected that their work might be done by the end of the year. As outlined in our July Viewpoint, many price indices were falling after the 75 basis point rate increase in June, followed by another 75 basis point increase in July. At that time, another 50-75 basis points were expected at the September meeting. The Fed did their best to talk down the market as it rallied, but maybe there were doubters about the resolve of the Fed. Well there is no doubt now, and the pendulum of Fed resolve may now have swung too far in the opposite direction.

We said in July that if the Fed recognized the easing price pressures in widely recognized market indicators, we may have seen the low in stock prices and the highs in longer term bond yields. Since the July Fed meeting, the broad commodities index is down 7%, crude oil down 15%, gold down 6%, and the dollar index up 6%. Commodities down while the value of the dollar is increasing are classical economic signs of deflation, not inflation. Our hope would be that Powell learned something about these relationships as an undergraduate student, but alas, his undergraduate degree is in political science.

Higher rates are certainly creating opportunities in the fixed income market. Treasury yields have moved above 4% across virtually all maturities. Yield spreads have widened on corporate bonds, moving yields close to 5% on intermediate maturity portfolios. Tax adjusted yields on our municipal bond strategy are even higher. We do believe we are getting close to the end of the Fed tightening cycle, and bond prices usually firm up and move higher when the end of the cycle is near.

Based on Jerome Powell’s comments after the latest Fed meeting, the beatings will continue. One economic positive has been the low unemployment rate, and Fed Chairman Powell has now explicitly stated that the low unemployment rate must also be beaten into submission and driven higher. As of 9/27, the S&P 500 Index is down 9% since the July meeting, and most other equity indexes are down more than 10%. Powell has told us this is mostly irrelevant to the Fed; he has said the unemployment rate must go up for the Fed to be satisfied, regardless of what other market and price indicators are foreshadowing. Investors in U.S. inflation-protected securities indicate future expectations for inflation have moved into the mid-2% range or lower across the curve, from two years all the way out to thirty years.

Another portion of the economy that has turned from tailwind to headwind is the residential housing market. The annualized sales rate for existing homes has fallen for seven months in a row, from 5.75 million in January to 4.28 million in August. This is below the roughly 4.7 million sales rate that existed pre-pandemic. New mortgage rates have skyrocketed this year, and the housing market is slowing even though, or due to, home prices being up 60% in the last three years. The housing market provides a key barometer of capital investment and consumer confidence, and it is one more concurrent price signal that the Fed should heed.

It seems Jerome Powell and the Fed have a both a tin ear and a blind spot for market price indicators. They are also receiving warning signs from global economic activity and exchange rates. The dollar has skyrocketed versus many other currencies. Dollar strength adds a strain to foreign economies in multiple ways. It makes imported goods that are produced in the U.S. more expensive, and it makes debts that are denominated in dollars more difficult to repay. These risks are evident in foreign developed and emerging stock markets that have underperformed U.S. markets.

These are some of the many signs of decelerating economic activity and lower prices to come. We have to believe that they will be recognized by the Fed in the near future. If this happens, there will be strong rallies in both bonds and equities. The price earnings ratio for the S&P 500 Index is now below 17 times 2022 earnings. The last instances of a ratio at this level were briefly during the market correction in December of 2018 and at the beginning of the COVID crisis in 2020. When the bounce in stock prices happens, the P/E ratio of the market goes up because it takes time for the earnings recovery to manifest itself. As the P/E goes up in these situations, deniers who claim there is still too much uncertainty and that prices are not justified by earnings miss these major market moves. While 2022 has certainly been challenging for stock and bond investors, we encourage investors to recognize the long-term opportunities lower stock valuations create and the fact that short US Treasury securities now yield over 4% – the highest levels in 15 years.



Random thought:  “Life starts all over again when it gets crisp in fall”     – F. Scott Fitzgerald, The Great Gatsby



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Listening to the Markets

July 19, 2022
Dow: 31,827

Often the markets will send signals about the current, and potential future, state of both the economy and the markets, but investors have to be willing and open to listening. Most often, preconceived notions about what should be happening get in the way. It’s easy to only see factors that support one’s worldview, and this “recency bias” leads investors to expect that whatever is happening currently will continue. We have suspected since the early spring that the July and September FOMC meetings would be key for the economy and the markets. Rate increases of 25 basis points in March, 50 basis points in May, and 75 basis points in June were expected by the markets. The stakes get much higher from here.

Over the last month or two, fears of a recession have begun to approach or surpass fears of inflation. The markets are sending this message. Most stock indexes fell between 15-20% in the second quarter, and the NASDAQ, the home market for many growth and tech companies, dropped by more than 20%. The Fed paid little respect to the stock market as a leading indicator at their June meeting. Stock prices and valuations dropped during the period, as investors feared future actual and estimated reductions in earnings.

But changes are afoot, especially over the last four to six weeks. National Association of Purchasing Managers manufacturing and services indexes fell to yearly lows, and their pricing index declined for the third straight month. New and existing home sales have declined. Small business optimism is at a nine-year low. Indicators of consumer confidence have plunged. One bright spot is employment; the unemployment rate has remained below 4% since the beginning of the year, employers struggle to find employees, and many who are willing to change jobs can gain significant salary increases. At the same time, changes with the employment picture are also creeping in. Weekly unemployment claims have slowly climbed to an eight-month high. These are economic activity indicators that have rolled over, but price indexes are also moving lower.

The commodities index is now down over 10% since early June. Crude oil is also down over 10% over the same five-week period. Market indicators of inflation over the next five and ten years have moved to twelve-month lows. All of these market price indicators have moved lower. The Consumer Price Index (CPI) is a trailing indicator. Waiting to stop rate increases until you see a decline in CPI is truly like driving a car while looking in the rear view mirror. Chairman Powell, are you playing checkers while market participants play chess?

It is entirely possible that we have already seen the high in longer Treasury rates and the low in the stock market. The FOMC raised rates 75 basis points on June 15th. The ten year Treasury yield hit a high of 3.48% on June 14th and is now 50 basis points lower. The S&P 500 Index closed at a low of 3667 on June 16th and is now 7% above that level. Based on what has happened in the economy and the markets over the last month, we would not expect the Fed to follow through on the 2% of rate increases that are anticipated over the next four Fed meetings this year. Those potential increases would bring short-term rates to over 3.5%. That is higher than all longer Treasury yields, which have moved lower over the last month. Keep in mind that all of these lower commodity prices and slowing of economic indicators have happened with the Fed Funds rate at 1.625%.

If the Fed is successful in recognizing a decline in price pressures, and responding with a slower path of rate increases, that could be very good for both the stock and bond markets. Declines in stock and bond markets are painful, especially when they happen concurrently. In most bear markets, defined as 20% declines from peak, market returns are higher one, three, and twelve months out. So far, that is what has happened since early June.

We have remained focused on summer as a key point of reckoning for both the Fed and the economy. Our best case scenario is that price indicators would slow or reverse their rise and the Fed would recognize the change and slow the path of rate increases. The apparent softness in the economy should help get their attention as well. Our concern is that the Fed now wants to see a material slowing in the economy, in addition to lower price indicators and inflation, in order to feel justified that they have vanquished the inflation genie. We believe that the market is sending signs that their work is on-track and closer to complete than recent backward looking inflation indicators may indicate. Jerome Powell, listen to the markets.



Random thought:  “In my career, the Fed has a 100 percent error rate in predicting and reacting to important economic turns.”  – John Allison IV, retired CEO of BB&T bank



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Is it still 2022? Have this year’s market moves aged you? Don’t worry, you are not alone in these feelings, but rest assured that we are considering all of the relevant information and working hard to position portfolios with a longer-term view in mind. The S&P 500 has had its worst start to the year since 1962, with yesterday’s darlings bearing the brunt of this pain. If anything, the recent market losses serve as a reminder that investors should be focused on their long-term goals that rely upon diligent planning, implementation and actionable items in order to reduce the negative impact of making an emotional decision that is based more upon short-term biases instead of actual facts.

Market corrections have always tested even the most experienced investor. They also happen to be a very normal part of fully functioning investment marketplace.   The real challenge is that corrections test an investors’ fortitude, conviction, goals and overall approach which quickly leads to even more fear, pessimism, and outright despair.  Despite the list of growing negatives that investors are currently facing, there are still a number of positive items that support taking a longer-term view:



How are we positioned and what does it mean to you?

Our investment process revolves around our risk controls. As a reminder, client portfolios remain fully invested, are positioned sector-neutral to respective benchmarks, and currently maintain valuation discounts. These tenets have been accretive year to date, as value stocks (lower price to earnings) have generally held up better than pricey growth stocks (higher price to earnings). Given the severity in divergence of returns across sectors, the fact that we also remain diversified across all eleven market sectors has proven beneficial as well. This fully invested positioning should continue to ensure that when, not if, the market moves higher fully invested client portfolios will stand to benefit from the market’s shift upward.

We have seen a common theme emerge amongst investment managers that believe current market conditions have provided investors with an attractive buying opportunity.  This is a sentiment that we also happen to agree with.  As a result, Dana has been focusing its efforts to identify those companies that are less economically sensitive and those that can protect their profit margins.  Therefore, we are seeking to own companies that exhibit both a resilient business model as well as strong pricing power, both of which are key elements of our investment process.  This type of approach supports a longer-term view regardless of short-term noise.

Overall, we remain committed to our relative valuation discipline which provides the potential for downside protection along with the benefits of more positive price movement when the market regains its footing.

Our counsel has always been to stay invested, within the risk tolerance guidelines that you have set with your clients. Your guidance, as an advisor, is always beneficial in times of stress and uncertainty. This is a time to be proactive with your clients – let us know how we can help.


Disclosure: Dana Investment Advisors welcomes any comments to their blog and is more than willing to discuss or explain any aspect of it. This blog is provided for general information only and is not intended to provide specific advice or recommendations for any individual or entity. This is not an offer, solicitation, or recommendation to purchase any security or the services of any organization or individual. The foregoing reflects the opinions of Dana Investment Advisors.


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The Reckoning

April 25, 2022
Dow: 34,049

The coming actions of the Federal Reserve have now become the key focus and driver of the equity and bond markets. Even though they faced issues during their tenures as Chair of the Federal Reserve, Ben Bernanke and Janet Yellen did not face the issue that Jerome Powell faces now. In March, the S&P 500 dropped almost 13% from its early January high and annualized CPI increased from 7% in December to 8.5% in March.

Over the last quarter century, whenever the markets or the economy encountered a period of stress, the Federal Reserve was able to ride to the rescue by providing liquidity and encouraging investment by cutting rates. During the 2008 recession, the Fed not only cut rates to .125%, but doubled the size of its asset holdings from less than $1 trillion to over $2 trillion. Their asset holdings doubled again to over $4 trillion in 2014, and doubled once more to over $8 trillion by the middle of last year. Annual U.S. GDP is about $23 trillion, and total U.S. debt is over $30 trillion, including intergovernmental holdings. In the last three hiking cycles, Fed Funds peaked at 6.5% in 2000, 5.25% in 2007, and 2.375% in 2019. Whenever the markets have indicated that they cannot tolerate higher rates, the Fed has heeded that warning.

Has there been a downside to an easy Fed? Not in decades. The Fed has been able to cut rates and add additional stimulus to the economy by buying assets. They began by increasing purchases of Treasury securities, then added mortgages, and even supported the corporate bond market through purchases during the COVID-19 crisis. None of these liquidity measures triggered inflationary spikes, providing a seemingly free lunch.

Now the Fed says that it is serious about controlling inflation, and realizes that its actions may cause asset prices to decline and will likely slow economic growth. The market believes the Fed is serious. As of September of 2021, the Fed Funds futures market expected one rate increase by the end of 2022. That increased to three expected increases three months later. By the end of March, the futures markets expected eight quarter-point increases over the next nine months, and now that expectation is closer to ten.

Can the Fed maneuver through 2.5% of rate increases over the next eight months? We doubt it. Real GDP growth is trending back to the 1-3% per year range. Inflation should pull back as the spike in energy due to the war in Ukraine recedes. There are other constituents in the CPI, such as shelter costs, that will prevent inflation from falling back to the levels of the last decade. Treasury yields are in the 2.5-3% range across the middle of the curve, and long-term market indicators of inflation have not moved above 3%. We believe that the market sees sub 3% Treasury yields as a sign that the Fed will not be able to raise rates to 2.5% this year and may not get beyond 1.0-1.5%.

What will the Fed do if the market or economy falters, or before inflation shows signs of receding? This is the reckoning. No Fed has faced this dilemma since Paul Volker vanquished inflation in the early 1980s. We expect a weakening market or economy to slow or stop Fed rate increases before the Fed Funds rate hits 2%. A better outcome would be indications that inflation was retreating prior to the implementation of all of the currently expected rate increases. Nevertheless, it is a dangerous time, and we will be watching closely and taking necessary action in our managed portfolios as the markets react to Fed actions over the next three months.

Counterintuitively, rates at the longer end of the Treasury curve usually peak at or near the beginning of a Fed-rate-hiking cycle, so most of the pain may have already been experienced by bond investors. Going forward, there is more yield to offset further price declines, and this should comfort bond investors. In the equity markets, the correction has lowered valuations. Economic tailwinds exist from a strong housing market, consumers with low leverage, corporations with strong balance sheets and a tight labor market that should maintain a low unemployment rate and strong wage growth. Consumers are also anxious to resume normal life after COVID-19 and this should keep consumer demand and spending robust.



Random thought: “Fasten your seatbelts, it’s going to be a bumpy night” – Bette Davis in All About Eve


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April 5, 2022


Dana Investment Advisors is pleased to direct our inaugural donation from the Dana Donor Advised Fund, to ShelterBox USA, Inc., a US-based 501(c)(3) nonprofit and affiliate of ShelterBox Trust, an independently governed charity in the UK. ShelterBox USA is 4-star rated by Charity Navigator and Platinum rated by Guidestar – the highest ratings for non-profit organizations. ShelterBox was nominated for the Nobel Peace Prize in 2018 and 2019.

ShelterBox helps people when disaster strikes by providing them with emergency shelter and essential equipment, which includes helping refugees fleeing Ukraine right now. Our colleague and Fixed Income Portfolio Manager, Noaman Sharief, became a Board member last fall, and brought this organization to our attention.  “What impresses me most about ShelterBox,” says Sharief, “is that the individuals associated with the organization are truly committed to serving humanity without delay.”

ShelterBox has three Ukraine-focused projects.

Project 1/Ukraine: Assisting Internally Displaced People (IDPs) who are sheltering in Collective Centers

ShelterBox is sending thousands of mattresses to evacuation collective centers, including schools, churches, and centers in western Ukraine, providing people who have fled their homes with somewhere to sleep and keep warm at night.

Project 2/Ukraine: Repairing Damaged Homes

ShelterBox is preparing to send thousands of ShelterKits, including heavy-duty tarpaulins, tools, and rope. The kits help repair homes that have been damaged so that families can shelter in place. The aid package includes high thermal blankets, hygiene kits, solar lights, buckets, and water carriers to help people survive in conflict-damaged buildings.

Project 3/Refugee Support:

ShelterBox will support refugees in neighboring countries with high priority portable items. As the conflict continues, the needs of people reaching the borders will increase. Resources of some countries are becoming overstretched as more and more people seek safety and refuge. Moldova, for example, has seen more than 380,000 people flee into the country – equivalent to more than 10% of its population.

Mark Mirsberger, Dana’s CEO notes, “Dana employees have always supported charitable efforts with their time, talent, and financial gifts. This new Dana Donor Advised Fund, established in Q4 2021, expands our collective efforts to help others. We plan on growing this Fund so we can provide financial resources to worthy causes like ShelterBox for years to come.”

If you would like to learn more about ShelterBox, please see:

A New Kind of World Disorder

March 15, 2022
Dow: 33,544

A brave new world began on February 24, 2022. It is always easy to spot the mistakes that were made in hindsight, but the Western world clearly did not do enough to deter Putin over the last 20 years. He took advantage of U.S. miscues in Syria, and he was clearly testing the West with his incursion into the Crimean and the Donbas regions in 2014. He believed that he could invade and conquer most of the Ukraine, even though Russian puppet leaders have been driven from Ukraine twice in the last 20 years. The failure of the West was a failure to take the threat of invasion seriously and to provide serious deterrents prior to the invasion.

If the Russian invasion is stopped or turned back within the next few weeks, the consequences for the U.S. economy will be minimized. Russian population is less than half that of the United States and declining, and their GDP is 1/12 that of the U.S. The companies in the S&P 500 Index with the greatest sales exposure to Russia still derive less than 10% of their total sales from that country. Historically, bear markets in the U.S. have been driven by economic slowdowns causing recessions – not geopolitical events.

The U.S. economy was in the process of emerging from the COVID-19 pandemic when this equity correction began. While inflation and imminent Federal Reserve rate increases have also been clouds hanging over the market, the economy added 678,000 jobs in February as the impact from the omicron variant wound down. Personal balance sheets are healthy, the housing and auto markets are very strong, and wage growth is robust. Corporate America in aggregate has over $1 trillion in cash on their balance sheets, and they’ll likely continue to use it in ways that benefit shareholders, including boosting dividends, buying back stock, investing in their businesses and doing accretive acquisitions.

Even though cost pressures are intensifying, many companies have been able to overcome both increasing cost pressures and supply chain dislocations over the past seven quarters. Oil prices have spiked during the conflict, but the U.S. economy is far less dependent on oil as an input than it was fifty years ago. U.S. petroleum consumption has been roughly 20 million barrels per day for the last 45 years, even as GDP has more than tripled. The U.S. has also gone from importing 60% of its consumption in 2005, to being a net exporter of petroleum products in 2020.

As most of our clients understand, we are investors and asset allocators, not market timers. The events taking place in Eastern Europe are horrendous, but the state of the U.S. economy is strong. Equity investors should be aware that -10% market corrections are a normal and regular occurring event. While they can be stressful for investors, they typically occur every year even though U.S. equity markets have advanced over 10% annually since 1926. After a rough 2022 start, many equity investors have begun to forget how strong markets were in 2021 with the S&P 500 Index hitting 70 new all-time highs and only briefly experiencing a modest 5% decline. Last year’s 28.7% advance for the S&P 500 Index without significant volatility was exceptional and not typical. Corporate earnings of S&P 500 Index companies are forecasted to grow more than 10% over the next few years, and U.S. productivity and innovation remain strong. Based on this backdrop and on yields of other asset classes, we expect equities to remain the best performing long-term asset class and see no reason why they won’t provide returns similar to their historic average over the next market cycle.

While we caution clients about making emotionally driven allocation changes based on temporary setbacks, there are opportunities to reduce risk and generate consistent investment income with bonds and other asset classes. The Federal Reserve is meeting this week and is expected to begin a tightening cycle by increasing the Fed Funds rate by at least 0.25%. Our adjustable-rate focused Limited Volatility bond strategy will certainly generate higher income as the Fed increases rates. In our equity strategies, we are focused on adjusting our industry exposure within the industrial sector and taking some profits in higher valuation stocks that have been perceived as safe havens over the past few years. We continue to monitor inflation expectations, which we believe will be higher and more persistent.

Clearly these are challenging times for investors, and we are ready to meet these challenges by following our time-tested investment strategies and making adjustments based on our evolving outlook. We will continue to share our insights and welcome your questions.


Random thought:  “There are decades where nothing happens; and there are weeks where decades happen” – Vladimir Ilyich Lenin


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