Updated: Dec 15, 2021
SUMMARY. The pace of economic growth & inflation depends greatly on whether the Fed is set at ending its injection of money into the economy sooner vs later or gradually winding it down. Its been decades the economy has been reliant on loose money to support growth. It may have finally come to a head in creating unintended consequences that are offsetting the very growth it was intended to create: INFLATION. Some of this inflation is caused by Covid-19 for sure but a combination of loose fiscal policy combined with vaccine mandates are potentially fanning the flames. In our last newsletter (dated 12/2) we questioned whether the "everything bubble" is ending whereby the environment created by the Federal Reserve (combo of loose money & negative real rates) inflating asset price is coming to a close. This week for equity assets the selling may indicating just that. The fear if it continues the bubble pop may spread to other assets as well including things like real-estate as both inflation and growth wanes.
INVESTMENT IMPACT. In our last note (dated 12/2) we noted the precarious nature of this liquidation phase (esp in a tax loss selling period) given the dependency on ETFs among both retail AND institutional investors. It may create an environment for a time where most assets get sold as funds attempt to adjust exposure to equities and raise cash. What's complicating things in determining the length of this is the use of leverage or borrowing money to invest in risk assets given artificially low interest rates. This could amplify the selling. Whether this continues for a while or not is uncertain (and it very well may). The period post its conclusion usually sees more rational investing in risk assets that perform in the "NEW" economic environment. This is why many times assets that lead the market on year don't the next. To be clear, we are in a high growth/inflation environment and we have long said in 2022 we may see the opposite ie lower growth/ inflation and potentially very low growth later in the year. We have long held that assumption when allocating nearly 65% of growth portfolios to health care. In the short term, health care is being liquidated with everything else (esp smaller cap names vs larger), but post liquidation that may not be the case. Why? Because health care generally is less dependent on economic growth vs the specifics of the companies products in addressing health care needs. Since its largely paid for by insurance vs consumers thus why its less dependent on economy. Time will tell what investors will rotate to in 2022 and what environment we will see economically.
Our model portfolio performance has been updated on our website as of 10/29/21.
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