October 2022 Update
Digital Department

The bear market is not over.

Before it is over, there will be a capitulation and you will not want to be an investor.

The stock market in 2020 and 2021 was a bubble. Reminds me of the 1998 and 1999 tech bubble.

As I have noted over the last two years, there is a very dark side to free money. Inflation. No capital discipline. When money is free, people will pay indiscriminate amounts to buy things. Stocks, bonds, houses, crypto.

And here is the point. When we reach the moment of maximum pain, which is coming, the opportunity will be the greatest.

What we have seen in 2022 is healthy. At current levels, stocks have returned to their normal historical valuation. Stocks are again attractive but no bargain. And bonds, with those rising rates that are causing all the pain, have plummeted in value – worst bond market in 50 years – half a century – and Fed Funds are really just reverting to historical norms.

Think of it like steroids. The returns over the last few years of the 2009-2021 bull market were ARTIFICIALLY fueled by near zero interest rates. The eventual result: Inflation – the worst we have seen since the 1970s. Slowing demand. Stagflation. Loss of purchasing power – which really means all the stock market gains weren’t actually REAL returns – just nominal.

So why invest? Let’s step back and put this in perspective. In the last cycle, the stock market (Russell 3000 Total Return Index) peaked on October 9, 2007. The market went down for the NEXT YEAR AND A HALF and bottomed March 9, 2009. The TOTAL DECLINE was 56% peak to trough. After bottoming in March of 2009, the Russell 3000 Total Return Index then went up 818% and peaked on January 3, 2022.

Let’s do the math for the last cycle. This cycle INCLUDES the worst bear market since the Great Depression. $100 invested in the stock market on October 9, 2007 (peak of the last cycle) was worth $44 on March 9, 2009. Beyond painful. The $44 on March 9, 2009 then appreciated 818% and was worth $404 January 3, 2022 (peak of this cycle).

So, the peak to peak return in the last cycle was 304%. A tidy sum. This is a compounded average annual return of 10.4% per year.

By staying invested through the bear market of the Great Recession of 2008-2009, investors more than quadrupled their money from October 9, 2007 to January 3, 2022. The greater than fourfold increase in the market over this fourteen year period INCLUDES the worst bear market since the Great Depression in the 1930s.

The most important thing that Sandhill can do is make sure that our stock and bond books are properly set for the next cycle. As I have recently noted, we have outperformed the market by 3.7% net of fees since February 1, 2022 through September 30, 2022. That we have done this as a growth manager in a value favored environment is an indication we are very much on the right track.

The bad news is that the pain is not over. It is useless to try and time it – no one is that smart. Too many dynamic inputs to know when a market bottom will be made. If you want an indication, it will be when you are ready to throw in the towel.

So, why do we have bubbles and bear markets that test the limits of our patience? Certainly, events and circumstances dictate market behavior and pricing. But most importantly, HUMAN EMOTION (Warren Buffet’s fear and greed) causes markets to OVERREACT. It is our job to take advantage of that.

A piece of good news. We have short term bond portfolios. This is not by mistake. The average duration (effective maturity) is only 3.9 years. That means that your bonds will mature relatively quickly and the proceeds from the matured bonds will buy new bonds that have much higher coupons (interest rates). More income and cash flow for our clients.

Here’s where we currently sit year to date through 9/30/22. Sandhill is on very solid footing. Our CEA portfolios through 9/30/22 are down 25.7% net of fees and 1.1% behind the Russell 3000 Total Return Index. I am good with that as we are a quality growth manager and this is the WORST environment for growth stocks (rising interest rates and slowing demand). We are right there with the benchmark averages that are a combination of growth and value. We are far outperforming the broader growth averages. And remember, over time, growth outperforms value. Bonds – we are outperforming the market (-10.3% net of fees vs -10.4% for the BOA ML 3-5 Year Corporate Index), have no credit problems, and have a short duration portfolio. Great position to be in. We have bonds maturing all the time. We bought 4 year Goldman Sachs bonds the other day with a 5.81% yield to maturity. No call provision. Great stuff. The key is we have no credit problems and need to avoid them. Our Large Cap Yield Product is outperforming its Dow Jones benchmark by 1.6% net of fees. And finally, the REIT product we are distributing is UP 6.5% for the year. The REIT will be challenged to support its dividend in 2023 with rising rates but believe they will maintain it.

I believe the S&P 500 will bottom in the 3300-3500 range.

There will be more significant rate hikes as the consumer remains strong and not enough demand function has been taken out of our economy.

I also expect the market to bottom late in 2022 or the first half of 2023. When it does, there will be bargains galore.

Black swan events include Russia using tactical nuclear weapons in Ukraine and China going after Taiwan. The greatest threat to the stock market is the risk to our electoral process. The process needs to function honestly and properly. Republican or Democrat, we are Americans. Our capital markets are head and shoulders – miles ahead – above any other investment theatre in the world. The reason is our truly democratic society governed by the rule of law.

My best to everyone for a terrific remainder of 2022.

With regards,

Edwin M. Johnston III

Founder, Co-Managing Partner


Annualized Performance Summary (Net of Fees) As of 09/30/2022

CEA (Master): 1 Year: -24.7% | 5 Year: 5.7% | 10 Year: 10.9%

Russell 3000 TR: 1 Year: -17.6% | 5 Year: 8.6% | 10 Year: 11.4%

Corp. Bond: 1 Year: -10.3% | 5 Year: 0.5% | 10 Year: 2.1%

B of A ML 3-5 Year: 1 Year: -11.1% | 5 Year: 0.9% | 10 Year: 1.9%

Large Cap Yield: 1 Year: -10.0% | 5 Year: 5.3% | 10 Year: 7.9%

DJIA: 1 Year: -15.1% | 5 Year: 5.1% | 10 Year: 7.9%

This report has been prepared for informational purposes only and is neither a solicitation to buy or sell securities. Third-party information in this report has been obtained from sources believed to be accurate; however, Sandhill makes no guarantee as to the accuracy or completeness of the information. Sandhill Investment Management (“Sandhill”) is a registered investment adviser with the Securities and Exchange Commission that is not affiliated with any parent company. Individual results may vary. Investments may not be suitable for all investors. Performance may be materially affected by market and economic conditions. Investment strategies have the potential for profit or loss. The U.S. dollar is the currency used to express performance. Performance presented net-of-fees is reduced by investment management fees, trading expenses, and administrative fees. Interest, dividends and capital gains in these Composites are not immediately reinvested. The Concentrated Equity Alpha Composite includes all discretionary non-wrap fee paying accounts in the all-cap core strategy which may hold large, mid, and small capitalization U.S. common stocks, American Depositary Receipts (A.D.R.’s), domestic ETF’s, sector ETF’s, and cash. The Russell 3000 TR Index is a market cap-weighted index of 3000 of the largest US common stocks which represents 98% of the US equity market. The Large Cap Yield Composite consists of all discretionary non-wrap fee accounts invested in U.S. common stocks, American Depositary Receipts (A.D.R.’s), domestic ETF’s, sector ETF’s, and cash in solely large capitalization companies. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.. The Corporate Bond Composite consists of all discretionary non-wrap fee paying accounts invested solely in individual Corporate Bonds and cash equivalents. The Corporate Bonds will generally be rated single B to single A and will have maturities of three to nine years. The Bank of America Merrill Lynch 3-5 year Corporate Bond Index is a subset of the Bank of America Merrill Lynch US Corporate Master Index tracking the performance of US dollar denominated corporate debt publicly issued in the US domestic market. Referenced benchmarks are not available for direct investment. For a full performance presentation and/or the Firm’s list of composite descriptions, please call 716-852-0279. Private REIT Disclosure: Accredited investors only: Non-Traded Private REIT is only offered and sold to individual investors and certain entities which are “accredited investors” under the Securities Act and the rules of the SEC, and who provide us with information we require to verify their status as accredited investors. Individuals are accredited investors only if they meet certain minimum net worth or sustained annual income thresholds. Entities are accredited investors only if they hold sufficient assets or are completely owned by accredited investors. Limited Liquidity: Investors may need to hold their shares for an indefinite period of time. Royal Oak’s share redemption program is limited in amount, may be terminated or suspended from time to time, and is only available after shares have been held for a required period of time, except upon death. In addition, Royal Oak’s ability to redeem its shares may be limited. Determined Share Value set by Royal Oak’s Independent Directors Committee: The Determined Share Value (DSV) is the price at which Royal Oak sells its common stock and is set by the members of the Independent Directors Committee of Royal Oak’s Board of Directors In setting the determined share value, the Independent Directors Committee considers, among other factors, annual valuations by an independent valuation firm, real estate appraisals and the purchase prices of recently acquired properties and tenant compliance with leases. There may be variations from time to time in how Royal Oak’s independent directors apply or weigh the criteria in setting the “determined share value” or stock price. Royal Oak is not required by law to follow any particular methodology in setting the stock price. Distributions with respect to Royal Oak’s common stock are only made if and when declared by the Board of Directors, and are subject to state law limitations on sources of funds and Royal Oak’s ability to pay distributions and certain contractual commitments, including financial covenants. Royal Oak’s past practice of distributions does not guaranty the timing or amount of future distributions. Royal Oak’s dividend is comprised of ordinary income (taxable) and return of capital (tax deferred).

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