BCA Weekly Commentary 10/29/21: Market Bifurcation Continues


SUMMARY. Our economic growth concerns were confirmed with 3Q21 GDP reported at a meager 2% well BELOW expectations. Inflation as reported by gov't stats is running under 5%, however we believe just by using our common sense observation is probably running 2X that. With that in mind, potential drivers to reaccelerate growth temporarily is tied to fiscal spending tied to social programs mostly. This historically has NEVER produced sustained growth and may not this time. Further, it may likely stoke even more inflation as for most part its about handing out money not encouraging investment especially given prospects for higher taxes. Next week, we may hear on the Federal Reserves decision on tapering its QE or bond buying that may have been the source of market liquidity.


INVESTMENT IMPACT. The underperformance of smaller capitalization names in our portfolio has clearly cost us performance since the summer. Recently, one of largest holdings trading at a fraction of forward earnings relative to its peers and S&P 500 sold off despite better earnings and guidance (revenues grew 57% year over year). This has illustrated what has been occurring since Summer as liquidation in smaller cap stocks has continued unabated no matter the fundamentals. As a result, we took actions to trim positions in this area, redeploying cash into larger cap names that we deem of value and posses growth and dividends. As a reminder, smaller cap stocks based on history tend to underperform in 4Q and outperform in 1Q tied to tax selling and market seasonality. Further complicating the investment climate in smaller cap names is high degree of retail speculation. We remain overweight in healthcare given what we deem poor economic growth prospects. Lastly, we remain perplexed as to why we are seeing record highs in the stock market while growth slows and inflation accelerates which normally drags on market performance.


Our model portfolio performance has been updated on our website as of 10/29/21.


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