Broker Check

June Newsletter



June 3, 2021

“Inflation”? or “Reflation”?


This may be redundant; but have you gone to the gas station or grocery store lately? The same items are more expensive today than they were just a few months ago! It concerns me to watch the gas pump dollar amount rise quickly, while the gallon gauge barely moves.  And did your Memorial Day bar-b-que grocery bill empty your wallet?

Today’s news reported that in Florida and South Carolina as many as twenty-five percent of the gas stations do not even have gas to sell! Energy prices have jumped twenty-five percent from just one year ago. Excluding the cost of food and energy, prices in the US have risen 3.1 percent over the last twelve months. Just this morning, our equity markets reacted to the downside as fears of inflation scared most investors. 

The Federal Reserve has the task of monitoring inflation and has recently acknowledged that inflation is on the rise and it has adjusted some of its policies accordingly. The Fed’s other job is to monitor employment (or, really UN-employment). Just today, new unemployment numbers fell to the lowest levels since before the Virus-driven pandemic; again fueling inflation as wages will surely rise with fewer employees to fill available job openings.  Just down the street from the Federal Reserve, the White House continues to make spending proposals, while printing new money to pay for the new programs on the White House wish list.


 So, what does all this turbulence mean to us, as managers of your investments; and, to you, our clients? In a nutshell, we have re-balanced the portfolio to continue to grow with inflation (think Alternative Equity investments in real estate as well as some energy) and we have reversed the defensive equity moves we made when the pandemic hit, with most clients’ portfolios now reflecting pre-pandemic equity allocations. Our view is that government spending will fuel inflation, but the accommodative Fed will continue to keep interest rates at historically low levels for the foreseeable future, as Fed Chairman Powell is still not overly concerned by the current surge in inflation. Furthermore, continuing government spending and lower unemployment will most likely result in “reflation” as our economy opens and returns to pre-pandemic levels. What I am saying is that it is possible to grow out of the inflationary pressures as corporate profits and valuations settle in at pre-pandemic levels. There are certainly several headwinds on the horizon as tax increases and lagging foreign Virus levels can certainly slow our growth down.

Nevertheless, many market observers believe that our growing economy can produce equity market growth in the eight percent range over the next twelve months; our portfolio is positioned to participate in that growth.  We certainly do not see market gains in the next twelve months matching the gains from the last twelve months (with valuations currently at the top end of any reasonable range).

We are pleased to report the following returns for our aggregate managed portfolio for the period May 31, 2020 to May 31, 2021:

*Net of fees

Each individual client’s total return will be a function of the equity/income allocation for their account. To my point on how we handled the portfolio during the one-year pandemic period ended May 31, 2021, the domestic equity portfolio returned over 53 percent for the period, and the alternative equity portfolio returned over 37 percent. At the same time, the international equity portfolio returned over 56 percent and the global allocation equity portfolio returned over 41 percent. Contributing nicely to the total return, the alternative income portfolio returned over 33 percent; followed by the income ladder of CDs and bonds returning over five percent.

The net result is that the portfolio did what was expected by returning out-sized returns with relatively a low relatively risk adjusted portfolio allocation.  As we look forward, the total portfolio is positioned to produce cash flow yields from dividends and interest of just over four percent. Those yields will continue to support the planned-for cash distributions to our many clients that receive regular distributions to meet their needs.

To keep-up with the expanding dynamics of our growing markets and new technologies, we have added back several positions that were trimmed back when the pandemic hit. Concerning our recent announcement that we will add positions in innovations which grew out of the work-at-home economy, we recently added another REIT invested in the cloud-based, data center space. Our portfolio now includes REIT investments in the 5-G economy, in E- Commerce space requiring logistic warehouses and the expanding cloud services business.

We continue to hold two Blackrock-managed positions directly invested in new innovations.  One fund was just added as we participated in the Initial Public Offering and has not yet had time to get fully invested.  The second fund, Blackrock Science and Technology Trust returned over 100 percent for the twelve-month period.

In addition, we have recently added an alternative income position in a fund that invests in floating rate loans and notes, where underlying interest rates will increase with inflationary pressures. We are working diligently to get all client portfolios rebalanced to include these positions by the end of June.  Those allocations will be reflected in your June 30th portfolio reports that you will receive in early July.

If you have not gone to our website recently, I would encourage you there view the video clip highlighting Warren Buffett showing off his singing skills https://www.intelligentim.com/from-the-desk-of-warren-buffet (who knew that an investment professional had such creative genes!).  Our website also includes our up-dated office hours now that we can safely get back to the office. We believe that in-person visits will now be the norm; however we can certainly accommodate a “Zoom” meeting!

Lastly, we continue to monitor the integration of TD Ameritrade into Schwab. We will learn the new trading and custodial platforms, when they become available, with the expectation of a relatively seamless transition.  We believe that there will be no new paperwork required from you to complete the transition.

As always, please call any of us if you need our attention.

 

Sincerely,

Intelligent Investment Management, LLP

Stephen Wheeldon