This 1st Week of November 2021 Thoughts
As significant inflation grips America, a growing number of my colleagues are focusing our clients on how it can erode not only your purchasing power, but money you have sitting in cash.
Inflation has hit a 13-year high, with the consumer price index jumping to 5.4%, according to the Bureau of Labor Statistics. To make matters worse, persistent supply-chain disruption and an energy crunch have been pushing up prices of raw materials and finished products.
Years of almot-0% bond yields and money market rates are forcing clients to be riskier than their risk tolerance might call for because the Federal Reserve is keeping rates so low that all the traditional places for cash are paying so little. When inflation is factored in…the return on your low-risk assets is actually negative. I’m waiting patiently to start buying bonds at the 1.7% range…as rising yields means we buy bonds at a lower price.
It is a big deal to me that the government has printed trillions of dollars in the last 2 years. Every currency in the world is devalued and I do not believe that inflation will be transitory. “Schwab increased staff pay by 5%. McDonalds here is starting people at $16 an hour. What do you expect will happen, after inflation slows down? Do you see employees taking a cut in their pay? Inflated labor costs aren’t going back down and will be priced into everything you purchase.
Right now, it is a delicate balance between rising inflation, rising rates and the fear that parts of the market could be overvalued. Having larger balances in cash than normal is necessary to be able to buy bonds, and lock in higher yields later on.
Sudden unexpected inflation like we have seen will disrupt the prices of both stocks and bonds. For this reason, you will see more short-term inflation-protected bonds (TIPS); floating rate bonds; short-duration corporate bonds and dividend paying stock.
As our thoughts start to turn to holiday celebrations, and the opening economy, lets be sure we are focused on the right things: the things that matter most, long term. Our investments will “take care of themselves” as we spend the time we need to, on them.
What matters most is the quality of our days. I’m here to help you be able to focus on what is really important: our families, and the lives we live. We have a busy few months coming, so let’s be sure we connect often on final year-end details.
Bonds are a Girls Best Friend...
Most people understand stocks: you invest, and the value of your investment tracks how well the company is performing. Bonds, on the other hand, might seem simple on the surface, but most investors say that bonds befuddle them. For this lower risk “foundation” of your portfolio, we expect bonds to be less volatile and to pay a reliable dividend. However, bonds can be surprisingly volatile: in 1986, during my first year as an advisor, Fed Chairman Paul Volker raised interest rates and bonds fell 20% over the next 6 months…only to regain their value after the Crash of 1987. Lets take a look at a type of bond that all clients own: Green Bonds.
Green bonds are a fixed income debt instruments used to fund projects that have positive environmental benefits. Demand is increasing, with total issuance reaching $270 billion in 2020 and it is hoped they will underpin the environmental transition we need to tackle climate change.
The proceeds raised from selling bonds are used for funding projects dedicated to sustainability issues. Investors committed to green economic activities who want to help finance the transition to a lower-carbon future are snapping up bonds that have a positive impact. The use-of-proceeds covenants give investors confidence in how their capital is being used and hopefully avoid funding ‘brown’ activities. While there are International Capital Market Association (ICMA) principles for how to manage the green bond process, there are no guidelines on what constitutes ‘green’ and what ‘good’ looks like. This leads to the potential risk of ‘green-washing’ as issuers seek to raise financing more cheaply than via vanilla bonds.
There needs to be a thorough process for evaluating each bond, as not all green bonds are equal. Fund companies we hire evaluate the quality and integrity of the issuer’s specific project and assess whether it follows best practices for transparency, governance and for post-issue monitoring, as well as its use of proceeds accounting and impact reporting. Issuers need to demonstrate they have a well thought out and holistic long-term sustainable finance strategy.
Sound complicated? It is…but with my due diligence…and the fund companies we hire to do the analysis, this part of your portfolio will impact your budget AND our environment.
Spend some time on these two charts and how our emotions affect our decision making. This “Anatomy of a Market Cycle” shows how CONFIDENCE and ENTHUSIASM lead to GREED as the market trends higher. Each time a correction starts it is short lived and the market again resumes it’s climb. It may take longer to correct than we expect, but it always plays out like this. When we are in the final “BUY” circle on the far left, there are “mini-cycles” and a pattern. First, the market sells off like it did a few weeks ago and there is INDIFFERENCE as pundits make their predictions. Then, as the market gets oversold, computer algorithms kick in to “buy the dip” and the market pops back up. CONFIDENCE resumes and stocks go higher. Once the final top is finally “in” the market will then drop, hit support, then drop some more. INDIFFERENCE turns to DENIAL…hope…and then to PANIC. Note how our emotions can lead to actions.
😲 Why does this matter to you? No one is immune to these emotions as the market goes through UPS and DOWNS as it is easy to forget how it feels with you see your portfolio drop 5%. Clients who have gone through a few of these full-cycles endure the FEAR and PANIC but know, the impulse to SELL never goes away.
The second one is very familiar to those who I work with on monitoring their individual stocks This is the Dow Jones Industrial as of the close of the market today. Notice the green circle back in August, when the Dow was topping…and then, a green circle a month later, when red outflows showed the double bounce. The rainbow rally follows the action of the chart above as the Dow made another “run” at a new high.
😲 Why does this matter to you? We don’t know when the last TOP will be put in and INDIFFERENCE will turn into DENIAL, FEAR, and then PANIC. We just know that it will. Stay tuned and watch this space!