October Recap
Hello and welcome to the October newsletter!
In this edition:
1.2 Billion People Moving out of Poverty
Inflation - how high will it go?
Shifting Market Returns
Here's a quick market update:
Index Update (As of 09/30/2021 from Yahoo Finance)
S&P 500 (Large Cap): +16.68% YTD | +28.09% YOY
Russell 2000 (Mid, Small Cap): +12.41% YTD | +47.68% YOY
Global Market – ex US: +6.67% YTD | +25.11% YOY
At Cedar Wealth Partners, we work towards creating lifetime and multi-generational wealth through the use of diversified portfolios. We make no attempt to time the market or out-smart the market, and we continuously refine our portfolios to match our client’s financial priorities.
This newsletter consists of our thoughts and insight about the top few questions and topics that have come up with clients and prospects over the last month. We want to keep our clients up to date with our latest thinking about financial trends and market news. Some of these opinions may play into our strategy, but not all apply.
1.2 Billion People Moving out of Poverty
One of the most common questions we get has to do with longer-term trends or what “we see coming.” Here I’ll share some of the broader economic themes that we are seeing.
Before I get started though, let me share two brief disclosures. The first is that I nor anyone else can accurately forecast what is surely unknown: the future. The second is that whatever is timely or pressing today will most likely not be timely or pressing in 10 years, 20, 30, or 40 years, which is “normal” timeline of retirement planning.
Global Middle Class – One of the largest Macro Economic trends that we see very little attention given to is how the Global Middle Class has grown and continues to grow. This is a population group of literally Billions of people, many of whom were recently in extreme poverty, never had access to electricity, or internet service. As this population group continues to march into Middle Class in their respective countries, one has to believe they’ll begin to be better educated, earn more money, consume more goods, and add in a positive way to the global economy. This of course are all positives for anyone invested in a Global portfolio, like our portfolios at Cedar Wealth.
Extreme Poverty: in 1990, there were approximately 1.9B people, about 36% of the Global population who lived in extreme poverty. In 2018, the number in extreme poverty had dropped to 650 million, or about 8.6% of the Global population. OurWorldinData.org
Electricity Access – in 1990, about 1.5B people, or 28% of the Global population didn’t have access to electricity. In 2016, that number had dropped to under 1B, or about 12.5% of the population. OurWorldinData.org
Internet Access – in 2000, about 8% of the Global population had access to the internet. In 2016, 46% of the world has access to the internet. OurWorldinData.org
What’s more, the most recent data sets we have are 3-5 years ago, our view is that these trends have likely only gotten better. This is especially true when you consider the advances in mobile networks over vast distances, Africa comes to mind. The entire continent is getting to skip over hard-wired telecom and internet lines which have historically been costly and slow to develop. Instead, the entire continent is starting to get connected with mobile networks that no only provide internet access, but with this, access to financial accounts and ways to store and save assets as well.
This Earth of ours is never going to run out a “bad news.” Wars, economic problems, civil unrest, political shenanigans, the list goes on. But as we sit back and start to survey the Global progress over any period of years, you have to just marvel at how the human civilization continues to advance the standard of living decade after decade. This continued Global forward march is the key reason we remain optimistic. And why we say that unless you think the world is going to end, the current market events most likely won’t impact you 10-40 years from now.
We have faith in the future, and we have faith you do too.
Inflation - how high will it go?
In September 2021, the Federal Reserve President announced current inflation expectations.
We’re now expecting 5% inflation for the next year and roughly 4% inflation over the next three years (NewYorkFed.org). Personally though, I feel the three year inflation number will inch up a little higher if for no other reason than the delayed reporting of home sales and the lifting of the 18 month moratorium on rents and evictions. Keep in mind that this is the first yearly inflation average over 4% since 1991 (Inflation). So, what does this mean?
Our assumption is that consumers will hold less cash as there is now more pain with holding cash than in the past 30 years. And while we are anticipating the Fed increasing interest rates, we don’t believe bank interest rates will jump significantly. We are assuming that we’ll see more debt pay-down, investing, or consumer spending. The latter two spur economic growth. The US consumer has a record high level of cash as reported by the Federal Reserve and FirstTrust.
For public corporations, we are anticipating companies will continue share buy-backs. The WSJ reported that S&P firms are projected to increase cash spending to $2.8 trillion this year (WSJ). This is one of the simplest ways a company can put additional cash to work.
To help curb inflation, we expect the Federal Reserve to increase interest rates or taper bond purchases, or both in the next 12 months (FT.com). This certainly is a fine line the Fed will need to walk and the Fed will most likely announce any change 3-6 months in advance of implementing any changes.
Should interest rates rise, this normally helps lower inflation. Now keep in mind that rising interest rates is also a headwind for bond investments. As interest rates rise, bond prices fall. There’s an inverse relationship at work because of the bond’s interest payment relevant to the bond price. To read up on this subject, please review this article from Investopedia.
So what is Cedar Wealth doing about this? We’re regularly monitoring the current economic environment and will make changes when we deem necessary to help ensure that your portfolio remains oriented with your goals.
Shifting Market Returns
A common question we get asked is where should someone be invested? Our answer to this question has never been anything flashy. There’s nothing exciting about a Diversified portfolio. However, there is something that we’re having to remind more and more clients about. It’s the difference between Growth and Value style investing. Consider the following data points.
Over the past 10 years, US Large-Cap Growth has out-performed Value by 19.4% to 13%
Since February 2020, US Large-Cap Growth has returned 53.5% compared to it’s Value counterpart at 22.2%
As such, the current valuation (or P/E) ratio for Growth is much more stretched at 30.5 compared to 16.5 with Value
When we think of investing, we always want to be looking at the current valuations. No one wants to buy high and sell low. So when we consider that since the beginning of 2021, US Growth and Value have almost identical returns, which asset class is more attractive to you? The one that returned close to 17% with a 16.5 P/E (Value) or one that returned close to 17% with a 30.5 P/E (Growth)? – Sourced from JP Morgan Page 13
As with any trend, it’s easy to get sucked in, to think the current market swing will always swing the same way. This is how trends work, and why a saying at our firm is that if you hold enough of one sector or company to make a killing in to, you also own enough to get killed by it too. Always remember that we can’t predict what the future holds, part of our job is to hold us all accountable to diversified investing.
In closing: We of course cannot control what the market does from here and we cannot predict when the next market downturn will occur. But we can control our behavior to these outside events and continue to stick with our long-term investment strategy.
As always, thank you for your trust, if you have any questions/concerns please contact me.
Cedar Wealth’s Facebook | Cedar’s YouTube Channel
David Hobbs, CFP®, CLTC | Wealth Advisor | Founding Partner
Offices in Indianapolis & Terre Haute
Office: 317-559-2940
Schedule a MEETING
Email: D.Hobbs@CedarWealthPartners.com
www.CedarWealthPartners.com
This report was prepared by Cedar Wealth Partners a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Neither the information nor any opinion expressed it so be construed as solicitation to buy or sell a security of personalized investment, tax, or legal advice. For more information please visit: https://adviserinfo.sec.gov/ and search for our firm name.
This newsletter is prepared to provide a degree of insight into the analysis used by Cedar Wealth to make investment decisions. It is not a complete description of all factors used by Cedar Wealth to make decisions on behalf of clients. The opinions included are not intended to be taken as fact, but are Cedar Wealth’s interpretation of the impact of external events on investments.
The information herein was obtained from various sources. Cedar Wealth does not guarantee the accuracy or completeness of information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. Cedar assumes no obligation to update this information, or to advise on further developments relating to it.
This article contains external links directing you to a third-party website. Although we have reviewed the website prior to creating the link, we are not responsible for the content of the sites.
An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation. The specific securities identified and described herein do not represent all of the securities purchased or sold for the portfolio, and it should not be assumed that investment in these securities were or will be profitable. There is no assurance that the securities purchased remain in the portfolio or that securities sold have not been repurchased. For a complete list of holdings please contact your portfolio advisor.