More inflation ‘on the horizon,’ says Envestnet’s D’Auria

Jeff Benjamin [00:00:03] Well, folks, my name is Jeff Benjamin, and this is Three Questions. Talking today with Dana D’auria, co-chief investment officer of Envestnet PMC. Dana, how are you doing? 

Dana D’auria [00:00:15] I’m doing great. Thanks so much for having me, Jeff. 

Jeff Benjamin [00:00:17] Thanks for being here. We’re going to look ahead a little bit here. We want to hear what what Dana’s brain has has in store for what she sees in store for the year ahead. Lot of good questions here for you, Dana, so we will try not to stump you. First off, what is the single biggest concern for markets next year? 

Dana D’auria [00:00:36] Well, there’s a few, but if I had to pick one, I’d have to say it’s inflation right now. You know, we just went through a year where the Fed was telling us that inflation was transitory. The big focus was on employment. And of course, that made a lot of sense coming off of a pandemic. But, you know, very much leading the Fed. We saw a lot of surveys from investors, consumers, et cetera, saying our big concern is is price increases. And we’ve seen that for months now. And so now we finally kind of have that about-face from the Fed. And they’re focused on inflation and they’re more hawkish and this is happening right as growth is kind of slowing down a bit. We just actually had a report out consumer spending was down in November, and that’s one of several. We’re starting to see growth leveling off just as inflation’s kind of being taken on by the Fed. So I’d have to go with inflation.

Jeff Benjamin [00:01:26] OK. That seems to be a theme from carrying over from 2021. And so we’ll watch that. Should we be ready for more market volatility in 2022? 

Dana D’auria [00:01:37] That does seem to be the current market expectation. I would say at this point, Jeff, and probably likely especially, you know, we’re in year to sort of have a recovery, so it wouldn’t be unprecedented to expect more volatility. Obviously, we have you know what we just talked about, inflation is kind of on the horizon, you know, potential Omicron now returning us to a certain extent to lockdown. I think we’re not going to see the lockdowns we probably saw at the beginning of this pandemic. I just don’t I don’t think that politically that’s feasible. I think we’ve got a lot of lockdown fatigue. But at the end of the day, we could certainly see supply chains worse and we could certainly see dollars chasing goods, as we’ve seen this year as opposed to services. So and we have seen sort of a rebalancing into defensive stocks, which you would kind of expect. Tech has been defensive, but now tech is facing certain headwinds. There’s, you know, certainly the valuation multiples, there are high and there’s potential regulatory issues there. So between Omicron of inflation and the Fed and fighting inflation and then throw in, what are we going to do with build back better? I think there’s certainly a possibility for more market volatility in 2022. 

Jeff Benjamin [00:02:47] OK. Well against that backdrop. How should financial advisors and investors plan for 2022? 

Dana D’auria [00:02:54] So, you know, it’s it’s tried and true advice, but first of all, control what you can, you know, focus on the areas that you know, you can control in your portfolio taxes, costs. Are you with the right risk tolerance, right? So what do I mean by that? Is, you know, have you kind of stretched in terms of how much equity you have in your portfolio versus fixed income, you know, with the hope of kind of getting some of the great returns that have been out there? But you really couldn’t take that the associated drawdown with that level of equity. Take a look at how much you have invested in equities versus fixed income, how much you have invested in higher risk fixed income like high yield and make sure that you can deal with that, that level of volatility. Diversify. You know, it’s folks say, Hey, when markets go down, everything correlates to one, so diversification doesn’t work anyway. My response to that is no, it’s actually working very well. Diversification doesn’t help you with systematic market risk, but it does help you with idiosyncratic stock risk. So in a market downturn, you don’t want to be in the worst performing asset. You don’t want to be in the worst performing sector or the worst performing country. You really want to be diversified. Even though everything is kind of dropping, you’re not having that experience of the true as bad as it gets during the downturn. So I’d say it’s kind of the tried and true stuff. I’ll get one other quick point. A small value has outperformed inflation in the decades that that we’ve seen. So you know, that’s a place to look. If you’ve not already had some small value contingent, I would say to look there.

Jeff Benjamin [00:04:24] Good stuff. There you have it, folks. You’re ready for 2022. Thanks to Dana D’auria, co-CEO of Envestnet PMC. Thank you very much, Dana.