Presidio Capital Management 2021 Annual Letter

By: Jeff Anderson, CFA

Finishing the 2021 year, we experienced waning monetary stimulus with the potential of upcoming interest rate hikes. Despite the fears of inflation, the S&P 500 managed a total return of 28.71%. Further, the Nasdaq was not far behind with a gain of 27.51%. The Russell 2000, a small and mid-cap stock index, lagged the larger indexes, finishing the year at just under 15% (1). All things considered, 2021 was another strong year for domestic equities.

The MSCI ACWI ex USA Index, however, only gained 7.82%. This index significantly underperformed the US markets over the 10 years (Exhibit 1).

The fixed income sector did not experience such positive outcomes, with the US Aggregate Bond Index losing 1.54%. Bonds lost purchasing power with the compounding effects of inflation. Contrastingly, 2021 was a good year to borrow money. The thirty- year fixed mortgage rates hovered around 3% for most of the year, which allowed homes to sell for nearly 19% higher than the previous year. Cities like Las Vegas, Austin, Tampa, and Orlando experienced gains of over 20% (2).

Bull and Bear Markets:

During bull markets, stocks are expensive. During bear markets, stocks are cheap. It’s that simple. Long-term historical returns for the stock market have averaged roughly nine percent. To accomplish that average, equity markets have had to endure long periods of zero to negative returns, market crashes, and luckily, bull markets lasting years (see Market Crash Timeline).

The stock market is a discounting machine. It takes all the predictions about the future of the business cycle and the future earnings of a company and discounts it into today’s dollars. Inflationary pressures can crimp growth and margins for certain industries, while others can pass those costs on to customers.

Interest rates affect the present value of a company’s cash flows. Higher interest rates mean higher discount rates, which decrease the present value of companies’ future cash flows. Growth companies are typically most sensitive to interest rates. Consequently, we experienced this reality during the first two weeks of 2022, as growth has been lagging value.

Nobody knows where the market will be in a year from now, let alone a week from now. Consensus stock market returns for 2022 are tepid at best. After two years of well-above-average returns, it seems safe to predict lower future returns.

Though it is important to reflect on returns for 1995 through 1999, when the S&P returned 37.5%, 23.1%, 33.3%, 28.7%, and 21.1%. These returns, respectively occurred, before the dot-com market crash of 2000, when the S&P 500 fell nearly 50%, while the Nasdaq lost 80% peak to trough (3). Hypothetically, if an investor had remained invested in the S&P 500 through 2000 crash, the investor would have earned a 75% gain over that entire period.

Attempting to time the market can be dangerous for a retirement portfolio, as markets never, consistently, rise in a straight line.

Investment Climate for 2022:

Robert Carey, CFA of First Trust Advisors L.P. laid out the tailwinds and headwinds heading into 2022 (4).


  • The major indices in the US are projecting solid earnings growth for this year.
  • Global Speculative-Grade Bond default rates remain well below historical averages.
  • Mergers and Acquisition activity remains robust.
  • Stock Buybacks: 2021 saw record buybacks and Data Trek Research reported that companies have the means to further increase buybacks in 2022.
  • Dividends are stable and growing.
  • Wall Street Strategists are optimistic. A Bloomberg survey of nineteen equity strategists reported an average price target for the S&P 500 of $4,950.
  • Mid-Term Elections: Republicans are the early favorites to take back the House and Senate. This will likely prevent further run-away spending. Gridlock is good.
  • Covid-19 Pandemic should ebb, with the latest variant, Omicron, being less severe than previous strains.


  • Covid-19 Pandemic could continue to disrupt economic activity.
  • Inflation: CPI stood at 7.0% a trailing twelve-month basis in December, which could cut into economic growth. This reading is the highest since 1982. If inflation persists, the Fed may get more aggressive with tapering and raising interest rates, which would hurt growth.
  • Supply-Chain Disruptions: Expected to persist into late 2022. Semiconductor shortages are impacting many industries and the backlog of container ships trying to enter global ports is not shrinking.
  • Fiscal Stimulus: The Build-Back-Better Act has stalled. The Biden Administration cannot win enough support within its own party.
  • Valuations are elevated. The trailing 12-month price-to-earnings ratio for the S&P 500 Index was 26.2 at the end of 2021, well above its long-term average of 17.2 over the past half a century.
  • Stock Market Correction: Data suggests that the S&P 500 Index experiences a 10% to 20% correction every 22 months. The last one was back in March of 2020.

Finally, the Federal Reserve will try to navigate the domestic economy through an inflationary environment not seen since the 1970’s. Bond purchases are scheduled to cease by the end of March. Consequently, we could see the first of multiple interest rate hikes begin, all with the purpose of cooling inflation while attempting to keep the economy growing and unemployment low.

The liquidity created by the Fed’s asset purchases since the recession of 2009, is the third leg of the monetary stool. Given the less-accommodative measures discussed above, the Fed may be reluctant to decrease its balance sheet this year. Decreasing the Fed balance sheet would remove liquidity at a time when the economy will be adjusting to higher interest rates.

Predicting stock market returns is nearly impossible. Nobody has a crystal ball. We can only draw on history to gauge the relative direction of markets. As stated above, markets are expensive, but they have been expensive for some time. Not being in the market because it appears expensive or risky can be more costly to your retirement plans than staying invested during market corrections and fluctuations. As we note in client meetings, investors know that inflation, taxes, and market crashes are inevitable. Money is worth less in the future, taxes typically go up, and markets crash. Fortunately, the long-term direction of markets is always upward sloping.

Happy Investing,

Jeff Anderson, CFA

Chief Investment Officer,

Presidio Capital Management.

(1) Market Data provided by the Wall St Journal

(2), “2021 Housing Market Frenzy Concludes with Double-Digit Price Growth”, Brenda Richardson.

(3) Wall Street Journal, “The Best Investment 2022 Stock Market Advice”, Jason Zweig.

(4) First Trust Advisors, L.P. – 2022 Market Outlook

Market In A Snap! January 24th-January 28th, 2021

By: Jeff Anderson, CFA

This Week: To say that the US equity markets were volatile would be an understatement. The S&P 500, Nasdaq and Russell 2000 all had intra-day moves of more than 4% during the week. Investors continue to construe a new year in which inflation will continue to run well above the Fed’s 2% mandate. Consequently, the Fed is now forced to accelerate bond purchase tapering, while embarking on a more aggressive rate hiking path than originally estimated.

The economy, however, is in good shape, yet it is projected to slow versus 2021 growth.  Consensus estimates for the S&P 500 earnings per share is $222, meaning the S&P is trading at just under 20 times earnings vs 26 in 2021.  Still above the long-term average of 17, but not absurdly expensive.   Of course, consensus estimates may be wrong.

Inflation and the Russia-Ukraine conflict sent Crude Oil higher, closing near $87 per barrel, up 2.5 % for the week, and 15.3% year-to-date. Do not expect lower gas prices soon.

US Labor Costs Grew at Fastest Pace in Two Decades:

A tight labor market coupled with accelerating inflation has forced employers to spend 4% more on wages and benefits. This increase is still almost 1% shy of the Fed’s preferred measure of inflation, the core personal-consumption expenditures index, which rose 4.9%. Higher prices are pushing wages up which, in turn, pushes prices higher, thus creating a virtuous cycle of higher prices. Economists estimate that higher wages reduce turnover and increase productivity, leading to company margin expansion. Time will tell.

The Two Things to Do When the Stock Market Gets Crazy:

If you have a Wall St Journal subscription, you have likely read Jason Zweig’s “Intelligent Investor” column.

Mr. Zweig’s piece in Friday’s journal was particularly poignant re: The Recent Stock Market Volatility. In the article, he makes two important points. One important point: put the market’s recent pullback into a long-term perspective. And two: recognize what kind of investor you are. The type of investor you are, matters more than the actual investments you own. The article included a chart showing the number of declines of 1% or more since 2008 (chart below). Volatility is unavoidable.

Warren Buffet’s mentor, Ben Graham, gave a speech in 1963 that had a particularly important quote. He said, “In my nearly 50 years of experience in Wall Street I’ve found that I know less and less about what the stock market is going to do, but I know more and more about what investors ought to do.”  Could not have said it any better.

Market In A Snap! January 17th-January 21st, 2021

By: Jeff Anderson, CFA

This Week: It was another volatile week for domestic equity markets. The Nasdaq 100 dropped roughly 7.5% for the week, its worst week since March 2020. It has lowered 14.2% from its November 2021 high. Historically, markets correct between 10% and 20% every 22 months (source: First Trust Advisors, L.P.). Therefore, the markets were due for a correction. As investors digested the likelihood of rate hikes coming as soon as March 2022, they have rotated out of growth stocks and into value-oriented companies.

Higher interest rates, persistent inflationary pressures and the Omicron variant’s less-than estimated effects on the economy allowed Crude Oil to finish slightly higher on the week, closing at $84.79 a barrel.

 CloseWeekly returnYTD return
S&P 5004,397.94-5.68%-7.73%
Russell 2,0001,987.92-8.07%-11.46%
US Treasury 10yr Yield1.763%  

Source: Wall St. Journal

This Issue:

  • Market Update
  • The Fed’s Playbook
  • Netflix, Peloton and the Curse of The Re-Opening Trade

The Fed’s Playbook

Historically, the drumbeat from Wall Street has been to avoid conflict with the Federal Reserve. As the Fed recently embarked on multiple Quantitative Easing programs, investors have realized that equities are the direct beneficiary from a wall of liquidity provided by the Fed.

Fed Governor, Jerome Powell, is still battling inflation, as it has persisted far longer than he originally estimated. In December of 2021, the fed futures priced in one to two rate hikes for 2022. However, since the CPI clocked in at 7% for 2021, Mr. Powell has set an aggressive course to taper the Fed’s bond purchasing program to rein in inflation with multiple rate hikes in 2022.

A “less” accommodative Fed has led to market volatility, with growth stocks taking the brunt of the sell-off.  The Fed essentially has three levers: to stop purchasing assets (mainly government bonds), increase interest rates, and reduce its balance sheet. The Fed reducing its balance sheet affects the market liquidity the most. Currently, there are no plans to reduce the Fed’s nearly $9 trillion balance sheet, which would keep the Fed accommodative, from a historical perspective.  If rate hikes and improvements in supply chain disruptions ease inflationary pressures, the Fed could return to a dovish positioning, allowing equity markets a boost later this year. If the Fed overshoots, the economy could weaken, and Mr. Powell could use that cue to reverse course. Mr. Powell has proven to be more flexible and reactive than previous Fed governors. We shall see.

Netflix, Peloton and the Curse of The Re-Opening Trade

The financial media coined it the “stay-at-home-trade.”  Companies that originally benefited from people forced indoors and ordered to work from home during the pandemic, saw their share prices swoon recently. In the beginning quarters of the pandemic, investors considered companies like Netflix, Zoom and Peloton, leaders in a new way of living.

As the economy re-opened, the “stay-at-home trade” has lost momentum. In some cases, like Peloton, companies simply over-estimated demand for their products in a post-pandemic world. The pandemic effects were so acute and new that many investors overestimated the durability of the growth prospects of these companies. In the short term, markets can be brutal. In the long term, companies will adjust, and their stock prices will eventually reflect a normal economic environment.

Market In A Snap! January 3rd-January 7th, 2021

By: Jeff Anderson, CFA

This Week: The US Equity Markets got off to a rocky start in 2022, with the S&P 500 declining nearly 2%, while the tech-heavy Nasdaq Index fell ~ 4.5%. Financials and Energy stocks returned more than 9% this week, while Home Construction, Biotech and Tech-Software sectors were down 4.5% to 8%. Rates moved higher, with the 10-year US Treasury Note yield climbing to 1.77% from 1.5% at the end of 2021. US unemployment rate fell below the Fed’s 4% longer-run estimate (partly due to a lower labor participation rate), signaling to traders that the first interest rate hike may come as soon as March. The futures market is predicting 3 rate hikes in 2022.  

Crude Oil was up 3.3% for the week, closing at $79 per barrel, still below its high of $84 in late October 2021.

Our 2021 Annual letter will be out shortly.

 CloseWeekly returnYTD return
S&P 5004,677.03-1.87%-1.87%
Russell 2,0002,180.98-2.87%-2.87%
US Treasury 10yr Yield1.77%  

Source: Wall St. Journal

This Issue:

  • Market Update
  • Americans Borrowed More Than Ever in 2021 to Buy Homes in 2021?
  • The Great Resignation

Americans Borrowed More Than Ever in 2021 to Buy Homes in 2021?

Mortgage Lenders issued close to $1.6 trillion in mortgages in 2021, aided by historically low interest rates. With the shortage of housing inventory and rising prices, many homebuyers snapped up homes for fear of waiting too long before home prices became unaffordable. Despite slowing home-price growth in the back half of the year, prices still rose 19.1% by the end of October. A Strong labor market and increased wages also supported the strong demand for housing.

The Great Resignation:

Last month’s payroll gains created 6.4 million more jobs than at the end of 2020, the largest increase on record. However, the country is still 3.6 million jobs short of pre-pandemic levels.

There were 12 million job openings in the U.S. at the end of the month according to the Wall St Journal. The low-wage sectors are the main source, aided by Government stimulus and COVID-19 fears. Employment numbers continue to strengthen but have yet to get back to pre-Covid levels. Labor participation is also at a low point, with eligible workers seeking early retirement while others are taking a break as they contemplate career changes. With wages growing, employers are finding it harder to hire enough workers. If or when people start coming back to the workforce, wage increases may slow.

Market In A Snap! December 20th-December 24th, 2021

By: Jeff Anderson, CFA

This Week: Markets finished ahead during this shortened holiday week. As you know, markets are closed today for Christmas. The market digested last week’s Federal Reserve Chairman Powell’s comments and resumed their upward trajectory for the year. Bond yields remain benign keeping a lid on mortgage rates. Housing starts have slowed but, overall, residential real estate construction demand is strong. Inventory is still relatively low, pushing prices higher. With all the stock market news focused on technology companies, you might be surprised to note that the best performing companies in December have been from defensive sectors, such as Utilities, Consumer Staples, and Healthcare. Year-To-Date, the best performing sectors have been Energy (up 66.6%), Home Construction (up over 50%), Semiconductors (up ~42%) and Financials (up over 33%).

Crude Oil finished up 2.6% through Thursday, closing at $73.83 per barrel. Happy Holidays!

 CloseWeekly returnYTD return
S&P 5004,725.721.22%25.82%
Russell 2,0002,243.714.24%13.61%
US Treasury 10yr Yield1.495%  

Source: Wall St. Journal

This Issue:

  • Market Update
  • Consumer Spending Cooled off in November
  • Bloomberg: New Study Shows Omicron Has 80% Lower Risk of Hospitalization
  • Build-Back-Better Act Derailed Again

Consumer Spending Cooled off in November:

The Wall Street Journal reported personal spending rose 0.6% in November compared with 1.4% in October. Many consumers purchased holiday gifts earlier this year because of fears of shortages. Overall, the consumer is still in good shape, with unemployment around 4.2% and personal savings of over $2.5 trillion.  However, the labor participation rate is still lower than in the past (see chart) and the personal savings rate, albeit still relatively high, is back to around pre-pandemic levels. As we have written in previous updates, economists were unsure how much demand was pulled forward because of certain product shortages on top spending down of the stimulus checks in 2020 and early 2021.

Bloomberg: New Study Shows Omicron Has 80% Lower Risk of Hospitalization:

The Omicron variant spreads much faster than the previous variants. However, these infections are 80% less likely to be hospitalized if they catch it. Unfortunately, if admitted to the hospital, the risk of severe disease is like the previous two. As many of us are somewhat numb or tired of hearing about Covid-19, the risks of illness for many still exist. The US reported nearly 240,000 new cases yesterday. Dr. Fauci said earlier in the week that the peak wave for Omicron would come much faster and the risk of infections are much higher for the unvaccinated. There have been many vaccinated people contracting Omicron, but the symptoms have been much milder on balance.

Build-Back-Better Act Derailed Again:

West Virginia Democratic Senator Joe Manchin has put a wrench in the legislation, citing concerns over the spending bill’s effects on inflation and debt levels. Senator Manchin has rejected certain provisions like extended paid leave plan, and a program aimed at pushing utilities to use more clean energy. President Biden has publicly stated that a deal will get done.  The bill has already come down from $3.5 trillion to around $2 trillion. Senator Manchin has publicly stated that he would only support up to $1.5 trillion in spending.  With the Fed accelerating bond purchases and signaling rate increases in 2022, this fiscal stimulus could be even more important for the economy in 2021.

Market In A Snap! December 13th-December 17th, 2021

By: Jeff Anderson, CFA

This Week: Markets closed lower for the week, as investors digested news surrounding the spread of Omicron variant, the Fed’s announcement of accelerating its bond tapering program, and inflation numbers. Despite consensus indicating multiple interest rate hikes next year, the 10- and 20-year US treasury bond yields declined. That has left more than a few strategists scratching their heads. The yield curve has been flattening which typically indicates lower economic growth in the future. GDP will likely stay elevated for the first half of 2022, but as the Fed tightens monetary policy, GDP will likely settle back down to its long-term average of 2 to 3 percent.

Crude oil lost 2.16% for the week yet is till up over 45% for the year. Inflation fears were outweighed by fears that the Omicron variant will slow global growth in addition to OPEC agreeing to boost supply.

 CloseWeekly returnYTD return
S&P 5004,631.54-1.94%23.02%
Russell 2,0002,175.93-1.62%10.18%
US Treasury 10yr Yield1.41%  

Source: Wall St. Journal

This Issue:

  • Market Update
  • The Federal Reserve to Taper More Aggressively
  • Buying High and Selling Low. One of the 4 Defects in our Financial DNA
  • Putting the IPO Market in Perspective

The Federal Reserve to Taper More Aggressively:

During Wednesday’s FOMC meeting, Fed Governor Jay Powell said the Fed is likely to increase the pace of tapering bond purchases and could be complete by March 2022. This puts the March meeting as a potential timeframe for the first interest rate hike in years. The futures markets are pricing in roughly three rate increases next year.   With unemployment rates low, the focus is inflation. The US economy had been unable to generate inflation above 2% for over a decade. The Fed has been willing to let inflation run a little hotter than normal as the threat of deflation outweighed inflationary fears. Now, inflation is running hot, and the Fed is signaling a policy shift towards tighter monetary conditions. The Fed governor, despite the criticisms, has been willing to change direction much quicker than previous governors. However, according to Powell, the criteria for rate hikes is different than for accelerated bond purchase tapering.

Buying High and Selling Low. One of the 4 Defects in our Financial DNA:

Morningstar’s Amy Arnott, CFA wrote an interesting piece on how not to invest (link at bottom of paragraph). Despite the poor performance of famed investor Cathie Wood’s ARK flagship ETF, ARK Innovation ETF, investors have fared worse.  Much worse. Why? They chased performance. Buying the ETF “after” the fund generated exceptionally strong, multi-year returns. To compound matters, these recent investors turned around and sold as the fund started generating negative returns. In Morningstar’s “Mind the Gap” annual study, they found that for the most recent 10-year period ended December 31, 2020, investors earned almost 2% less per year compared to the returns of the funds they invested in. This is not a knock against ARK or Ms. Wood. It is simply an example of how many investors behave, which can have material consequences to building wealth.

Putting the IPO Market in Perspective:

To say 2021 was a good year for companies going public would be an understatement. Including SPACs and Secondary Offerings, as of October 31, 2021, 755 deals were completed valued at $214 billion. From the attached chart, these figures were above the previous peak period of 1999-2000. Companies (and their Investment Bankers) like to go public when markets are rising, and sentiment is high. Interestingly, over a two-year period, 2020-2021 total deals were not that much higher than the 1999-2000 period.  Historically, market returns after big deal years tend to be lower, or even negative. Having a well-diversified portfolio of domestic and international equities as well as fixed income securities with a long-term horizon can mitigate the effects of market corrections.

Market In A Snap! December 6th-December 10th, 2021

By: Jeff Anderson, CFA

This Week: It was a rather volatile week for many companies.  A number of high-flying technology stocks fell on hard times, sending some shares down 40% or more.  You wouldn’t know it from looking at the returns of the major indices.  The S&P 500 and Nasdaq indexes are dominated by a handful of large companies, and they have held up well.  Apple’s market value is approaching $3 Trillion, essentially drowning out the noise from the smaller companies in theses indexes. 

 CloseWeekly returnYTD return
S&P 5004,712.983.82%25.45%
Russell 2,0002,210.662.38%11.93%
US Treasury 10yr Yield1.488%  

Source: Wall St. Journal

Crude oil had a decent week, gaining nearly 9% to $72 per barrel, but well off its highs in October where it hovered around $82.  Oil traded down to nearly $10 in April 2020 when the economy was shut down due to the pandemic.  The dramatic increase in oil prices is more a function of return-to-normal price ranges. 

This Issue:

  • Market Update
  • US Jobless Claims Fell to Lowest Level in Half a Century
  • US Inflation Hits a Multi-Decade High in November

U.S. Jobless Claims Fell to Lowest Level in Half a Century

There’s a shortage of labor.  The labor participation rate is almost 2% lower than pre-Covid.  Economists have coined this period as “The Great Resignation”.  People are leaving the workforce.  Some are retiring, while others are taking time off in hopes of recharging their batteries and finding a better paying, more fulfilling career path.  We could also call this post-Covid world “The Great Mobility” as many US workers were able to move thousands of miles away from their offices where they can reduce their cost of living or seek a more balanced lifestyle.  Whatever the reasoning, it is increasingly harder for employers to find good employees, and when they do, it usually costs more.

US Inflation Hits a Multi-Decade High in November

The economic headlines have been dominated by inflation numbers for several months now.  Despite the high reading, it was to be expected.  Bond yields actually moved lower.  Why is that? It’s all about expectations.  Since the 6.8% print was not a surprise, there was nothing to spook the bond markets.

The broader indexes took this all-in stride, with the large cap indices all finishing higher on the day.  Consumers are flush with cash and willing to spend.  Unemployment is low.  Wage gains are helping.  Corporate profits, so far, are growing, meaning that they can pass along price increases.  How much of consumer purchases is pulling forward future demand as people rush to buy goods that may cost more later remains to be seen. 

Market In A Snap! November 29th-December 3rd, 2021

By: Jeff Anderson, CFA

This Week: The S&P 500 closed on Friday at 4,538, posting a loss of 1.2% for the week.  Despite the recent market weakness, the S&P 500 is still up over 20% for the year.  The market correction drove Treasury bond yields lower, with the 10-yr Treasury Bond yield settling below 1.36%.  Crude oil, on the other hand, has been very weak, settling 2.6% lower for the week but down a whopping 18% since Wednesday.  OPEC’s decision to hike output, the Omicron variant’s effects on economic activity and President Joe Biden’s announcement that the government will release supply from the Strategic Petroleum Reserve all contributed to the fall in the price of oil.   Overall, inflationary pressures subsided this week, despite Fed Governor Jerome Powell acknowledging that certain supply-chain pressures are taking longer to work through.  He even went so far as to remove the word “transitory” stating that the term means different things to different people.   Transitory doesn’t have a definite timeline; it simply means that certain costs pressures are not expected to reach a higher, permanent plateau.

This Issue:

  • Market Update
  • Investors Poured Record Amounts of Money Into Equities in 2021
  • The U.S. Added “Just” 210,000 Jobs in November
  • U.S. Businesses Posted Their Highest Profit Margins Since 1950

Investors Poured Record Amounts of money into equities in 2021

Bloomberg reported on November 25th that this year’s inflows into equities are the largest rolling 12-month amount over the past 19 years, amounting to almost $900 billion. Bonds took in a little over half that amount.    

U.S. Added “Just” 210,000 Jobs in November

Friday’s unemployment numbers were somewhat disappointing, but that doesn’t tell the whole story. Prior month’s numbers are always adjusted, making each report somewhat inaccurate.  Nonetheless, economists had predicted over 500,000.  We are not back to pre-pandemic employment numbers, but the economy is continuing to add jobs.  Unemployment is down to 4.2%.  the Labor Participation rate is slightly higher, meaning more people are in or actively looking for work.  The chart breaks down employment by sector.  Leisure and hospitality are lagging but that’s where the largest wage gains have come from.  According to the Wall Street Journal, a “survey showed that 1.1 million more people were employed in November than in October.”  Chief economist at Jefferies LLC., Aneta Markowska, said the November payrolls figures “doesn’t really change what we thought about the labor market.  It’s still very healthy and moving toward maximum employment very quickly.”

U.S. Businesses Posted Their Highest Profit Margins Since 1950

Despite the rhetoric we’re hearing from CEOs about wage inflation, corporations are doing better than OK.  A Bloomberg article earlier in the week that “US corporations outside of the finance industry posted their fattest margins since 1950 – one reason why stock markets keep hitting all-time highs.” Businesses have been paying more in wages and benefits, with “total compensation up 12% in the last quarter from a year earlier.”  At least for now, employees and employers are benefiting from higher prices.  Since labor expenses make up a considerable amount of a business’s overall costs, their ability to pass these costs along to consumers is paramount in keeping profit margins healthy and growing.  With capitalism being a force of creative destruction, we should see businesses increase their investments in technology to drive higher labor productivity, which may ultimately lead to less of a reliance on human capital.   The make up of the US labor force in 10 years from may will likely look vastly different than today.

Market In A Snap! November 15th-November 19th, 2021

By: Jeff Anderson, CFA

This Week: The S&P 500 closed at 4,697 amounting to a gain of 0.3%.  The yield on the 10-yr Treasury bond settled at 1.54%, down roughly 2.5% from the previous week.  Oil was the big loser, posting a loss of almost 6% on the week, closing at $76.11 per barrel.   A surge in COVID-19 cases in Europe has put a damper on growth expectations as Austria announced their intention to go into full lockdown.  Fears of this spreading to other countries weighed on the commodity.

This Issue:

  • Wages vs Labor Productivity 
  • Target Stock Fell Despite Earnings Beat
  • Ford, GM Step into Chip Business

Wages vs Labor Productivity

John Deere and the United Auto Workers Union (“UAW”) reached an agreement this week after negotiations fell apart last week leading to 10,000 workers going on strike. The new labor agreement includes a 20% increase in wages over the lifetime of the contract, including a 10% increase this year. In addition, a signing bonus of $8,400, a return of cost-of-living adjustments and other retirement benefits were part of the deal. It is no secret that labor productivity has outpaced wages for decades, but that isn’t the full story.  When health insurance and other benefits are added to wages, the total compensation has increased at roughly the same rate as labor productivity. Benefits amounted to 31 per cent of total compensation through September (source: Bureau of Labor Statistics release, Thursday September 16, 2021). Granted, some industries are more productive than others, and profit margins for many companies proves that. It is also one of the reasons why the stock market has been so strong. Increasing profit margins are a key driver of growth in stock prices. As inflation pressures linger, total employment costs will likely increase, putting downward pressure on profit margins. Companies that can pass these increased costs along will be fine, but it will further reinforce inflationary forces. Unlike increased costs from supply bottlenecks, these costs are fixed.

Target Stock Fell Despite Earnings Beat

The company posted solid third quarter sales’ growth, yet the stock fell. Why? The Wall St Journal reported that both Target and Walmart “will have more than enough food, toys, and goodies to keep their shelves full over the holiday season.”  It was all about margins. Target decided to not pass along those costs to their loyal customers. The market didn’t like that, sending the stock down 5%.  Target wants to maintain market share, and to do so, they are keeping a lid on prices. The only reason this works is if they believe that the cost pressures from supply-chain bottlenecks are waning. With $11 billion or so in inventory that is turned over roughly 6 times per year, they have a decent idea of what the supply chain looks like.  If they saw a longer-term supply-chain problem, they most likely wouldn’t have decided to keep prices level. However, management admitted that some of the recent cost pressures outside of the supply-chain are not temporary, with suppliers passing on some of increased operating costs. it will take the better part of 2022 to sort this out. Target’s COO was quoted saying, “no one knows the precise answer.”  I guess we’ll have to wait to find out.

“Ford, GM Step Into Chip Business”

A considerable number of new cars you see sitting on dealer lots cannot be delivered.  Why? They’re missing critical semiconductor “chips”.  The chip shortage has been addressed in previous weekly updates. The two oldest US automakers, Ford, and General Motors have said “enough’ s enough.  We need a domestic, steady supply of chips.” Ford kicked things off by announcing on Thursday that they have “outlined a strategic agreement” with an American-based semiconductor manufacturer. Prior to the pandemic, the global supply chain was humming along, yet the fragility of it was not anything anybody really understood.  A company’s success is contingent upon its ability to produce a product on time and at an acceptable price. When this breaks down it can turn any executive’s hair gray. It is just another example of corporate America having to change the playbook.

Market In A Snap! November 6th-November 12th, 2021

By: Jeff Anderson, CFA

This Week: The S&P 500 closed at 4,682.85, down 0.3% for the week but still up nearly 25% on the year.  The US 10-Year Treasury yield closed at 1.57%, down 0.5% despite all the inflation news.  Crude Oil was also lower, finishing the week at $80.81 per barrel, down 0.44% this week but still up a lofty 67% on the year.

This Issue:

  • Market Update
  • Inflation Fears
  • Americans Quit

Inflation Fears Sink Consumer Confidence

US Consumer Confidence just hit a 10-year low. With equity markets at all-time highs and the demand for housing as strong as it is, one would expect a different number. However, at the top of most consumer’s minds is not the buoyant markets for stocks, crypto, and housing. It’s inflation.  The effects of a jump in inflation rates can cause households to cut discretionary spending and/or purchase the necessities that are at most risk of seeing further price increases. Take automobiles for example. New cars are selling for prices that are 10 to 20% above sticker price. Those that need a car are forced to pay up. Those that don’t will wait…until they need to, hoping that prices will return to normal.

“Waning confidence reflects ‘an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation,’ Richard Curtin, director of the survey, said in a statement.”  Political pundits claimed President’s Trump defeat in 2020 was due to his handling of the pandemic. The inflationary effects brought on by the pandemic response from Mr. Biden are causing an equal dramatic drop in his approval ratings.

US Inflation Reached a 30-year high in October:

“The Labor Department said the consumer-price index (“CPI”) increased in October by 6.2% from a year ago.” Even stripping out food and energy (hey, who needs to eat or drive?), CPI rose 4.6% for the month.

The two inflation camps’ arguments were that is permanent vs transitory. Now, the transitory camp is saying it is “transitory for longer.”  As we’ve said in previous updates, many of the inflation pressures today are due to supply bottlenecks.  We won’t know whos’ right for a while.

The goal for any investor is not to “predict” the future, but rather to “be prepared” for it. Whether inflation ends up being transitory or not, there is inflation now. The cost of almost everything is going up.  That’s a fact. 

A record 4.4 million Americans Quit Their Jobs in September:

The pandemic has turned everything on its head. Life is short. Things happen. Many people are contemplating their future resulting in many career changes, some of which, involves lifestyle changes. Working from home for has allowed them the freedom to live wherever they want to, free from the shackles of the office. On top of that, some workers believe that they can earn more elsewhere, as the demand for certain skills is driving wage growth.