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A Further Look | Aug 23, 2021

Investing 2021: Respect the Complexity

David B. Root, Jr.


While the debate rages whether today’s inflation will prove permanent or transitory, and whether the Delta Variant will slow the economy, we as investors must meet the challenge of uncertainty. It is important to remain optimistic and have a positive outlook, but be thoroughly prepared if things don’t go as hoped. This is becoming the theme for 2021.

Accelerating inflation can increase the possibility of a rise in interest rates. However, Fed Chair Jerome Powell believes inflation will eventually move downward which we’re in agreement – meeting their initial projections of 2%. Despite the increased transmissibility of Delta and the increased health threat for those who aren’t vaccinated, our understanding of what’s needed to contain Covid-19 is in a very different place than it was in 2020. Several available vaccines and enhanced treatments drastically reduce the risk, but don’t completely eliminate it.

For investors, trying to outguess factors like the rate of inflation and the spread of a virus is a fool’s errand. Now is the time when discipline counts. There is a big difference between refining your process that has been built over time, and abandoning it altogether.

We believe that the markets have priced in many of these challenges, including the ending of enhanced unemployment benefits in September. That should bring more workers in to the job market – reducing the impact of the labor shortages on wages and therefore the price of goods.

The Fed now seems more focused on a sluggish economy than inflation. If economic growth falls back to 2% considering all of the stimulus and other factors we have seen over the last year, we may be in for economic stagnation, or ‘stagflation’ as it was called in the 1970’s under Jimmy Carter. Year-over-year increase in the Consumer Price Index was 4.2% in April, 5% in May. And 5.4% in June. Those are the highest readings since Sept 2008.

Meanwhile, the rate of growth is still high. This could be viewed as good news, but we also need to put it in the context of the largest fiscal and monetary stimulus in recent history.

So, while it has been relatively smooth sailing for the market for several months, we want to prepare for the possibility of choppy waters. The market is becoming narrower in the short term, and money is moving into more conservative territory. In fact, the S&P 500 index has doubled from its bottom March 23, 2020 – fastest in history. And is trading at an elevated P/E multiple of 27x earnings, having done so only 3% of the time since 1953.

It is also time to respect what is necessary to keep risk at a minimum. At DBR & CO, our ability and willingness to be data dependent allows us to modify our allocations within our Four Seasons Process. Within this model, we are moving many portfolios into our Fall sector, defined by the factor of growth decelerating and inflation accelerating. As conditions change, we are prepared for it. As our Chief Investment Officer, Michael Aroesty said recently in his Q2 Market Commentary: “The only thing worse than being surprised by the unexpected, is for the expected to occur and not having been prepared.”

It is a matter of balancing the good – strong economy with higher corporate profits, with the bad – increased prices (inflation) and the threat of higher interest rates. Taking a more conservative approach doesn’t mean abandoning your allocation strategy. It means making adjustments to steer through the uncertainty ahead. For example, while it appears the bond and gold markets have thus far seemed unconcerned about inflation, they are worthy of more attention.

No one has privileged access to the future, but to have a knowledge advantage, it takes more than simply following consensus. Market consensus can often overemphasize current developments and fail to look far enough into the future. While we can’t know the future, our goal is to do the best possible job of investing in the absence of that knowledge. We’ll let the data be our guide.

In 2021, doing the best possible job will come down to the difference between being confident (I know what’s happening) and being guarded (I don’t yet know what is happening).

We will be following what is happening in Washington very closely. Proposed legislation could have further inflation implications. The enormity of government spending is putting more money into the economy while there remain significant supply restraints, causing higher prices. Quietly, continuing inflation can have the same effect as higher taxes. It could even result in the real thing - a tax increase to pay for it all.

Even so, one of the most important rules in investing is committing for the long run, unless there is absolutely compelling evidence to the contrary. There isn’t currently. But being fully invested moving forward will require a more guarded approach while remaining confident that we are going to be OK for the long term.

Thanks for reading.

This material has been provided for general, informational purposes only, represents only a summary of the topics discussed, and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice or recommendations. Rather, they simply reflect the opinions and views of the author. D. B. Root & Company, LLC. does not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation. There can be no assurance that any particular strategy or investment will prove profitable. This document contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information derived from such sources, and take no responsibility therefore. This document contains certain forward-looking statements signaled by words such as "anticipate," "expect", or "believe" that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. As such, there is no guarantee that the expectations, beliefs, views and opinions expressed in this document will come to pass. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. All investment strategies have the potential for profit or loss. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. The impact of the outbreak of COVID-19 on the economy is highly uncertain. Valuations and economic data may change more rapidly and significantly than under standard market conditions. COVID-19 has and will continue based on economic forecasts to have a material impact on the US and global economy for an unknown period.

David B. Root, Jr.


Founder & Chief Executive Officer

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