In this video Tim discusses Factor Investing and goes over Quality, Momentum, Value, Size and Volatility Factors and how they function within an investment portfolio.

In this week’s essay, Tim discusses the problem of trying to value the equity markets based off consensus forward estimates. Wall Street estimates will always be behind the curve in a downturn and this time is no different. Stocks may look “cheap” on current estimates but those estimates are always far too high ahead of recessions.

Labor Shortage

Wage inflation in the United States has increased dramatically since the US economy emerged from from the depths of the pandemic. Tim explores when will this parabolic wage growth in the United States top out and how fast it decline as the Fed raises rates.

Secular vs. Cyclical

On the back of recent CPI data, markets have rallied but Fed comments aren’t quite so bullish. In this article, Tim covers WealthVest’s stance on whether current inflation trends are secular or cyclical and highlights some headlines from top news stories to help illustrate our stance.

The Enduring Link Between Demography and Inflation 08/04/2022

To better understand the driving forces behind today’s inflationary pressures Tim dives into an analysis of age structures and their impact on inflation from the Bank of International Settlements. Their analysis looks at 22 advanced economies from 1870 to 2016 and shines a bright light on what inflationary pressures could be facing the US in the coming decades.

As a Portfolio Manager or Financial Advisor, losing money in a bear market can be painful, but in my experience, not nearly as agonizing as losing money or even just not participating amid market strength. The latter comes with a feeling of embarrassment and a sense that everyone is making money except for your clients. But as a fiduciary, the number one goal always must be to preserve capital. Warren Buffett once said, “The first rule of an investment is don’t lose money and the second rule of an investment is don’t forget the first rule.”

As anyone who has been a reader of our work knows, we believe that there are several distinct structural forces that will lead to higher long-term inflation. We’ve written about energy underinvestment and declining productivity as contributors to the thesis. This week, we want to throw another factor onto that list and this one is more counter-intuitive than those previously discussed: declining populations. I say counter-intuitive because, like many, I had always looked at the example of Japan as evidence that declining populations would yield declining inflation.

It’s over. That’s the message from Blackrock’s 2022 Midyear Outlook. The economists and strategists at the world’s largest asset manager with a tidy $10 Trillion of AUM wrote,

Let’s start with what we already knew coming into this week. We knew that financial conditions have gone from historically easy to historically tight in an incredibly short period of time. We knew the Fed isn’t letting off the gas until clear signs emerge that inflation is under control. Don’t forget, that includes wage inflation. While commodities might be breaking down and that helps, the Fed is a long way from seeing the kind of labor market softening they are going to need to start jawboning to the market that they might be pulling up on rate hikes. As evidenced by the yield curve inversion, fear of an imminent recession has trumped fear of runaway inflation.

The most important thing I learned this week (besides never grab hold of a skillet on a 500 degree grill) is that the people arguing that Fed will lose their nerve early and Fed Funds wont get over 3% are going to be wrong. I say that even in the context of observing commodity disinflation and continued leading indicator weakness that suggest we are sliding toward recession and curve inversion. Chairman Powell, Cleveland Fed's Mester as well as the Bank of International Settlements, which issued their annual economic report this week, are all singing from the same hymnal.

The Fed will successfully destroy demand. Gasoline prices may not come down meaningfully anytime soon due to the structural supply issues we discussed last week. Job openings may well stay elevated for months to come and consumer spending will continue to benefit from the dwindling stockpile of savings from fiscal stimulus and the vestiges of QE. But in one very important sector of the economy, the Fed's efforts to cool demand are already playing out. That sector is housing (OER/Shelter) which represents roughly 40% of the data that goes into CPI. To state the obvious, interest rates matter to housing and a doubling of long-term interest rates matters a lot.

The Fed will successfully destroy demand. Gasoline prices may not come down meaningfully anytime soon due to the structural supply issues we discussed last week. Job openings may well stay elevated for months to come and consumer spending will continue to benefit from the dwindling stockpile of savings from fiscal stimulus and the vestiges of QE. But in one very important sector of the economy, the Fed's efforts to cool demand are already playing out. That sector is housing (OER/Shelter) which represents roughly 40% of the data that goes into CPI. To state the obvious, interest rates matter to housing and a doubling of long-term interest rates matters a lot.

This week, we focused on trying to better understand the potential durability of higher energy prices.

As a reminder, at WealthVest, we have a long-term view that potential GDP growth is going lower. That means, we see a real GDP growth rate that will average below 2% and an inflation backdrop that will be consistently problematic, quite unlike the grinding decline of inflation over the last four decades. For what it's worth, this is an increasingly non-controversial view among academic economists, but not one that is yet embraced more broadly on Wall Street.

In this episode of WealthVest: The Weekly Bull & Bear Season 2 Episode 29, recorded on June 22nd, Drew and Grant discussed a $2 trillion influx in bank deposits, the best and worst performing sectors since the Covid-19 crisis, May retail sales, Empire State manufacturing, The Fed's corporate bond buying program, warning signs for the dollar, P.E. in 401ks and new issues Amazon must contend with.

With the Covid-19’s stock market sell off in March, and subsequent rebound over the last few weeks, it is important to look at the metrics that might define the bottom of a market. Timing the bottom of a market correction is an exercise in futility, but it is important to understand some of the fundamental and technical metrics that can help investors contextualize the price of the market.

How do you demonstrate timing and sequence of returns risk with your clients? The consumer-facing sales tool “The Hatfields and Mccoys” tells a simple yet effective story on sequence of return risk. In the piece, we examine two hypothetical families entering retirement at age 65, but under different circumstances. Both families retire with $500,000 of their nest egg fully invested in the S&P 500® index. They both withdraw 4% annually, with a 2.5% increase each year to keep pace with inflation. The McCoys experience the annual returns from years 1978 to 2008, while the Hatfields experience the same returns, but in reverse chronological order, with a key point being that the annual return for 2008’occurs during their first year of retirement and the return for 1978 is their last.

When I sat down in early February to reevaluate the piece, What’s Your Favorite Fixed Income Alternative, the 10-year treasury hovered near historic lows, by March, they had plunged further than many expected. March was the most volatile month we’ve seen since the Great Depression, not only in equities, but in bonds too. U.S. sovereign debt has traded at highest highs, with yields dropping to .318% on the 10-year and 1.34% on the 30-year*. Falling interest rates have resulted in gains for bond funds and bonds trading in the secondary market. With bonds trading at record highs, talk to your clients about potential bond alternatives for a few reasons.

You are undoubtedly getting phone calls each and every day from your weary and worried clients about what they should be doing with their investments and how today’s events will affect their financial plan. You’ve helped navigate them through the ups and downs of the market in the past, but this is the first time guiding them through a worldwide pandemic. What do you tell them?

Are you prepared?