As always, we begin this month’s newsletter with a recap of the last month, and March was enough to make any investor nauseous!
As the month began I got an eerie feeling that I’d seen this market scenario play out before. At first I couldn’t put my finger on it, but then it hit me! Like an epiphany, the Bernanke “Taper Tantrum”. There was a short period back in 2013 when panic triggered a spike in U.S. Treasury yields, after investors learned that the Federal Reserve was slowly putting the brakes on its quantitative easing (QE) program. Only in this sequel we have Jerome Powell as our leading man with a one liner that sent the 10-year Treasury yield a blaze and the stock mar- ket diving on March 5th 2020;
“We do expect that as the economy reopens and hopefully picks up, we’ll see inflation move up,”
It was an oh so subtle mention of the dreaded evil villain “inflation” coming back to life and just like a stereotypical horror movie, we all jumped out of our seats and screamed in panic. Alright I maybe over dramatizing, but this really goes to show you the power every single word spoken by a sitting Federal Reserve Chairman has on markets. Just like Bernanke Taper Tantrum, I believe this period will be short-lived and in the months ahead the Fed will be able to ease the markets worries surrounding the markets anxiety over inflation.
As expected the US approved a $1.9 trillion stimulus package and no that’s not a typo it really is almost two trillion. We in the business call it “helicopter money”.
Helicopter money refers to increasing a nation’s money supply through more spending, tax cuts, or boosting money supply. (Investopedia)
The normal motto for a period of easy monetary policy would be “Don’t fight the Fed”, but this time around its “Don’t fight the Fed, Treasury, Congress, Senate and White House”. They’ve brought a bazooka to a knife fight and the tanks on their way in the form of a massive infrastructure package.
The knee jerk reaction to all this stimulus from investors has been swift “watch out impending inflation is just around the corner”. The reality is Fed Chairman Powell is most likely right on the money when he says we’ll probably experience a short-lived period of heighted inflation (over 2%), but it won’t last and if it does he has the tools to fix it. Runaway Inflation is like the boy who cried wolf, every few years you hear about it but it never materializes.
Key takeaways to consider given a backdrop of global stimulus (Worth repeating from March’s newsletter);
• Increased consumer spending (Already comprises 70% of US GDP)
• Massive Infrastructure spending – Industrial sector will outperform
• Commodity Bull Market – Supply/demand restraints will lead to higher prices
• Cyclical Value recovery will out-perform Growth for the foreseeable future
This simple acronym has been the industry’s rationale for the historic rise in the stock market. It basically states that yields are so painfully low in bonds that investors are forced to buy stocks in search of any reasonable return. This rings true for those traditional portfolios restricted solely to either stocks or bonds. TINA has become the unfortunate by product of mas- sive intervention from the Federal reserve. Inevitably investors are taking on more risk than they’d like to achieve returns. It’s worth repeating my view that the Traditional 60/40 balanced portfolio is broken and isn’t optimal anymore.
So what are investors to do? It continues to be time to think outside the box! Long gone are the days of over- loading on market darlings and blindly letting them run. Investors need to expand their investment universe and give asset classes like private equity, structured notes (discussed in more detail later), and niche investment strategies through ETFs, Mutual funds and Hedge funds. Incorporating additional diverse investments will provide greater diversification and a much improve risk/reward profile.
I know most of you reading the subtitle are saying to yourself “what in the world is a structured note” and what does it have to do with a cheesy 1980’s TV series.
Here’s a definition from Investopedia:
A structured note is a debt security issued by financial institutions. Its return is based on equity indexes, a single equity, a basket of equities, interest rates, commodities, or foreign currencies. The performance of a structured note is linked to the re- turn on an underlying asset, group of assets, or index. (Investopedia)
Like stocks there are thousands of options available, but what’s unique is they can be customized to get the exact exposures you’re looking to achieve. One of the best attributes to structured notes, is the ability to include a percentage level of downside protection.
In a world where traditional bond yields are so low, structured notes can be the perfect tool to achieve added returns with measured risk levels compared to owning the stocks outright. Like MacGyver you have to use what’s available to make the best out of any situation. Although we might not be defusing a boom like MacGyver, we are finding some safer ground for your portfolio. For investors that have the knowledge and risk tolerance structure notes can be a life saver!
Biden’s New “New Deal”, move over Roosevelt
The proposed multi-trillion infrastructure plan from President Joe Biden should continue to pro- vide tailwinds for industrials and cyclical stocks. But it won’t just construction, materials, and manufacturing that will benefit. Today’s infrastructure proposal will include digital 5G networks, smart grids and clean energy projects. Here are some of the proposals;
• $621 billion into transportation infrastructure such as bridges, roads, public transit, ports, airports and electric vehicle development
• $400 billion to care for elderly and disabled Americans
•$300 billion to retrofitting buildings and affordable housing
• $580 billion in American manufacturing, research and development and job training efforts
What’s the catch? There is always a catch! The package also includes an increase in the corporate tax rate to 28% from 21%.Biden also wants to include a global minimum tax for multinational corporations and en- sure they pay at least 21% in taxes in any country. So far the market is positively reacting to the sugar rush of trillions of dollars being pumped into the economy. We’ll see how well Biden can maneuver the fine line between stimulus spending and future tax increase. So far stimulus has all the markets attention.
This one is straight from the headlines – Archegos Capital Management is the family investment vehicle founded by former Tiger Management analyst Bill Hwang in 2013. What went wrong for the bil- lion-dollar family office? Like most market fables, this one includes the oh so familiar “leveraged” bets. When unsuccessful, they had to be unwound quickly (margin call) to the detriment of the stocks that were liquidated.
What lessons can the average investor take away from this blow-up;
Lesson #1 – “Leverage cuts both ways” – Make sure you always evaluate and monitor your risk levels. Bad decisions are multiplied in a panic.
Lesson #2 – “One man’s mistake is another man’s opportunity” – Anytime you have forced sellers there’s an opportunity to get things at a dis- count. In this case Archegos held some quality stocks that became cheap fast. Seasoned investors used it as an opportunity to buy!
Lesson #3 – “Pay attention to red flags” – In 2012, Hwang pleaded guilty to insider trading of Chinese bank stocks.
This should have been a warning to those brokerages that allowed the high levels of leverage in the first place.
The tone remains the same, choppy markets as
we absorb higher but manageable longer-term rates. A continuation of the rotation to reopening names over stay-at-home plays. Tech will continue to struggle as high valuations shake out and investors turn to value over growth. Hopefully many of you took advantage of these themes from my previous newsletters.
Aside from that, until next month! And don’t for- get to email me any questions you have and also, if you’re interested in having a chat about what I can do for you, get in touch. It is a very exciting time to be investing and I look forward to sharing it with you.
