By Ryan Turbyfill, MBA Financial Advisor
It has been a wild 21 months for us all, including the stock market. We sit near all-time highs which in March of 2020 we would have been ecstatic even if the market just returned to pre-Covid levels but would have never imagined we’d be 36% above the February 2020 highs in S&P 500 Index.
During that time, the government has injected an trillions of dollars into the economy and consumers are willing to spend at unprecedented levels after being cooped up for months in 2020. Company earnings have been strong, and many are surpassing analysts’ expectations. With all the cash floating around, strong earnings have all helped the market soar.
However, we sit at near all-time high valuations of the stock market and interest rates remain near all-time lows. Mortgage rates still sit at mid to low 3% range and 10 year Treasury at 1.48% as of writing this article. This has also helped boost the stock market, as investors including pension funds feel forced to allocate more into stocks than usual to beat and exceed inflation and with rates so low with conservative savings vehicles.
Inflation has been the buzz word as of late and driven by a number of factors. Those cooped up consumers spending those increased amount of dollars and due to supply chain issues, there aren’t enough goods to feed this demand. Also, with the low interest rates, borrowing is cheap, therefore further increasing the demand for anything from homes to cars.
Semiconductor chips are in almost everything we use from computers, cars and even a blow dryer. This has further created supply chain issues and seen most visible in lack of cars, driving up used car prices and rental car prices as they are not able to buy or add to their fleet to meet demand.
After many of these semiconductor manufacturers such as Taiwan Semi, AMD, etc. cut or stopped production at the peak of Covid fear with many unknowns, it’s very hard for those companies to ramp up from that, let alone rapidly increase production to meet high demand.
We feel some of this inflation will subside in the next year or two as the supply chain works itself out, but other areas maybe more persistent. Also, we believe interest rates will be higher by the end of 2022 than they are currently. Bonds (debt from companies or from governments) are very sensitive to interest rates. As rates increase, the value of the bond decreases. For many bonds, including corporate, they are paying such a low yield/rate, that we feel they are not compensating investors for the interest rate risk.
One of my managers almost 20 years ago told me that she is open to any complaints, but only if it is followed by a proposed solution. So, we have outlined a few concerns above, but as you trust us to manage your money, what have we done and what are we doing about it?
For increasing interest rates, we have reduced exposure to corporate bonds and increased exposure floating rate loans and preferred stocks. These are bit higher risk but pay a much higher rate/yield and are less interest rate sensitive. To compensate for that increased risk, we have also increased TIPS (treasury inflation protected bond) exposure and money market funds which are more conservative.
Now on the inflation front, we try to stay away from high flying, speculative companies that tend to get beat up in inflationary and increasing rate environments. We have also continued to invest in solid companies that have competitive advantages, are able to pass much of their increasing cost onto consumers and are undervalued or at least fair value.
Black Friday the Dow Jones Index dropped 905 points over Omicron Covid variant fears. This is reminiscent when the Delta variant emerged, and much is to be known on the affects of these both on health and the economy. We had roughly a 5% pullback in the market in October this year, but a correction of 10+% is normal every year and we have gone since March of 2020 without one. Not to say we are trying to predict a correction, but we try to prepare as best we can and also look for opportunities in the markets when these situations present themselves.
Thank you again for trusting us during these unprecedented times and as always, please feel free to reach out to us anytime to discuss this further or long-term financial planning.
*S&P 500 Index cannot be directly invested in