Ed Cofrancesco is the CEO of International Assets Advisory. As an independent Broker-Dealer, Ed has worked with a variety of financial advisors and institutions for nearly three decades, carrying extensive knowledge of the financial industry. Ed strives to lead his clients, firm, and partners to profitability, which he has accomplished during several economic downturns throughout his career.
Russ Alan Prince: Can you tell us more about IAA and its investment outlook?
Ed Cofrancesco: International Assets Advisory—IAA—was founded in 1982 with the purpose of bringing international exposure to retail investors, which amounted to a revolutionary idea at the time. Over the last 40 years, our mission evolved to become a full-service, retail-oriented, comprehensive financial services platform.
Our goal has been to excel through a relationship-driven method, utilizing both fee-based and commission-based models as best suits the wants and needs of our clientele. We work closely with our advisors and institutions, to offer the very best choices of products and services.
As far as our investment outlook, in late April of 2020, after the onset of the COVID pandemic and the initial shock to equity markets, with cautious optimism, we believed that equity markets would rally and we predicted a DJIA of 35,000 by 12/31/2021.
In February of 2021, we began warning of inflation and by April of 2021, we saw inflation as long-term and not transitory. Meanwhile, by the end of December 2021, when equity markets had reached the levels we predicted in April of 2020, it became apparent to us that inflation and supply change shortages would be with us through at least 2024 and we became very bearish on equity markets overall.
On December 31, on both Bloomberg TV and Fox Business Network, we predicted that markets would be very erratic, moving two steps back, one step forward, three steps back, two steps forward, and so on but always trending lower until a big sell-off which we expected to happen sometime in the second half of the year. We also expected the economy to slip into recession sometime in 2022. We think the whipsawing that we have seen in equity markets through this year, the continued rise of inflation, and the obvious slowing of the economy are exactly in line with our predictions from late 2021.
Prince: How is inflation in 2022 different from previous years…say the 1970s when it was rampant?
Cofrancesco: Inflation has been so far below the historical average for more than 20 years that the upward momentum we’re now seeing is shocking to many working-age Americans who have never been through something like this. There are numerous reasons why we’re being hit with this inflation now, but we think that much of it is self-inflicted by our political leaders. There were many voices warning that those extra stimulus packages were unnecessary and would be inflationary.
Actually, if we use the same calculus for inflation that was used in the ’70s, inflation today would be well over 10%. The reality is the Federal Government has been playing games with the inflation calculations for years to suit political agendas.
We feel this effect in many different ways. While it may seem logical to exclude energy costs from the “core” inflation calculation because of energy’s volatility, energy has a much greater impact on the cost of goods than ever before. The cost of energy was a big driver of inflation in the 1970s as anyone who remembers the gas lines can attest. In those days many, many times more of the goods we purchased were produced domestically. Today, much of what we purchase is made overseas and thus rising energy costs have a much greater impact on the transportation costs of goods sold in the US today than in the ’70s.
Prince: What is your market outlook over the coming months?
Cofrancesco: At IAA we feel that the chances of recession are better than even money and more and more economists seem to agree with us. In fact, we think that we are already probably in a recession. Inflation has come on a lot stronger than most observers expected and the stewards of our economy, especially, Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell, failed miserably.
We have been consistent with our predictions of an equity market correction of at least 35% in major indices and nothing to date has occurred to change that prediction. We believe that the Fed and the Government will not/cannot create a soft landing and recession is inevitable. Thus we think investors should be moving to stocks that are defensive picks, which we believe will do significantly better than the general market in the coming months and we’re increasingly focused on other defensive postures, such as covered call writing, and buying puts, maybe even using vehicles that have fallen out of favor in recent years like variable annuities where there are ways you can participate in the market upside while limiting your downside risk.
We believe that the current choppy trading, with markets trending downward, will continue for a time as investors scramble for a safe place to put their money and earn some kind of a return. Until finally, we get capitulation and the big sell-off. We believe that is likely to occur in late Q3 or early Q4.
Beyond that our crystal ball is kind of foggy right now, so we’re urging clients to exercise a great deal of caution.
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.