By Ryan Turbyfill, MBA
During the past 14 months, we have seen dramatic and rapid changes to many parts of our lives. In February of 2020, we were able to pack into a sports arena, shake hands and no masks were to be found. That all changed suddenly; people started working from home, kids with online schooling and I recall the only sports on TV was a virtual game of HORSE by WNBA and NBA players. Now many are vaccinated, traffic is back and MLB All Star game is scheduled to be held in Denver this summer.
With all the rapid changes, we have tried to stay on top of these changes as we manage your hard earned dollars, both looking for opportunities and limiting risk where we can. Below are areas of this rapid changing world that we are closely watching.
Inflation is what is spooking the market, especially as I write this on May 12th, 2021 as the Consumer Price Index (CPI) data was released this morning. Year over year, inflation rose 4.2% which was higher than many expected (highest since 2008), furthering the market sell off. The Federal Reserve for years has been trying to get inflation up to their target of 2% without much luck; now it is double that.
The question is whether this is transitory (temporary) or more permanent. With the rapid shut down of the economy, last spring, prices dropped. Now with the reopening, household savings rates near historic highs and government stimulus, demand is surpassing supply in many cases. Lumber prices have more than doubled this year, used car prices are surging and there are many new cars that can’t be delivered as there is a semiconductor shortage. If the supply chain gets “repaired” and labor starts to normalize, inflation may certainly be just transitory. To try to counter this, we have bought TIPS (Treasury Inflation Protected Securities) for most of our portfolios. Now this will not hedge against all inflation, but may help. Something we are keeping a close eye on.
Now I could write many pages on this topic, but won’t bore you. With the recent run in the market, stocks are expensive. One matrix is how much do we pay for one dollar of a company’s annual earnings (PE Ratio) very closely. These have gotten to be at the high end of the historic ranges. There are some arguments supporting this; earnings have been increasing nicely, interest rates are so low, that many investors are buying stocks and many company stocks pay good dividends. We have slowed some buying as we have found less stocks to look of value and if the pull back in the market continues, will provide more opportunities.
Last year saw a troubling appetite for high risk stocks that performed phenomenal. Many of these companies (a lot in the tech sector) more than doubled last year even though they lose millions if not billions of dollars and have no visible path to profitability. This reminded many of us of the dot.com crash of 2000, where many of these stocks were down 85%. We have little to no exposure in this area due to crazy valuations. One of the most popular funds last year, is now down 34% from it’s recent high on February 12th. We continue to look for value and valuations for companies we like for the long term.
It may be surprising to many that this is the area that isn’t higher on the list. With the current government deficit, historic or close to historic low tax rates, regardless of politics, it just seems like taxes will increase at some point. Whether it is on corporations, income tax increase on the wealthy or capital gains, is TBD. This is why we don’t have it higher on the list as ideas or rumors from Washington DC are a dime a dozen. Once legislation seems to have a clear path, this will be more of a focus. Outside the market’s reaction to possible tax law changes, we feel our value here will be to help you do financial planning to adjust to changes.
Over the past year, it seems like the market only goes up….but any that has been in the market long enough know that isn’t normal or sustainable. In fact, since 2000, there have been 11 market declines and they have averaged 15% pullback. While they are not fun, they are normal and at times even healthy for the markets long term. We continue monitor many areas, make adjustments where we see fit and always here to answer any questions or just to talk through the changes.