The Financial Advocate: Fall 2021
As we seem to be gradually emerging from Covid-19 (it is almost 2022!), we find ourselves in a conundrum. The economy is finally recovering – rather robustly. But, will people come back to work? Why is inflation running so hot? Will the markets keep going up? What about interest rates? What about all that proposed political spending? Who’s going to pay for it all? The dictionary defines a “conundrum” as a difficult and confusing problem or situation; we’d argue that sums up the world we live in today.
Let’s try to make some sense of it all, and offer some suggestions on how things may pan out.
First, the positives. The economy and corporate profits are soaring! Most major American companies han-dled the pandemic rather well. With some government support and with adroit management, companies “right-sized” to the “new normal,” leaning down, refinancing, and setting their sights on how to operate in a Covid and eventually post-Covid world. For the most part, their strategies worked well. With Covid mostly behind us, we have record shattering profits quarter after quarter. The stock market is cheering! That’s the good part but…
Where are all the workers? Why are there “help wanted signs” eve-rywhere? Why are some store shelves empty?
Workers – Many people spent Covid working from home. Many parents became their children’s teachers. Many moved away from cities to the suburbs. Lives changed.
Here are some helpful facts. We are “missing” (conservatively) five million workers. Some are parents who are not coming back to em-ployment. A whole different group were nearing retirement and de-cided to do just that – retire! Another group does not want to come back to work fearing another round of Covid. There are those that resist vaccines and choose to quit. Lastly, some speculation surrounds people who may have accumulated some wealth through the equity appreciation of their homes, stock market in-vestments and crypto currencies and now have enough money to stay home for a period.
Here’s the key statistic, labor force participation is now at around 61.7% of eligible workers actually work-ing. Before the Financial Crisis, that number was 66%! That’s a whole lot of people. The latest JOLT’s re-port indicated that there are over 10 million unfilled jobs out there. Are they coming back? We think the an-swer is “very slowly.” This is the new normal.
Inflation, empty shelves etc. – Yes, inflation is running hot. It is interesting to see how it shows up. The su-permarket and the gas station are obvious examples. The supply chain disruption is everywhere. When you shut down the largest economy in the world, it’s hard to just start it back up from scratch. Semiconductors are in nearly everything you buy. When semiconductor manufacturers cancelled their orders for raw materi-als at the beginning of the pandemic, they had no idea that the recovery would be quick and robust. The swell in demand caught many of them off guard.
Remember all those workers who went home and moved to the suburbs? They all needed cars and ap-pliances and electronics – all at the same time! The supply chain is global, meaning a lot of the raw ma-terials going into finished products are not produced here. As a result of worker shortages in the shipping, transport, warehousing, retail industries, the supply chain backed up. It is so backed up that shipping costs are up 1000% or more! The busiest port in the country is in Los Angeles. In normal times, there is usually one or two ships waiting to be unloaded. As of several days ago, that number has grown to over 100 ships! Thousands and thousands of containers, all filled with the products you are trying to buy!
Interest Rates and the Fed – During the pandemic the administration spent several trillion dollars supporting the US economy. The Fed spent 4-5 trillion more! This is truly a staggering sum. While keeping interest rates at rock bottom levels and flooding the markets with money, the economy survived, then BOOMED! The Fed has begun (this month) reducing the rate of monetary support from the economy. This will continue into the middle of next year. At that time, the Fed will gauge the status of the economy and decide whether or not to raise interest rates. Interest rates are designed to tamp down inflation. As everything becomes more expensive due to higher interest rates, theoretically demand cools and prices retreat. We shall see. Higher rates in the short term are not necessarily bad for the stock market. The perception is that if the Fed is raising rates the economy must be doing well. We all know a strong economy leads to higher profits.
Politics – Earlier this year, we postulated that the Biden administration’s spending plans would be curtailed. While passing the $1.2 trillion-dollar infrastructure plan this month is noteworthy, it paled in comparison to the $3.5 trillion dollar social spending plan that Biden hoped to pass. With massive infighting in the Demo-cratic party and staunch opposition from the Republican party, this bill has been reduced to half its initial size. Political approval rates are low, there were some upsets in the November elections, and the holiday re-cess is looming. We might not see a final version of this package until next year.
Therefore, in summary, our best guesses moving into the new year are:
Workers – Higher wage rates are the new normal. But, technological developments may eventually damper this trend. Think autonomous driving, robots, and other advances that im-prove productivity. By the way, robots and autonomous vehicles don’t take sick leave, need retirement plans, and they work 24/7! Lots of invest-ment opportunities in this new normal.
Inflation and the supply chain – higher prices will affect us for some time. The supply chain will take at least to the middle of next year to get back to normal. Again though there are opportunities in “on -shoring” more man-ufacturing, more technological advancements in logistics, and transporta-tion. More investment opportunities.
Interest Rates & the Fed – We believe the Fed has done a great job manag-ing through the pandemic. Now comes the hard part. The Fed must con-vince markets that they can successfully back out of the markets and let the markets return to normal (meaning no Fed support). We are hopeful that they can do this with little disruption. Only time will tell, we do expect some rise in interest rates in the coming year but disinflationary factors should keep those increases modest. We believe President Biden’s renomi-nation of Fed Chair Powell is a major positive.
Politics – 2022 is an election year. Midterm elections are a big deal. Expect plenty of ad spending, finger pointing, and just plain nonsense in the political arena this coming year. That does not seem to present a healthy environment for the Biden social spending plan to flourish. It may not happen at all. If it is passed in some fashion (greatly curtailed) expect some increase in general taxation. Again, we expect far less aggres-sive tax increases than originally proposed.
Our job remains to manage the situation we are given and protect you, your plans, and future by the best means possible. Our rigorous research and disciplined portfolio management has generated yet another rec-ord year for our clients. Portfolio performance remains exceptional in discretionary, actively-managed ac-counts. When the time comes for us to take a defensive posture, we are prepared to do so. For now, we con-tinue to see opportunities in many investment areas. So many new, innovative industries are available for in-vestment. For our more conservative investors, corporate balance sheets remain strong, dividend increases are on the way, and corporate oversight is the best we have ever seen. ESG is being embraced by corporate America and climate change initiatives abound. We are watchful for storm clouds on the horizon; but for now, it’s sunny outside!
Global Alpha: Global Alpha continues to adapt to shifting market conditions. Some themes such as mega-cap tech, semiconductors, cloud, robotics and AI remain in place. Others are shifting. In the payments space for example, we have reduced positions in traditional credit card companies and increased positions in new forms of payments. We have added investments in traditional auto makers as they transition to the EV world. We are always on the lookout for changing consumer trends as well. Newer areas for Global Alpha include Fintech, traditional cyclicals, energy and logistics. A trouble spot has been in cutting edge bio-tech. These companies are “one step away” from the next BIG solution, but have been languishing as inves-tors seek areas of immediate profitability. We will hold and monitor our exposure here to prevent an erosion in the model’s overall performance
Global Balanced: Global Balanced is positioned for an economic recovery that spans beyond the US. It has exposure to re-opening investments both domestically and abroad. The portfolio has expanded its exposure to the commodity and natural resource sector. Positions in infrastructure have worked well. Core holdings in technology, healthcare, and consumer discretionary names continue to play a central role in the strategy’s domestic equity holdings. At this time, all fixed income positions are short-term, inflation adjusted, or varia-ble rate securities.
Moderate Allocation: The Moderate Allocation portfolio continues to be overweight equities, underweight fixed income, and slightly overweight cash. We will use cash opportunistically as pullbacks present them-selves. Over the past few months we continued to trim some of our core holdings as their price advances be-came extreme. Examples of positions that were trimmed include: Costco, Target, and Nike. We are still over-weight these holdings versus our benchmark. Some positions were sold because their “turnaounds” are tak-ing much longer than anticipated. Boeing and Intel are two examples. We initiated a position in Freeport-McMoRan, which is benefiting from the inflationary environment . We also added positions in General Mo-tors, and Cisco Systems. The model’s performance is besting its benchmark on a year-to-date basis.
The quarter’s financial planning topic is “Year-End Tax Planning.” As we mentioned, many tax initiatives are tied up in the Social Infrastructure Bill (“Build Back Better”). This is making it somewhat difficult to make formal tax projections for 2022. That does not mean we are not going to take any action. As always, we will comb taxable accounts for offsets. If you have any personal gains or losses from other investment activity, please be sure to let a member of our team know, as we can take this into consideration so you can achieve opti-mal tax results. Just like with your investments, as the tax code shifts, so too will our recommendations on this front.
As always, we appreciate your patronage and continued support. Enjoy the holiday season!
Nick Ventura, CFP® CPWA® President / CEO