BCA Weekly Commentary 11/26/21: Excuses Excuses
Updated: Dec 15, 2021
SUMMARY. This past week was marked by the realization that growth in 2022 is far the given that many expect. For the entire year we have been warning about headwinds to growth going into 2022 from inflation to rates to unsustainable fiscal spending & anti-growth policies to monetary policy becoming less lose (printing less money). As a result, the Covid-19 variants were used an "excuse" to create the worst day in 30 years in markets last Friday. Acknowledging Covid-19 is a real headline risk to growth its ONE OF MANY that exist going in 2022. Although one can debate the level of such things as inflation & growth going into next year, we continue to expect SLOWER growth & inflation overall as the ladder creates a HUGE tax on consumer spending. One risk to health care which became evident last week is a proposed spending cap on Medicare recipients in the House version of the latest fiscal spending bill. This may come in conjunction with drug price negotiations as well. This has put a cloud of uncertainty over healthcare particularly big pharma however it maybe too soon to access its impact or whether such legislation will get passed.
INVESTMENT IMPACT. Little has changed in model portfolios in the past week or two other than shifting exposure to higher quality health care names of higher market capitalization. Tax loss selling season is upon us that usually lasts till mid December at which time small cap stocks where we are exposed tend to stabilize in anticipation of a seasonally stronger period come January. Tax loses are usually taken on stocks that have fallen thru the year towards year's end tending to amplify losses in those names further in short term. Whether this is the effect that is occurring to pressure our near term performance or fundamentals time will tell. In any case valuations of small capitalization stocks have fallen much greater vs large caps which in part is why we are exposed to them. The chart below illustrates this in health care which shows a 45% plus performance gap YTD! As you know picking the bottom in the midst of liquidation in these names is always difficult.
As US economic growth wanes in 2022, as well as inflation, we expect a gravitation back to small capitalization stocks and heath care in particular which maybe less impacted from economic growth variations. Notwithstanding the risks outlined above in healthcare with pending legislation, we believe healthcare maybe less exposed to slowing or slow growth in long run particularly the stocks we selected (at least that is our hope).
Our model portfolio performance has been updated on our website as of 10/29/21.
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