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Interesting List of Lists from our Research Provider

by Fortem Financial October 23, 2023

WHY WE BELIEVE LONG-TERM INTEREST RATES ARE RISING

  1. Reversion to the Mean: typical spread between 10-year & inflation is 200 bps
  2. Greater Sense Inflation is Structural: Slowing Globalization, Deficit Spending, Environmental Priorities
  3. Persistent Deficits 5% of GDP
  4. Spooling Effect of Net Interest Expense in the Absence of QE
  5. Fed has continued QT After SVB Pause
  6. Foreign Demand Weakening by Choice (Saudia Arabia) or Circumstance (China)

 

REASONS INFLATION LIKELY TO BE STRUCTURAL

  1. Changing Nature of Globalization: Friend-shoring and on-shoring are more expensive; shorter supply chains; industrial policy
  2. Step-function Higher in Stock of Money: M2 up 40% since February 2020
  3. Labor Shortage: JOLTs data still reports almost 9 million job openings
  4. Few Signs of Fiscal Discipline: Fed fighting the Federal Government
  5. 60%+ of Federal Budget is Indexed to Inflation
  6. Environmental Priorities Over Energy Security: raises price of fossil fuels

 

IMPLICATIONS OF STICKY LONG-TERM INTEREST RATES FOR EQUITY INVESTING

  1. Risk-Parity strategies will be less effective: Bonds are likely to be a poor hedge against stock market risk
  2. Absolute return long/short hedge fund strategies are likely to outperform levered long private equity investments
  3. Earnings and cash flow multiples are likely to trend lower
  4. Shareholder yield is likely to make up a greater portion of the total return from equity investments
  5. Unprofitable companies will not be able to perpetually rely on easy access to cheap capital

 

REASONS TO OWN ENERGY SECTOR

  1. American majors are unusually capital disciplined
  2. The sector is institutionally under-owned: the combined weights of the Energy and Materials sectors are less than half the sum of the weights of AAPL & MSFT
  3. The sector’s earnings weighting is almost double its market cap weighting
  4. Energy outperforms under tight regulation: Presidents Carter and Biden were far better for the stocks than Presidents Reagan and Trump
  5. They remain short-duration equities in a higher inflation environment
  6. Technical Picture: 96% of stocks in the sector are above their 200-day MA

 

REASONS WHY ANTICIPATED RECESSION HAS NOT (YET?) OCCURRED

  1. Tight labor markets: Profit margins have declined for the S&P 500, but not enough to prompt companies to lay off workers
  2. Savers’ income surged. Using money market fund data, we estimate that monthly income from savings is running at more than $20 billion per month
  3. The Fed offset QT in March: In response to the collapse of Silicon Valley Bank assets on the Fed’s balance sheet jumped by roughly $400 billion in three weeks
  4. A reduction in the TGA. The Treasury Department drew down its General Account from $580 billion in January to roughly $20 billion by June 1st
  5. A decline in the Strategic Petroleum Reserve. The SPR now stands at its lowest level since 1983
  6. Deficit Spending: The US budget deficit increased $800bn in 2023. Just $100bn of that is due to interest cost. The rest is lower taxes & higher spending
  7. The lags associated with monetary policy changes are long and variable

 

For all the reasons above our portfolios remain overweighted shorter duration, higher dividend paying companies trading at a discount to the overall equity market. We are also looking to increase the duration of our fixed income holdings to take advantage of the rising yield curve. We increased our exposure to long/short hedge funds at the beginning of 2022 and remain the position that having alternative investment exposure will reduce the overall volatility in our clients’ portfolios.

Source: Strategas

 

Market and Index Changes for the Week Ending 10/20/2023

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.

 

Sincerely,

Fortem Financial
(760) 206-8500
team@fortemfin.com

 

 

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Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

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Five Star Professional Disclosure:
The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
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Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

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The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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