BCA Special Commentary 8/15/21: More Neutral Model Positioning


SUMMARY. Many times in the past market experts have called for a market correction as economic fundamentals erode and many times they were proven wrong. So what is different this time? The reason why many corrections that were supposed to happen fundamentally ended up never happening as asset prices moved higher is simply either more monetary (more printing) or fiscal policy (more spending) or both occurred. Markets think the slower growth will be temporary as more money gets printed ie the saying "The Fed has markets back". Well the same thing appears to be occurring now in that we have a clear deterioration in the pace of economic growth now being offset by continued money printing and even more gov't spending. Many recognize these actions may create asset bubbles & speculation only to see markets decline eventually as in 2000 & 2008. WHATS DIFFERENT THIS TIME IS NEVER BEFORE HAVE THERE BEEN NEGATIVE CONSEQUENCES TO MORE SPENDING/ MONEY PRINTING. Interest rates never rose significantly nor inflation in past episodes of gov't actions. What is currently occurring is inflation is now running HOT in excess of 4% plus annually measured by the CPI (even higher if you actually measure prices in the real world) and its beginning to erode consumer confidence which in turn historically impacts consumer spending. Further, the Federal Reserve, indicated last week, it may begin to taper bond purchases to tighten monetary policy (less of it) or money printing in response to more fiscal spending & inflation. In past episodes of economic erosion, markets ignored it and failed to decline and in fact continued to rise as MORE spending and/or money printing occurred. This may not be the case this time. Now one can debate whether the Fed will actually print less money allowing interest rates to rise, slowing inflation and economic growth further as many make the case that the current bout of inflation is driven by Covid-19 reopening which it very well be. However, it appears likely that the 10 trillion dollars printed since Covid-19 began also has contributed. Third world nations who let monetary policy run amuck printing money like mad (ie Brazil) almost always experience inflation at some point as we are seeing in the US. The response is usually more spending & more money printing worsening the economic outlook. If the first $1 trillion in spending gets through Congress and then the next $3.5 trillion one can see the parallels to actions taken by 3rd world countries to try to create growth. More importantly, the latter $3.5T will most likely come with higher taxes to make matters worse. And possibly lower money printing (see below). THE POINT BEING WE MAYBE PAST THE POINT WERE PAST FISCAL & MONETARY SPENDING/PRINTING WERE FREE OF NEGATIVE CONSEQUENCES TO GROWTH.


INVESTMENT IMPACT. Given our already cautions outlook on 2022 growth we thought it prudent to explain why we have greatly reduce our equity exposure and positioning model portfolios with lower market correlation (movements with markets up or down or neutrality) IF or when markets correct or decline sooner vs later. We outlined this in our prior Weekly Commentary, but wished to explain further why we have done this. Besides, the economic situation, there are indicators in the market we watch that also cause us to be cautious. Many stocks despite market averages rising have fallen in response to good earnings reports. In fact, two in our portfolios last week did the same despite already being well off their 52 week highs as are many smaller capitalization stocks. Further, we did this ahead of the Federal Reserves Jackson Hole meeting in a few weeks which may bring further light on tapering money printing. Many Federal Reserve governors openly stated the need to move up tapering last week as well. Time will tell what actually unfolds and remain ready to re adjust our lower equity exposure and high cash/bond levels appropriately.


Our model portfolio performance has been updated on our website as of 7/30/21.


For more insights see our website and disclosures found there at BCA. The thoughts contained in this newsletters are intended lend insights into BCAs current & future thinking on changes to BCA model portfolios. They are not intended to be recommendations and should not be taken as such. As always contact us for further explanation of how these events can affect your finances. To unsubscribe from our newsletters & website please email us with "unsubscribe" in the subject.

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