Updated: Aug 14, 2021
SUMMARY. The week was capped by the lowest reading of the University of Michigan Sentiment Index since Covid-19 (and in years) for August (see below). This is one of many indicators pointing to slower economic growth. The combination of a Covid-19 resurgence, stimulus cycling through consumers wallets and higher inflation could be the reasons to explain the drop. Although employment has showed signs of improving via record job openings (Source: Jolts report) we think this maybe tied to the ending of employment benefits forcing some lower paying jobs back in work force. The question is will the upcoming stimulus ie infrastructure bill offset this weakness. Although we agree it will somewhat, unlike past ones it is NOT directed at the consumer (and spread over periods) which maybe starting to reduce spending. FURTHER, AND MORE IMPORTANTLY, THE FEDERAL RESERVE OFFICIALS THIS WEEK HAVE REPEATEDLY CALLED FOR REDUCED BOND PURCHASES OF QE COME THE FALL. This may have a greater negative impact on asset prices as would the possibility of a slowing economy. Either way we maintain our assumption of slowing economic growth in 2022.
INVESTMENT IMPACT. Small Capital Growth Stocks continue to underperform and in some cases fall dramatically. The pace of this occurred over past weeks whereby many growth names are trading near 52 week lows not highs like the broader market. This may foreshadow a broader market sell off potentially. Similar occurrences happened at the end of the Internet Bubble in 2000. The sell off has been particularly severe in stocks that maintain short positions (hedge funds betting they fall) which may explain some of this as they add to them by selling. Despite our belief this sell off is temporary we greatly reduced our long exposure in small capitalization stocks and equities overall given its severity. In our growth models, equity positions are under 30% net of hedges (these reduce equity exposure) while cash/bonds near 35% our most conservative posture in 3 years. However, we maintained our positions in core high conviction stocks that we deem still hold compelling valuations & risk/reward. All of which are classified as value not growth in media, technology and biotechnology. We will likely not add to our equity exposure until we see clearer signs of economic growth & risks to Federal Reserve actions as we believe both valuations & expectations of growth remain elevated. We stand ready to reduce equity exposure further if necessary.
Our model portfolio performance has been updated on our website as of 7/30/21.
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