A Synopsis of Our Recent Webinar
By Vanessa Wieliczko, CFA, CAIA, CFP®
Chief Investment Officer, HoyleCohen
In a recent webinar, I had the pleasure of sitting down with Kent Chan, Equity Investment Director at Capital Group, as we took a moment to reflect on the third quarter of 2021 and to discuss possibilities for the future.
While the market began to cool in September, market valuations remain elevated by most measures. However, it’s important to distinguish between the multiple expansion we saw in 2020 whereby stocks were becoming more expensive per unit of earnings, versus the market performance we’ve seen in 2021 which has been primarily fueled by earnings growth. For more detail on this topic, please see our blog post entitled “Are Stocks Too Expensive?” authored by HoyleCohen Senior Wealth Advisor Robert Carnegie, CFA, CFP®. Dexterity, and the ability to consider risks to the downside, has become increasingly important in light of a more complex macroeconomic backdrop.
Following 2020, a strong rebound in demand has been met by widespread supply chain shortages which have constrained supply and instigated inflation. The vulnerabilities of a global just-in-time inventory management marketplace have been exposed. When combined with a period of prolonged deferred capital and infrastructure investment, the result is a bottleneck that started as a semiconductor shortage and is now widespread through the mid-stream manufacturing of components impacting automobile manufacturing, children’s toys, and consumer electronics equipment to name a few. Going forward, active stock selection is key as we are likely to see a divergence in the impact on corporate profitability based on necessary capital investment, the ability to source inputs to meet the demand for products, and the company’s pricing power and ability to pass inflation on to customers.
Many industry experts have called the current environment one of “transitory inflation”. Yet predicting how long the rate of inflation will trend at these levels is a difficult task because it’s impacted by a multitude of unpredictable factors, not the least of which are monetary and fiscal policy. While the Fed may not be raising rates until 2022/2023, bond yields are already reflecting the expectation. Historically, we’ve seen financials, industrials, and real assets like commodities and real estate do well in inflationary environments. Incidentally, this should bode well for emerging markets since their economies are generally net exporters of commodities. It’s likely that technology will also fare well, particularly cloud-based companies that support cost control measures. Broadly speaking, growth and market performance are expected to slow as we’ve frontloaded to today and borrowed from tomorrow. To read our full October 2021 Market & Economic Update authored by HoyleCohen Senior Wealth Advisors/Partners Peter Mueller, MBA, CFP® and Steve Taddie, CBE, CFM, please click here.
As always, we appreciate your confidence and support as we seek to build portfolios for the long run. If you or someone you know would benefit from speaking with a HoyleCohen Advisor, we encourage you to reach out.
