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The Adjustment Period Continues

As we progress through the recent volatility I believe the market is pricing in the higher rates that the Fed is implementing with anticipated acceleration. That being said, I do not believe the market has fully adjusted to the effects of rampant inflation, the effects of quantitative tightening just being implemented, nor the anticipated earnings revisions as a result of these challenges. Bearish sentiment will continue until the Fed moderates policy.

Accordingly, I think the capital markets will remain volatile for the next few months. Once the Fed eases up on the pace of tightening, China fully opens up, and/or inflation is reasonably tamed, the market will settle into a more historical valuation multiple. Pending the overall market reversion we have been holding back from investing our large cash balances. There are now however some individual stock names that have reached attractive earnings multiples and I feel comfortable dollar cost averaging into these candidates given the drawdown as a result of today's 8.6% inflation report. Going forward you may begin to see selective purchases, and as the broader market reaches more historical levels of valuation you may see a more aggressive move on our part.

In the meantime the positions we hold have acted defensively as they are principally large capitalized companies that pay stable and growing dividends, have large cash reserves on their balance sheets, and are buying back their own stock opportunistically. Additionally these proven enterprises have been through several of these cycles before and have come out in a stronger position on the other side. Nominal GDP remains strong but real GDP has been impacted by inflation and will be slower than previous years. As we have written about in the past, this historically has induced volatility but leads to strong long-term equity returns. 

I just wanted to touch base with you as we progress through this period of adjustment and give clarity to our investment strategy. As always we are available to discuss in greater detail.


Commentary Disclosures: Covington Investment Advisors, Inc. prepared this material for informational purposes only and is not an offer or solicitation to buy or sell. The information provided is for general guidance and is not a personal recommendation for any particular investor or client and does not take into account the financial, investment or other objectives or needs of a particular investor or client. Clients and investors should consider other factors in making their investment decision while taking into account the current market environment.

Covington Investment Advisors, Inc. uses reasonable efforts to obtain information from sources which it believes to be reliable. Any comments and opinions made in this correspondence are subject to change without notice. Past performance is no indication of future results.

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Covington Investment Advisors, Inc.
301 E. Main Street
Ligonier, PA 15658
Phone: 724-238-0151
Fax: 724-238-0148