Heading into Q4, the U.S. stock market is wrestling with a litany of concerns: inflation, tapering of stimulus from the Federal Reserve, potential of rising taxes in 2022, and massive supply chain disruptions. Combine these concerns with the fact that September and the first half of October are typically weak times of the year, it is no wonder the S&P 500 dropped 4.65% during the month of September, according to Charles Schwab as observed on 10/5/21.
In keeping with the tenants of the Accelerator Model, we think it makes sense to purposely evaluate which of these worries can have a real impact on the markets and our investment portfolio (and which will not). Read on for our perspective on three topics we are paying close attention to as we look ahead.
Inflation and the gradual slowing of the Federal Reserve’s large-scale asset purchases are intertwined. During the latest Federal Open Market Committee meeting, Chairman Jerome Powell suggested that tapering might begin in November.
With that announcement, the yield on many government bonds began to rise. Thus, it’s likely that interest rates will increase. How high they will go, however, is the trillion-dollar question.
On the other hand, growth in the U.S. is currently slowing. The Conference Board is forecasting Q3 GDP at 5.5%, down from the 6.6% growth seen in Q2. Slowing growth should put a cap on interest rates, especially when paired with the increased efficiencies of our high-tech society. These two factors, we expect, will have an overall deflationary effect.
While we feel runaway inflation is probably not on the horizon, we thought it would be prudent to increase our exposure to sectors that perform well in rising rate environments and have compelling valuations. As you know, innovation is a core tenant of the Accelerator Model. However, we trimmed some of our innovation stocks recently. Not because we lost conviction in what they do, but because their revenue and profitability are far off in the future and those are the types of stocks that tend to fare poorly in a rising rate environment.
Unfortunately, there is no end in sight for the COVID-19-led issues with the global supply chain. In a system that is only as strong as its weakest link, there are logistical issues with the container market, shipping routes, ports, air cargo, trucking lines, airways, and warehouses.
With this in mind, software companies lead the way, as they are largely unaffected by global supply chain dislocations. Additionally, the growth of most software companies is independent
of the broad macroeconomic environment. We are comfortable including these companies in the Accelerator Model for the stated reasons.
After eighteen months of doom and gloom, airlines finally have reason to be optimistic. With widespread adoption of the COVID-19 vaccine and the opening of several key intercontinental routes this summer, ticket sales are headed in the right direction.
We are optimistic about growth in commercial aerospace, due to airlines looking to upgrade their aircraft to more modern, energy-efficient machines. Similarly, we are taking a cue from the Chief Commercial Officer of Airbus who is predicting record jet sales. In a post-COVID era, Americans have a strong desire for travel, but never have crowded airports and planes been less compelling. This is a sector we have been invested in since the inception of Grinnell Capital, and we are excited to see what 2022 holds for commercial and private aerospace.
One thing we always ask ourselves; “what’s on the come-up?” Said differently, which sectors of the economy and which specific stocks will experience the next wave of growth, and where is Wall Street underestimating that growth?
As the market reacts to supply chain issues and the threat of runaway inflation, Grinnell Capital remains focused on disciplined investing through opportunistic growth, underpinned by deep, fundamental analysis. As we exit the COVID-19 pandemic, we are identifying market opportunities in sectors that will see record sales.
Grinnell Capital is an investment management firm founded by Frank Grinnell and Dana Grinnell, a team with over 40 years of combined experience in investment management, business ownership, and executive leadership.
We aim to simplify investing through two distinct products: the Accelerator Model and the Ignition Model.
The Accelerator Model is a concentrated portfolio of inefficiently priced and disruptive companies poised for growth that are selected using a disciplined, fundamentally-driven investment process underscored by stringent risk controls.
The Ignition Model is a portfolio of ETFs designed to provide sector-specific exposure and capitalize on market trends.
By providing a simplified approach to investing, we endeavor to help our investors live confidently. Contact us to learn more about Grinnell Capital.
Grinnell Capital is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. For additional information about Grinnell Capital, including its services and fees, please review the firm’s disclosure statement as set forth in Form ADV and is available at no charge at https://adviserinfo.sec.gov/firm/summary/311742.
This information is provided for informational purposes only. The information contained herein should not be construed as the provision of personalized advice and is subject to change without notice. This material should not be considered as a solicitation to buy or sell any asset or engage in a particular investment strategy. Investing in securities involves the risk of loss, including loss of principal invested, and may not be suitable for all investors. Past performance is no guarantee of future results.