A year ago, we were cautious about chasing risk. We remain somewhat cautious about the overall market given the double whammy of slowing earnings growth and declining P/E multiples alongside tighter monetary policy. However, it’s hard not to acknowledge that some fluff has come out of the market and the overall risk/reward profile looks more balanced. Even more “conservative” stocks are down sharply as market weakness has spread. We aren’t firmly embracing risk, but it could make sense to start incrementally taking on more risk as prices decline. At a minimum, it is important to fight the natural tendency to become increasingly negative as markets decline. Even if stocks aren’t “cheap” yet, they are cheaper than they were.

The speculative fervor of last year is done and we generally aren’t interested in many of the lower quality names that have blown up. But, a number of high quality and durable franchises have also been pummeled during the recent melee. Admittedly, many of these were formerly trading at lofty and unsustainable valuations.

Fast forward to present, we have very recently been incrementally taking on a little risk at much more attractive prices. We recognize we could be early, but timing bottoms in various names will be virtually impossible. Taking baby steps towards risk could prove prudent over the course of the next few years – even if it looks foolish in coming months.

Again, equity markets face headwinds that make recent declines somewhat unsurprising and we aren’t changing our tune with regards to expecting more subdued returns than prior years (the start to 2022 has gone a long way to subduing returns already!). However, we can definitively say that these and other high-quality stocks should have much less downside than before. We are not calling this an “all in” moment. Perhaps we are just a little less cautious given a somewhat improved risk/reward setup for the market.