SUMMARY. We remain cautious about economic growth going into 2022 despite prospects of continued fiscal stimulus amounting to trillions in potential spending. This week congress proposed slimed down fiscal stimulus plan vs the $3.5 trillion originally proposed. Regardless, with already elevated inflation the benefits may be short lived thus why we continue to be more worried about growth vs inflation long term and remain very selective on stocks in our model portfolios.
INVESTMENT IMPACT. Price anomalies in the markets are at extreme levels in our view tied to liquidity, risk aversion & leverage as well as high levels of retail or individual involvements in markets. This has introduced high levels of volatility particularly in smaller capitalization names which models are exposed to. Having said that small capitalization stocks in our view represent much lower valuations vs large capitalization stocks and in many cases have already corrected significantly. Thus, our preference of buying stocks at lows vs highs and patiently waiting for fundamentals to get reflect in those valuations. This may take time since small capitalization stocks ARE NOT in favor and we encourage clients to have patience and take a longer term view vs concern over short term price swings. Most stocks in our model portfolios are closer to 52 weeks lows vs highs unlike S&P500 index as an example. Also relative to historical valuations the following is also true:
"The top 200 stocks on U.S. markets go for 22 times their expected earnings over the next 12 months—42% above their average valuation over the past 35 years, according to data from BofA Securities’ head of U.S. equity and quantitative strategy Savita Subramanian. Mid caps, on the other hand, trade at a 30% premium to their long-term average valuation, and small caps stand at 9%."
Source: Marketwatch.com
Short-term valuations can significantly negatively effect long-term returns especially if prices are elevated to the extent that they are.
As a result of all of the above both our cash/bond levels remain elevated across all our model portfolios while equity exposure remains much lower than normal (25%-30% lower in some cases). In our view its one of the most challenging investment environments in many decades.
Our model portfolio performance has been updated on our website as of 7/30/21.
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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