Weather you like it or not
Spring has not been kind. While we wait for cool breezes and warm sun, Mother Nature has doled out temps in the forties with 25 mile an hour wind. The polar fleece is still the go to clothing item to deal with this. But our despair will be short lived. Warming trends are on the way, and T shirts, shorts and flip flops will appear out of nowhere. We deserve this after the last year. Enjoy, savor, and please take advantage. We know the Summer is always too short, but it is up to us to exit the front door and go have some fun. Go for it!
Market Rotations – The Swings are Huge
For casual observers of the stock market, it appears that we inched to all-time highs, and then pulled back over the past two weeks. At Compass Rose, we saw a completely different picture. There was chaos, money flipping from one sector to another, often in a blink of the eye. Whereas 2020 had discernable trends, 2021 has presented uncertain focus.
Starting in November/December, the market began to project the re-opening of the economy. Suddenly, oil stocks began to pop. Next it was the financials, followed by the airlines and cruise ships. If you did not know better, you would have thought that the pandemic was completely over. So, market forces then jacked the prices of industrials. When they got too expensive, money flowed to commodities like lumber, steel, and agriculture. Portfolio Manager’s heads were spinning with the new hot stock sector of the day.
So, to summarize, everything that worked so well last year was now out of favor. Technology stocks sold off dramatically. Health care and Biotech were no better off. And all the stay-at-home plays like Zoom and DocuSign were clobbered.
In response to these events, we have revamped our portfolios to focus on energy, financials, commodities, housing, furnishings, and re-opening themes. So, if your inbox is full of trade confirmations, now you know why. We are confident that steady trading has avoided most of the major stock price declines, we have been left to secure earlier gains while we redeploy cash towards what is working today. In the meantime, we will wait for the markets to calm down and re-establish a discernable direction going forward. Stay tuned.
Back to the Future – Inflation is Back
We have been asleep for a decade now when comes to inflation. It simply has not been a factor. So, it was a rude awakening when the Consumer Price Index data came out this past week. Inflation was back with a vengeance. The CPI jumped to over 4% year-over-year! This was a wake-up call for all those policy makers who assumed that inflation was tame, now, and forever. Not so. The jolt from the news was felt everywhere. The markets sold off, and analysts scrambled to downgrade their projections for economic growth.
The Chairman of the Federal Reserve chimed in to tell us that this uptick in inflation was most likely temporary and no need to raise interest rate to combat the uptick. We shall see.
In the meantime, you and I can see the real impact on grocery prices and what we pay at the gas pump. This is now a very real concern that price inflation (and wage inflation) must be watched very carefully.
Please be aware that inflation did not come out of nowhere. For over a year, our Federal Government has been creating rescue and stimulus spending programs at an unprecedented rate. Whether you believe that all of this is necessary or not, the fact is that spending without any new revenue source is going to pump up consumption, drive demand and inflation is a byproduct of these programs. In addition, the Federal Reserve keeping rates extremely low and buying debt has had the added effect of stimulating demand, and thus inflation.
All of this will work its way into the performance of investments, and likely lower return in the short run. However, there are always winners and losers in every economic cycle, so be assured that we are on the hunt for the new winners in the economic game.
Taxes and You
Let us give credit where credit is due. If politicians are going to increase spending, there is an obligation to say where the money is coming from to pay the bill. So, the Democrats are suggesting higher corporate taxes, capital gains taxes, and perhaps even a wealth tax. We should take all of this with a grain of salt. Many politicians do not want to vote for massive tax increases prior to the 2022 Congressional election. So, we anticipate that there will be a series of compromises that, in effect, result in mild increases in taxation. That is the good news. The bad news is that government spending will continue to outpace government revenues, increasing the deficit and stoking…. (you got it) … inflation.
So, what is to be done about it? Well, what is done is done. The rescue packages and stimulus bill are enacted and have hiked spending. The country does need infrastructure investment, so there will likely be a compromise (but smaller) budget package for this item. It is important to remember that infrastructure spending does not happen in a year, it will be spread out over the next ten years. Thus, the fiscal impact will not be as great as predicted by many pundits.
Nevertheless, at some point soon, we must begin to true up revenue with spending (although we do not need to get to a balanced budget). The nation can withstand deficit spending, we just cannot have our deficit exceed our real GDP by an ever-widening margin. We need a steady diet of the deficit being reduced by small, but significant, margins each year. We will keep you apprised of how this is going.
June 11th, 2011
One decade ago, Jim and Karen took a bold step to give up the security of being employees at a major Broker/Dealer (Wells Fargo Advisors, for those that remember). We embarked on becoming independent business owners, with all the risk that that step entails. As we look back now on our ten-year journey to find better ways to serve clients, we are stunned that we did not take that big step sooner. We have found freedom to listen to our clients, adjust our services to what clients told us they needed, and rejoiced in being able to pick investments for our client unfettered by the dictums of “national management”. In our opinion, our financial planning capabilities grew by leaps and bounds. In our opinion, the quality and productivity of our investments soared. In our humble opinion, we think that we did the right thing for you, our clients.
So, in our low-key way, we are going to celebrate the birthday of Compass Rose Private Investment Management, another example of how small business in America can innovate, turn on a dime, and prosper. We are now part of the great American Dream!
Have a wonderful Summer!!