With the Summer Rally taking an early Fall Break through most of September, our stock sales outpaced purchases at a rate of 2:1. We’ve followed this course through most of the past 12 months given a late stage rally that has pushed valuations up 50% plus over the past 7 quarters to rank in the 90th percentile historically. Accounts have done well, and it’s not that we don’t enjoy the rush so much as we want to maintain our balance. The air thins at these high altitudes, and volatility usually follows. We expect conditions won’t materially change through year-end.
With the Fed announcing that its freeze on interest rates will hold over the next few years, uncertainty shifts from assessing the nominal environment towards how this shakes out and what it means longer-term. At this juncture, our views trend along the following:
- The US Dollar becomes the transmission for attracting foreign dollars to fund the government’s capital shortfall, pushing the dollar lower.
- Higher foreign currency values raise the cost of imports but also push up the value of foreign earnings of US companies, and broadly globalized Growth Stocks do well.
- The pace of tax and regulatory cuts, over the longer-term, will either slow or reverse course as government exacts its payback from the benefits sowed in the downturn of the pandemic.
- Domestic growth remains sluggish so long as labor remains slack following the furloughs and (emerging) permanent shifts as the economy adjusts to a “new for now” normal.
- Pressure to lift immigration restrictions for filling unmet labor needs proves hard to reverse, and the lower dollar value of pay winnows the skilled talent pool needed in Technology and Medical resulting in constrained growth.
- Portfolio roles for bonds narrow on low yields, pushing broader stock allocations. In turn, high equity valuations prove ‘sticky’ despite rising systemic risks.
- Poor underlying business conditions for VALUE stocks limit their more typical appeal and soften the cyclical rotation to VALUE and SMALL CAP.
- Ditto for Global markets where Asian economies remain attractive, but liquidity constraints, market integrity, and opaque reporting curtail payback periods and keep US investors participation to a minimum.
Our focus lies in pushing closer to our 18% (and rising) Equity Cash Reserve target as we prepare for a more strategic restructuring in the coming years. As these shifts will involve added realized capital gains, we ask that you please review and keep us abreast of your own tax planning.
Finally, we’d note that the revisions made to our Investment Plan assumptions amount to less change to projected total rates of returns (5% – 6%), but more in the underlying mix and path we expect different asset classes (Stocks and Bonds) to follow. The net effect suggests our recent period of outperformance over the past few quarters above Investment Plan numbers is less likely to repeat for a while.
As always, we welcome the opportunity to discuss our expectations, your circumstances and the track of your progress together during an Annual Review via Zoom Meeting or a phone call.
James W. Mersereau, CFA, CIC
Daniel A. Kane, CFA, CIC