CIO Mid-Year Review: Keeping a Long-Term Perspective

We’d like to start our Mid-Year Review with a pause. At the end of 2021, we looked forward to a new year—a potentially calmer year—having come through almost two full years of the coronavirus pandemic. As people, we were aware our lives had changed, but we hoped for a better 2022; as investors, we were aware that the economy was strong and employment was robust, yet challenges loomed, including inflation, supply chain disruptions, and tightening monetary policy; as employees, students, and family members, we recognized much was different, but we sought a return to what’s familiar. What we didn’t know was that a world leader who controls one of the largest militaries on the planet was about to start one of the worst atrocities in Europe since World War II. Our thoughts are with the Ukrainian people, and our hope is for this unjustified, senseless human tragedy to end quickly

The equity market started 2022 on a high note, with the S&P 500® Index hitting an all-time high on the first trading day of the year. This turned out to be the last hurrah for a market that saw a continuous march higher in 2021, having hit 70 new all-time highs, with a new all-time high being recorded on average every three and a half days. Concerns in the market then coalesced and overpowered bullish sentiment, and the market has spiraled lower throughout 2022. Factors that drove the market lower include: tightening monetary policy as the Federal Reserve has begun raising rates and has announced plans for shrinking its $8.5 trillion asset portfolio; inflation, higher energy costs, and their effects on the domestic and global economies; continued supply chain disruptions; investors’ indiscriminate liquidation of broad-based ETFs and index funds and the detrimental effect on equities; and the near-term and long-term global implications of the Russian invasion of Ukraine.

While markets are adjusting, many positive conditions remain intact. Corporate balance sheets and profits remain strong, GDP growth remains positive, the consumer continues to show resilience in the face of rising prices, cash is abundant both at the corporate and household levels, unemployment is exceptionally low, and our financial system remains healthy. Markets are also experiencing a change in leadership, as value stocks have been outperforming growth stocks, and traditionally defensive sectors such as Utilities and Consumer Staples have been outperforming the broader market. Finally, the Energy sector has soared in 2022, as companies reap the benefits of dramatically higher oil and natural gas prices, and shareholders are rewarded with significantly higher dividends, aggressive buybacks, and higher stock prices after many years of underperformance for the sector.

With history as our guide, we are hopeful that eventually the market may bottom and head higher again. Since the financial crisis of 2008, we have experienced many corrections and many recoveries to new highs. The Dow Jones Industrial Average has dropped over 10% eight times, including the current drop, for a median decline of 14.00%, and on average, it took 45 trading days to drop from peak to trough and 127 trading days to return to the previous peak. Since the current drop has taken longer to go from peak to its recent trough, it may take some time for a recovery in prices to truly take hold.

On a positive note, valuations have come in, and many stocks have become more attractive, especially for longer-term investors. We note, however, that the concept of “historically cheap stocks” does not, on its own, move the market higher. Rather, it is overall capitulation and improving fundamentals that could bring buyers back into the market and reverse any bearish trends. Investors need to see improving company earnings, retreating inflationary trends, a measured pace of interest rate increases globally that does not cause significant economic contraction, hope for a more peaceful and orderly world economic system unconstrained by supply bottlenecks and other hindrances to global trade, and, most importantly, a subsidence of the deleterious effects of the coronavirus pandemic. While that may seem like a “tall order,” we believe that patient investing, focusing on value, quality, and downside risk mitigation, works well over the longer term.

During this tumultuous period, performance of the majority of the Hennessy Funds has been relatively strong when compared to the overall market as well as to our benchmarks. During the six months ended April 30, 2022, the Dow Jones Industrial Average, the S&P 500® Index, and the NASDAQ Composite Index dropped 7.05%, 9.65%, and 20.15%, respectively, on a total return basis. During this period when these three major indices saw significant declines, we were pleased that seven of our 16 Funds posted positive total returns, 10 of our 14 domestic Funds outperformed the S&P 500® Index, and over half of our active funds outperformed their primary benchmarks. Three of our Funds that are focused on the Energy and Utility sectors, both of which saw positive returns, are the Hennessy Energy Transition Fund, the Hennessy Midstream Fund, and the Hennessy Gas Utility Fund, and all three Funds performed exceptionally well with positive total returns of 28.78%, 14.52%, and 16.61%, respectively, during the six month period.

The backdrop of global economic concerns, rising U.S. interest rates, and the growth to value rotation impacted our two international funds. The Hennessy Japan Fund and the Hennessy Japan Small Cap Fund experienced negative total returns of -30.55% and -22.97%, respectively, as the Japanese stock market suffered from concerns of the continued economic slowdown in Asia, as well as other parts of the world. As long-term investors, we believe patience and investing in businesses that have strong fundamentals will outweigh the short-term pain. While we would prefer to post only positive returns for our shareholders, we are pleased that our overall style of investing and our general focus on value, strong balance sheets, and resilient income streams have allowed many of our Funds to hold up better than the broader market.

We thank you, our shareholders, for your continued interest in our family of Funds. We are grateful for the trust you put in us, and we will continue to strive to manage our portfolios for long-term performance, ever mindful of downside risk. While volatility and uncertainty may impact the markets in the short-term, we encourage investors to stay the course, maintain a diversified portfolio, and keep a long-term perspective. If you have any questions or would like to speak with us, please don’t hesitate to call us directly at (800) 966-4354. In closing, we would also like to thank all of the healthcare and frontline workers that have worked—and still work—tirelessly throughout the coronavirus pandemic

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Best regards,