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BCA Weekly Commentary 10/27/23: Reversion To Mean

ECONOMIC IMPACT. It has been over 5 months ago since our last newsletter. Since then long-term rates spiked from a combination of run away govt spending and inflated growth data that in time will revert back to mean. The big picture if you run the math if rates stay where they are the interest, on the nation debt will explode and that is beginning to weigh on long term rates as risk to funding huge deficits increase. Further the fictitious stats on both employment & GDP are stunning to us as most glaze over them and none scrutinize them. In fact most take them as truths. Yet with 40% of GDP govt spending and it increasing 23% this year its simple where the growth is source from & how its fueling inflation. Many private sector indicators are the complete opposite of growth. The glaring differences of reported inflation vs actual real world inflation and how that impacts reported growth are absurd. Many cos are reporting top line growth but FALLING unit demand to demonstrate how inflation can provide appearance of growth. Listening to many 3Q23 earnings calls you would think we are in recession and in fact if you back out the govt spending and "seasonal adjustments to many economic stats" and under reported inflation recession not growth is the reality. We believe what's at play is politics and optics going into an election year and eventually the fundamentals will take over. How long that takes to force rates lower which they should by now is anyone's guess but in time may because that's what realities point to. The runaway govt spending cant be sustained & the farce on growth it is driving (IF RATES STAY WHERE THEY ARE). In conclusion, we expect since demand is very weak for goods & services, very high debt levels, unsustainable govt spending & elevated price levels near term rates may revert back to mean which are lower then where we are. You simply cant have zero growth and rates at 5% for long. And to be clear whether rates fall or not significant growth wont return for years to come since prices remain sticky even though inflation wanes....things are still way too expensive vs incomes.

INVESTMENT IMPACT. Many indices ex 7 big tech names (DOW, Russel 2K, Russel 2K growth, Russel micro cap index) are negative on year and flat the LAST 5 years. In past years we saw this gaming of tech names to boost appearances of returns on indices like NASDAQ & S&P500 which are capitalization weighted and it wasn't sustainable. To make the point if the S&P500 was EQUAL weighted not dominated as a percent by larger cap tech names it would be negative on the year. I should note if you account for 20% plus inflation last 5 years returns are massively negative (ex tech) which I should add DOES NOT SUPPORT SUCH ABSURD NOTIONS OF 5% GDP GROWTH AS WAS JUST REPORTED. Our gross returns relative to respective bench markets remain above them in 2023 despite the recent model losses especially in growth models (see Sharesight tracking models).

Recently, in our growth models we shifted assets to high yielding credit products some in real-estate lending some in private cos credit lending in anticipation of very low growth for the foreseeable future. Our income oriented models too we opted for these credit products for higher yields. Whether growth or income we seek current income since we think returns even with some rate reduction relief will be low for some time to come. Going forward into 2024 we continue to expect cyclical companies & rate sensitive assets (ie financials/reits) to perform better as rate cut hopes rise as we move into 2024. However, we remain balanced in maintaining some growth exposure (only 25% in growth models) as well while the growth models contain equity positions that would not normally be in a growth portfolio due to their high dividends ie like medical REITS/ financials. As we head into 2024 we don't see much changing in the investing picture other than cyclicals & rate sensitive assets performing better vs growth. And to emphasize better is predicated on rates staying put to falling some and is relative either way.

We remind investors that going forward expectations for returns for the overall market over the next decade remain low as we expect well below returns vs history. Be that it may we are hopeful our models can improve on that going forward.

Our model portfolio performance has been updated as of the date of this newsletter as tracked by Sharesight.

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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