Stumbling Across the Finish Line
Contributed by Doug Walters, Max Berkovich
Last week I attended my kids’ track meet. I watched the 800m race, a grueling event; too long to be a sprint but too short to be long-distance. One of the runners who had gone out fast was clearly losing steam in the final stretch. With another runner not far behind, he attempted to pick up the pace only to find himself losing control, half-falling, half-running for the last 20 meters. He held off the competition, but it was not pretty. Value investors seem to be in a similar state of imbalance as we push toward the end of the first half of 2021.
The first half of the year has been a good one for value investors up until this week. The Federal Reserve’s FOMC meeting and subsequent press conferences have tripped up value stocks as we approach the end of June and close out the first half of 2021. So what did the Fed say?
- They now expect two rate increases in 2023. Previously they had been forecasting none. However, this was already priced in by investors.
- They are talking about, talking about, reducing asset purchases (i.e., tapering). This was well-telegraphed.
Nothing in those headlines is particularly bad for value investors. It appears the shift may not be directly a result of the Fed’s comments. Investors are also coping with concerns about “peak growth” as year-on-year growth comparisons become more difficult and still trying to grapple with the uncertainty of inflation. The Fed has generally been sanguine about inflation, noting that the current increases are transitory, but did express a slight bit of caution in their comments this week.
Investors are, as usual, dealing with significant uncertainty. This underlines the importance of a well-diversified portfolio, held with patience to benefit from the long-run returns that the markets have to offer.
On the Dots
The Federal Open Market Committee (FOMC) indicated that overnight lending rate increases might begin in 2023.
- While it is still some time away, the Fed is preparing the market for higher rates and reduction in their bond purchasing program, a mechanism that is used to reduce stimulus in our economy.
- The Fed’s balance sheet has doubled since March 2020, increasing by nearly $4 trillion to combat economic conditions caused by the pandemic.
Reconciliation
A bipartisan infrastructure bill proposal of about $1.2 trillion in spending over the course of 8 years gained some additional support in the Senate. Deliberation on how the bill will be funded is the main sticking point for the support and is holding up progress.
- In the meantime, Democrats are working to move their own $6 trillion infrastructure bill through the party-line reconciliation process.
- There is no easy path for a bipartisan or party-line bill. It is looking unlikely that either of the two bills would be passed until after the summer recess.
Lumber Pains and Oil Gains
In the last 12 months, we witnessed a huge rise in commodity prices. Prices of lumber increased over 117%, copper and aluminum rose over 60%, and even pork prices have doubled.
- Bottlenecks in the supply chain cause the rise in commodity prices, and pressure is felt in nearly every commodity.
- However, we are beginning to see signs of relief in lumber and copper prices this year, as both declined from their all-time highs.
- Oil and gasoline prices continue their upward trend with no signs of relief. We witnessed a similar price rise and shortage of gasoline in 2008 as oil prices reached an all-time high.
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