October 2021 Thoughts and Insights

Michelle Trouvé |

We hope everyone had an enjoyable summer and is ready for cooler weather and the seasonal change into fall and winter.

Speaking of changes, as you know, our process is based on measuring and mapping the rate of change of Growth and Inflation leading us to our investing quadrants (see map enclosed). These changes are compared on a one-year and a two-year basis. Of course, the past two years have been unlike any period in history we have known due to the Covid Pandemic. Economies were halted, re-started, halted again due to the Delta variant, and now restarting again. Thankfully the case count in the US for the Delta variant is on the decline.

From an investment quadrant perspective, over this past year we have moved from Quad 2 in Q1 and Q2, to Quad 3 in Q3 and now back to Quad 2 in Q4. These quick quad shifts have kept us busy as we add investments and remove them to capture profits and manage risk. We apologize for the abundant trade notifications, but remind you that trades are now free, and we are evolving our process to the new speed of the markets.

To help illustrate our organization and process, below is a visual of our current equity model portfolio. We look both through the lenses of economic sector and time/holding period. Individual portfolios may vary from the model due to legacy holdings, client directed investments, etc.

On the left is the model equity portfolio grouped by economic sector, and on the right is the model portfolio grouped by theoretical holding period: long-term, sector rotation, and single stock gains.

As the Delta variant fades in October, businesses re-open, and employees report back to the office, we anticipate a period of accelerating growth again in the fourth quarter and into early 2022. The main factors contributing to growth are household savings deposits at all-time highs, increased consumer and industrial demand, and labor acceleration. Inflation will continue to persist into early next year.

Despite the many bearish headlines regarding the US budget, debt ceilings and Washington gridlock, the US Dollar remains stable, the VIX (volatility index) is not in the panic range, and high-yield spreads are narrow. We watch these indicators daily for changes and currently they all support continued upside in equities and Quad 2 allocations.

We also track the 10-year Treasury daily, which has moved from 1.30% at the end of July to 1.60% currently. A 30-basis point move in such a short time is noteworthy and suggests that the market believes that the Fed will move towards tapering in November. Higher interest rates are good for equities and our interest-bearing cash accounts; however, they are less supportive of gold. We recently sold our gold ETF (ticker GLD) to free up capital for other market purchases. However, we remain committed to our physical gold allocation (ticker PHYS) which is not considered part of our equity model.

Our fixed income portfolios have done very well despite the rise in rates. We remain committed to our income focus and are excited about adding Blackstone real estate and credit strategies to our model.

At some point next year, we expect our two-year comparisons for both growth and inflation to decline, indicating a shift to Quad 4. We will be prepared for this likelihood.

Using the Hedgeye math-based macro models and learning the inside of the market structure has been a liberating process for us. We are no longer distracted by headline noise and are able to remain calm and focused amid the volatility.

We are grateful for your trust in us as we evolve our process. We are dedicated to serving you and, as always, welcome any questions you may have.