April Commentary

In April, our net weighted average return in was +3.45%. Our net average return for the month by strategy:

Conservative: +1.83%

Balanced: +2.61%

Growth: +5.96%

Through the first four months of 2021, our net weighted average return was +6.62%. Since 2015, we have generated a net weighted average return of +64.62%.

An optimistic earnings season

In the US, the strong improvement in the economic and business outlook has been a common theme in management earnings commentary. Depending on their state of reopening, managements range from optimistic that pent-up demand will jump-start growth to confident that the currently strong strides in recovery will continue. Even those in particularly COVID-sensitive sectors, like airlines, are confident that demand will bounce back once all restrictions are lifted.

Given the pace of vaccination in the US, that could be sooner rather than later. Currently, around 40% of the US population has already received at least one vaccine dose. Compare that to Israel and the UK, where more than 50% of the population has been vaccinated and new confirmed cases have dropped off precipitously. It is not hard to see why companies across all sectors are so optimistic.

Even though the vaccine rollout has been disappointing in the rest of Europe, we too will pick up the pace and get back to normal. And despite talks here in Latvia of shutting down terraces just as they have opened for business, I am confident that re-opening will actually happen faster than expected. With this reopening, expect to see significant improvements in business outlook and better than expected returns from European equities.

Revisiting inflation

As I covered in last month’s commentary, there has been a great deal of focus on inflation during this earnings season. On one side, we have higher commodity prices, driven by both surges in demand and problems in the supply chain. At the same time, tightness in the US labor market has also appeared, evident from elevated job vacancies, increasing quit rates and strong wage growth.

As a result, there are already plenty of commentators calling for the Federal Reserve to tighten monetary conditions before inflation gets out of control. As I wrote last month, it is best to ignore them.

In part, because these calls for runaway inflation are exaggerated due to base effects. But more importantly, because the policy makers have determined that they want inflation, especially in wages.

Political power between parties changes fairly often, but broader policy stances within parties also shift from left to right over decades, moving back and forth between the interests of capital and labor as different groups garner greater influence over periods of time. Things tend to continue in one direction until there are massive imbalances and building public sentiment (and resentment) quickly tips the scale back in the other direction.

During the Gilded Age from the late 1800s through the 1920s, capital was firmly in control. In response to the Great Depression, FDR’s New Deal set in motion an era of pro-labor policies that culminated with Lyndon Johnson’s Great Society of the 1960s. Following the tumultuous 1970s, the interests of capital again had political control during the era of globalization from the 1980s through the 2010s.

Signs are increasingly pointing towards another shift in the balance occurring, and, combined with the sizable broad money supply growth we have seen over the past year, consumer price inflation is likely to be higher over the coming years than during the recent past.

There is no blueprint for how best to invest during an inflationary regime, as each period has a myriad of unique circumstances and reasons for happening, but it begins with recognizing that a regime change is underway. Using the frameworks of the past and paying attention to the circumstances of the present, we are focused on navigating the path ahead.

On behalf of our client portfolio management team, thank you for your continued trust and support.