By: Jim Brilliant, CFA, Co-Chief Investment Officer, Portfolio Manager
& Scott Van Den Berg, CFP®, ChFC®, CEPA®, AIF®, CRPS®, CMFC®, AWMA®
As we enter the fourth quarter of 2023, there is no shortage of market moving headlines or questions about the direction of the economy and markets. Investors face the prospects of recession, higher inflation, stagflation, higher interest rates for longer, along with political polarization, and significant war-time tragedies in Eastern Europe and the Middle East.
Century Management’s co-chief investment officer and portfolio manager, Jim Brilliant, CFA, and our company president, Scott Van Den Berg, CFP®, ChFC®, CEPA®, AIF®, share the company’s viewpoints regarding the potential impact of these events on the stock and bond market, as well as on client investment portfolios.
Watch the 46-minute question and answer session in full below. You can also download the slides shown in the video. If you prefer a summary of our thoughts, read the outline below for key takeaways on how we view the economy and markets, and the areas of investment we believe offer some of the best potential in this environment.
In summary, we believe…
- In general, consumers and businesses are in better financial shape than the US government and are better able to handle today’s inflation versus previous inflation cycles.
- Inflation will likely remain stickier for longer and interest rates will likely stay higher for longer.
- The US government’s large and growing budget deficit has resulted in record levels of federal debt.
- Until now, the combination of declining interest rates and higher debt levels have been manageable.
- Due to higher interest rates, the interest expense owed by the US is increasing and becoming a larger percentage of its’ budget, which presents a significant problem.
- We believe the US is rapidly heading toward a debt-doom-loop. This is a cycle where rising interest costs create a bigger federal government deficit, requiring more debt issuance, resulting in a larger interest expense, consuming an ever-larger portion of the US budget.
- This would likely force the US to print more money just to pay for the higher interest expense, creating an even bigger federal government deficit.
- Without significant budget reform and deficit reduction, there will likely be a significant devaluation of the US dollar and quite possibly substantial inflation.
- None of these events will happen in a straight line. By that we mean, while we expect interest rates to rise, there will be periods when bond prices rally and yields decline.
- This will likely translate into increased volatility for both the bond and stock markets.
As for our client portfolios…
- Overall, Century Management’s focus is on companies with pricing power, good balance sheets, and those that we believe are better suited for the next three-to-five-years in this new environment, rather than focusing on what was popular over the past decade.
- We believe in holding positions that will help offset the stagflation environment we foresee.
- An overweight in energy holdings remains a core theme. Particularly integrated, exploration and production, and service-related companies.
- This also includes building positions in metals such as gold, silver, and copper, which we believe are good longer term holds.
- We also expect food shortages could be a developing issue and are expanding our research in this area.
- We believe that many industrial names present good investment opportunities given the continued reshoring of manufacturing, as well as recently passed legislation such as the Infrastructure Investment and Jobs Act, the Inflation Reduction Act, and the CHIPS and Science Act.
- We believe that on a selective basis, technology related companies also hold great promise. Especially those focused in the areas of automation, robotics, and artificial intelligence.
- We believe that selective financial companies will also benefit from the current interest rate environment.
- Importantly, unlike the past 15 years, interest rates now make holding cash and more specifically, rolling short-term treasury bonds, a reasonable option in the absence of other values.
- For fixed income, we believe in owning shorter duration, individual treasury bonds and investment grade corporate bonds, typically those with maturities that are less than three years.
This information is educational in nature. CM is not making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the presenters and are subject to change without notice at any time. CM does not provide legal or tax advice and the information herein should not be considered legal or tax advice.