CENTRAL BANKS FIGHT INFLATION
In their fight against inflation, the Federal Reserve and the Peoples Bank of China shook up financial markets in a coordinated fashion this past Wednesday. Their actions shifted the attention of investors from value investments (stocks such as industrials and commodities that have accelerating earnings due to the reopening of global economies) to growth investments (companies with more consistent earnings profiles that are less sensitive to economic gyrations).
When markets change we make adjustments with the markets, using a rules based process focusing on both principal protection and price momentum.
Inflation can create big economic problems, especially if it gets out of control. Central banker actions gave the markets three takeaways: a) the bond market is signaling an economic slowdown, b) the early-cycle (value) economic trade is winding down, and c) investors are shifting towards a mid-cycle economic trade (growth).
THE EARLY-CYCLE ECONOMIC TRADE IS WINDING DOWN
The surge in inflation has put pressure on economies globally. Significant inflation is disruptive to political systems on many levels (when it negatively impacts voter check books). The extent of the damage hit computer screens with the May CPI release.
In their fight against inflation, the Federal Reserve and the Peoples Bank of China shook up financial markets in a coordinated fashion this past Wednesday. Their actions shifted the attention of investors from value investments (stocks such as industrials and commodities that have accelerating earnings due to the reopening of global economies) to growth investments (companies with more consistent earnings profiles that are less sensitive to economic gyrations).
When markets change we make adjustments with the markets, using a rules based process focusing on both principal protection and price momentum.
Inflation can create big economic problems, especially if it gets out of control. Central banker actions gave the markets three takeaways: a) the bond market is signaling an economic slowdown, b) the early-cycle (value) economic trade is winding down, and c) investors are shifting towards a mid-cycle economic trade (growth).
THE EARLY-CYCLE ECONOMIC TRADE IS WINDING DOWN
The surge in inflation has put pressure on economies globally. Significant inflation is disruptive to political systems on many levels (when it negatively impacts voter check books). The extent of the damage hit computer screens with the May CPI release.
On May 26th Reuters reported that China went as far as banning certain investors from buying commodities, which they highlighted in their story “China bars banks from selling commodities-linked products to retail buyers”.
This past week the battle against inflation was taken to the next level. China coordinated with the Federal Reserve Bank’s hawkish tone by announcing their plans to dump commodity reserves onto the market, sending the industrial, financial, and commodities sectors into a tail-spin. We’ll see if it works.
06/16/21: Bloomberg: “China’s Campaign to Control Commodities Goes Into Overdrive”
06/16/21: GO Banking Rates: “China To Sell Off Reserves of Aluminum, Copper and Zinc In Order To Tame Prices”
The Federal Reserve signaled rate increases in 2022 and tighter fiscal policy in the future. We can see the price reaction in the following chart, which compares how sectors reacted. Growth stocks rose and value stocks fell.
The adage “Don’t fight the Fed” is applicable here. One week of returns does not make a trend, but a break in trend within the context of the Chinese Central Bank and the Federal Reserve drawing a line in the inflation sands is significant. Their actions tell us what to avoid but also gives us new opportunities.
CAPITAL SHIELD - Investments in the commodities complex broadly broke trend and our capital preservation program exited those investments, locking in gains and preventing further declines. Capital Shield acts as a brake, if an investment breaks trend it is sold and added to the cash account. Those funds can then be reinvested into investments that have superior momentum characteristics (identified by one of our institutional partners).
GLOBAL RANKED MOMENTUM - We implemented Global Ranked Momentum last fall. GRM is our process (supported by institutional service providers) that ranks the price momentum of all assets globally. The objective is to maintain a portfolio of investments that are in the highest demand by investors (top 50%).
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DEFINITIONS
Capital Shield – Highcroft Investments Advisor’s Capital Shield program is a rules based discipline that has capital preservation as its’ primary objective. Using technical analysis the program exits investments that have broken trend, shifting those investments into cash. The discipline helps to lock in gains and prevent further declines. Capital Shield acts as a brake when investments and markets generate downward momentum.
CRB Commodities Index - Thomson Reuters/CoreCommodity CRB Index is calculated using arithmetic average of commodity futures prices with monthly rebalancing. The index consists of 19 commodities: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, RBOB Gasoline, Silver, Soybeans, Sugar and Wheat. Those commodities are sorted into 4 groups, with different weightings: Energy: 39%, Agriculture: 41%, Precious Metals: 7%, Base/Industrial Metals: 13%.
Global Ranked Momentum – Highcroft Investment Advisor’s Global Ranked Momentum program is a rules based discipline that has capital growth as its’ primary objective. Using fundamental and technical analysis, provided by institutional service providers, the rules based system ranks the price momentum of all assets globally. Asset allocation is constructed from the top 50% of those assets. Resulting portfolios are then positioned in the top 25% to top 50% of assets globally, those which are in the highest demand by investors.
NASDAQ Index - The NASDAQ-100 is a modified capitalization-weighted index. The stocks' weights in the index are based on their market capitalizations, with certain rules capping the influence of the largest components. It is based on exchange, and it does not have any financial companies. The financial companies were put in a separate index, the NASDAQ Financial-100.
S&P 500 Growth Index - The index measures growth stocks using three factors: the ratios of book value, earnings, and sales to price. S&P Style Indices divide the complete market capitalization of each parent index into growth and value segments. Constituents are drawn from the S&P 500®.
S&P 500 Value Index - The index measures value stocks using three factors: the ratios of book value, earnings, and sales to price. S&P Style Indices divide the complete market capitalization of each parent index into growth and value segments. Constituents are drawn from the S&P 500®.
Trailing Stop - The term trailing stop refers to a general strategy whereby investors desire to limit declines of their investment holdings. The strategy does not eliminate the possibility of loss, it is designed rather to cut short the trend of continued declines. The discipline can limit losses and lock in gains.
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. This memorandum is being made available for educational purposes only and should not be used for any other purpose.
The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
Investing involves risks including possible loss of principal. Past performance does not guarantee future results. Any investment or investment strategy outlined herein are not suitable for all investors, readers should conduct their own review and exercise judgment prior to investing. Wherever there is the potential for profit there is also the possibility of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein and may be subject to change without notice. Neither Highcroft, Inc., Gerald Asplund, nor LPL Financial, has no duty or obligation to update the information contained herein.
To the extent you are receiving investment advice from a separately registered independent investment advisor or broker, please note that Highcroft, Inc., Gerald Asplund, and LPL Financial are not an affiliate of and makes no representation with respect to such entity.
Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources. The economic forecasts set forth in this material may not develop as predicted.
Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer.
The sources from which information has been obtained is assumed to be reliable; the accuracy of such information is not guaranteed, and the accuracy and completeness of such information has not been independently verified.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results. Investing in the index would require investors purchase an investment product, which would involve fees and expenses.
The fast price swings in commodities and currencies can result in significant volatility within an investor's holdings.
ABOUT US
Highcroft Investment Advisors provides retirement planning, investment management, financial planning, fiduciary investment management, and lifetime income planning. Certified Financial Planner. Working with business owners, individuals, and wealthy families near Wayzata, Minnetonka, Plymouth, Orono, Minnetrista, and Minneapolis Minnesota (55402, 55391, 55447, 55364, 55428).
Highcroft Investment Advisors serves as a 3(21) and 3(38) Investment Advisor and fiduciary for labor union supplemental 401(k) and pension plans and corporate 401(k) plans. Highcroft works with the union's counsel, recordkeeper, administrator, and the plan's trustees. United Association, Plumbers, Pipefitters, Steamfitters, IBEW, and Carpenters. Serving Wisconsin and Minnesota. 401(k) investment management provided through LPL Financial's corporate RIA - offering 3(21) and 3(38) services.
Working with business owners, individuals, and wealthy families near Wayzata, Minnetonka, Plymouth, Orono, Minnetrista, and Minneapolis Minnesota (55402, 55391, 55447, 55364, 55428). As independent financial advisors we are not driven by certain products or services, instead we focus on your needs as an individual. Services include fiduciary fee only, retirement and divorce financial planning, life insurance, capital preservation, lifetime income planning, bonds, stocks, ETF, income, IRA, brokerage, rollover IRAs. Financial advisor near me, financial planner near me, independent planner near me.