Q4 Newsletter to Our Clients

The fourth quarter is now upon us as we approach our second holiday season with COVID and this ‘new normal.’ Vaccines are being rolled out at an ever-increasing rate along with more pharmaceutical companies producing highly accurate test kits, booster shots all while tracking potential variants. Yet, it would be impossible not to acknowledge those that have personally experienced the loss of someone close to them.

Such a tragedy is perhaps best viewed through the lens of The Stockdale Paradox. Admiral James Stockdale was a prisoner of war in Vietnam for over seven years and a recipient of the Congressional Medal of Honor. He once was asked, “who were the ones that didn’t make it out?” Admiral Stockdale’s response was rather stoic- “the optimists.” Jim Collins, who personally interviewed him, asked to further explain.

“...They were the ones who said, ‘We’re going to be out by Christmas.’ And Christmas would come, and Christmas would go. Then they’d say,’ We’re going to be out by Easter.’ And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again... And they died of a broken heart.”

Admiral Stockdale provided guidance on how to endure any situation with the following—

“You must never confuse faith that you will prevail in the end — which you can never afford to lose — with the discipline to confront the most brutal facts of your current reality, whatever they might be.”

This is a testament to the U.S. and world economy after such tragedies as 9/11, the Global Financial Crisis, and now the current pandemic. Many wondered how we could continue and, yet, we prevailed. The economy as well as the markets adapted and even thrived through such tough circumstances. Today is nothing different, and so we would like to address several macroeconomic events impacting the world economy and the markets.

The Federal Reserve’s Mandate

The Federal Reserve is unique compared to other world banks in that it not only has the mandate to stabilize the dollar but to also promote full employment while moderating interest rates.

Inflation has the ability to rear its ugly head primarily through higher input costs with producers (‘push inflation’) and strong demand by consumers (‘pull inflation’) with too much money chasing too few goods.

Traditionally, the Fed attempts to tame inflation on the demand side by reducing the money supply with higher interest rates. What the Fed is experiencing is a tough balancing act of also controlling the rising costs of production. If they reduce the money supply too quickly, it can cause the economy to re-enter a recession.

We are experiencing rising costs with low supplies ranging from consumer staples to toys for the holiday season. The average cost for shipping a 40-foot container from east Asia to the U.S. has increased over 7x while fuel costs have risen 65% in the past year. Retailers with the best supply chains will stand to thrive this holiday season.

Experts in the retail industry have spoken on several news outlets to expect no [unplanned] markdowns. If you see it, buy it. It likely won’t become cheaper when you go back. It may not be in stock, either. The top comments noted are that the consumers are not in charge this season for the first time in a long time. The retailers are.

Furthermore, holiday travel may see highly elevated prices for airfare assuming flights are not severely delayed or canceled due to limited flight crews. Several friends that fly for several major airlines are constantly at risk of falling out of currency. When that occurs, they must return to the flight simulators, which typically are located near the company’s main hub, further exacerbating labor shortages in the aviation industry.

The More That Investors Worry About Inflation The More It Could Influence Policy

Typically, fund managers conduct top-down research when they are in search of value. In recent months, more of them are redirecting their focus toward constituents and what they are voicing to their politicians. After all, the more investors worry, the more it could potentially influence public policy.

One knock-on effect would be that rising Treasury yields will likely result in higher costs to service the national debt. It is our opinion that as interest rates start to rise we will inevitably see fiscal policy becoming the focus for the markets as well the general public.

Ultimately, nobody has a crystal ball and can foreshadow what is around the next corner. Yet, time-tested strategies of maintaining a diversified portfolio of investments and being proactive with tax planning have proven to be the best course to maintain. Bonds have always served as a cushion to equities even in a rising interest rate environment. Like the keel of a ship, your investment strategy is not built to stand up against a single swell, but also to the elements it will have to endure in the open seas.

Admiral Stockdale would remind us to never lose hope for the best outcome while also acknowledging and preparing for the worst situations that could arise. The success that we have witnessed with clients all has stemmed from acting on a plan. Without it, we risk allowing our own behaviors to determine our real-life returns.

Office Relocation Just a Few Blocks South in DTC

We wanted to make clients and their families aware of the office move just a few blocks south in the Denver Tech Center. We are excited for the change as there will be personal meeting rooms available and we will continue to have ample garage parking for visitors.

The future location at Prentice Point has a scheduled move-in date for early November:

Cetera Investors
5299 DTC Blvd, Suite 800
Greenwood Village, CO 80111