The Monthly Mosaic | November 2021


Hi, Patrick Ryan had a multi asset solutions here at Madison investments.

Inflation continues to be the big story of 2021. Just here in the last week, we got some pretty surprisingly high inflation numbers. Again, headline CPI is now running north of 6%. Year over year, and even core is running about 4.6%.

I think a lot of expectations from market participants were that inflation would spike up and then we'd start to see it subside a little bit. But continuing having large upside surprises are concerning. And when you look at, you know, what we're up against the Federal Reserve clearly has started to taper and take action, but the Fed doesn't want to move too quickly. So really, they want to be, you know, drawing this out. And inflation is structural. So we've had, you know, energy policy that is constrained supply, we also had over overly stimulated fiscal policy that's been, keeping demand up while supply is still there. So all those things concern us and when inflation is, is making those upside surprises, and you see a Federal Reserve that maybe is letting go of that inflation mandate, and really only focusing on the employment side, you can see that was still 4 million jobs short of where we were at the peak before COVID, that, you know, the Fed has a long ways to go before they're really going to becoming overly restrictive and inflation could start to run hotter and hotter. And that's certainly something we debate here more recently, on all the investment teams.

The equity market here since the end of September is up 9% In the US, so certainly, stocks have taken in stride, not necessarily respecting that inflation is going to stick around maybe believing the Fed that is transitory. But we have seen areas of the market, small caps have done better. We've noted that throughout the year, a little bit more of an inflationary bias there when small caps are doing well. So some of the areas of the market that we'd anticipate to do well in a more inflationary environment have started to recover. But overall, the equity market does not seem to be moved by these increasing inflation shocks have been experiencing.

Looking at the fixed income markets, it's been a bit of a surprise where you've seen the equity market rally, but the overall the yield curve starts to flatten. So there is a little bit of a belief there, again, that the Fed is going to be able to get this right. But also that maybe they're raising interest rates a little bit more quickly, could end up tripping growth, longer term. So we've seen actually the long end of the bond market actually do the best. So long term treasuries here in the in the fourth quarter so far, have actually performed the best in the market, whereas those shorter term securities are a little bit more impacted by the Fed activities have done worse.

Because we do view this as a high risk equity market, we're holding a little bit of extra cash. The bigger areas within the equity market, we have tried to avoid discretionary consumer discretionary stocks in in our equity allocations, the thinking there inflation is going to be taking more money out of consumers from energy and, and food prices less to spend. And we're also seeing consumer sentiment is actually at pretty low levels. And then also, you know, we continue to look at commodities as a good place to be really from a supply shortage issue and continued demand.

So as we look out the next 6-12 months, again, I think it's going to be more volatile equity market, and we're up, you know, 26 plus percent here in 2021 already, so certainly the easy part is behind us. And we definitely think that returns are going to be a little bit more hard fought in the next in the coming year.

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