Past performance is no guarantee of future results. Trend signals are proprietary research of Fortunatus Investments, LLC, a Registered Investment Advisor with the Securities and Exchange Commission (SEC). Reference to registration does not imply any particular level of qualification or skill. Prior to June 2014, Fortunatus Investments was a wholly owned subsidiary of Executive Wealth Management, LLC and they continue to share common ownership and control. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation. One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.
Quote of the Week
| Some investors may choose to harvest capital gains now, rather than potentially pay a higher rate in the future. However, U.S. taxable domestic investors own only about 25% of the U.S. stock market. The other 75% is owned in accounts that aren’t subject to capital-gains taxes (e.g., retirement accounts, endowments, foreign investors). We would expect opportunistic investors who are unaffected by this proposal to step in and take advantage of lower prices. History bears this out. There is no relationship between changes in capital-gains tax rates and the performance of the U.S. stock market. For example, the last time capital-gains taxes went up was in 2013, when they rose by nearly nine percentage points. Yet stocks rose 30% that year.. Mark Haefele of UBS Investment Research commenting about the possible effect the Biden administration’s proposed capital gains tax hike may have on the equity markets. |
Market News
In our last quarterly commentary we stated that the cost of inputs to the economic machine were increasing in value possibly leading to future inflation. We noted that the inflation that should be coming had not yet shown up. It is now starting to show up. The March report on the Consumer Price Index (CPI) showed that over the trailing twelve months (TTM) we have seen inflation of 2.6%. Is the economy starting to run hot and with it inflation? It is important to note that the numbers from March 2020 include some deflation, as they include the initial cessation in economic activity due to the pandemic. The relevant question is how high will inflation be allowed to rise before we see the Federal Reserve step in and raise interest rates in an attempt to curb it. Because of the incredible strangeness of 2020, we believe it is important to put the TTM numbers into context. If we neglect the abnormally low 2020 reading for CPI and look at inflation over two years, it is only coming in at a 2.1% annualized rate after the March 2021 reading. This means that on a slightly longer terms basis, inflation is running right at the Federal Reserve’s long term target rate (approximately 2%).
How will we know if the CPI will continue to accelerate and we start to get inflation at higher levels? We can look at the Producer Price Index (PPI) as an indicator for future inflation. The PPI is an index of the cost of inputs into the economy, and it has shot up quite a bit over the last few months. We can see in the graph directly below that for several decades in the 20th century the PPI and the CPI were very correlated.
As seen in the chart below, the US economy in the 21st century has become less shackled to the price shocks associated with raw materials (spikes in the gray dashed line), the way it was during the period after WWII through to the inflationary era of the 1970s. This does not mean that there is no correlation, indeed the correlation is still significant, but the magnitude of movements in the CPI vs movements in the PPI has ceased to be useful.
So we are seeing inflation, albeit muted at this point, but the rate of change is increasing. An overweight to equities generally helps to offset the mild inflation that we are currently seeing. Indeed, so far this reporting season with 25% of the S&P 500 reporting, the net profit margin is the third highest since 2008 according to FactSet Research. This means that companies have been able to pass along rising input costs to the end consumer. We have seen several consumer staples companies announce price hikes on many of their product lines without a hit to sales. If inflation does get too high then it will not be good for anybody, but we are not seeing that in the numbers at this point.
Model Update
There were no trades in the Fortunatus models during the week ending on April 24th, 2021. The major equity market sectors remain in a long-term favorable trend, and the Fortunatus Asset Allocation models are near their maximum allowable equity exposure with domestic stocks favored over international shares.
On a Lighter Note
Through the magic of artificial intelligence algorithms, social media platforms are able to connect kindred spirits separated by vast oceans of time and space. That is how this writer became aware of the Instagram account of the self-proclaimed “largest, oldest and most powerful puddle” in the Russian city of Yuzhno-Sakhalinsk. Apparently, from a tiny pothole in 1994, an invincible puddle emerged that would persistently befuddle the residents of the city. On its 25th birthday, the puddle decided to go on social media so that it could properly thank the city officials for their foresight in allowing it to live such a long and undisturbed life.
Its watery wit gained fame throughout Russia, and soon social media influencers were flocking to the town so that they could get on a board to paddle in the puddle to the middle of the muddle for a unique photo op. The puddle used its new prestige to promote the presence of “sister puddles” throughout the former Soviet Union and to organize puddle parties for similar towns infested by immutable murky mires. It even seems to have learned how to speak some English over the last year.
But be careful. For it was the German philosopher Nietzsche who said, “If you gaze long into an abyss, the abyss will gaze back into you.” So surely if you peruse the posts of a puddle, the puddlesome posts may peruse you too.
A Puddle Selfie On Its 25th Birthday.
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Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.
1 Week = closing price on April 16, 2021 to closing price on April 23, 2021
1 Month = closing price on March 23, 2021 to closing price on April 23, 2021
3 Month = closing price on January 22, 2021 to closing price on April 23, 2021
YTD = closing price on December 31, 2020 to closing price on April 23, 2021
All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions as well as any prices indicated are current only as of the date of this report, and are subject to change without notice. Material provided is for information purposes only and should not be used or construed as an offer to sell, or solicitation of an offer to buy nor recommend any security. Any commentaries, articles of other opinions herein are intended to be general in nature and for current interest. Some of the material may be supplied by companies not affiliated with EWM and is not guaranteed for accuracy, timeliness, completeness or usefulness and EWM is not liable or responsible for any content advertising products or services.
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