Dear friends and clients,
You’ve heard about it on the news, you’ve felt it at the grocery store and at the gas pump, you’re having to deal with it every day.
It is inflation.
We didn’t hear much about it in the news or feel its impact until very recently. With a 1.4% increase just in the month of March, the US Producer Price Index (PPI) recorded the highest ever year-over-year increase in history. The famous US Consumer Price Index (CPI) saw its highest year-over-year increase in 40 years. Together, these two price indexes highlight the serious threat rising prices have on your purchasing power and your investment portfolios. In other words, inflation does not limit its impact to your grocery purchases, it is also weighing on your life savings, and for many, their daily choices.
Inflation’s impact on the financial markets has been strong and immediate.
Familiar stock market Indexes
· S&P 500 Index (SPX) -13.31% (NEGATIVE)
· NASDAQ Composite Index (COMPQX) -21.16% (NEGATIVE)
· Dow Jones Industrial (DJ-30) Index -9.25% (NEGATIVE)
· Barclays Aggregate Bond Index (AGG) -9.83 (NEGATIVE)
Yes, you read that correctly. All major indexes are languishing in negative territory.
· S&P 500 is in correction territory (10% loss)
· Tech-heavy NASDAQ is in bear market territory (20% loss)
· Dow Jones is just ¾ of 1% shy of being technically designated as being in correction
Add to that the beating taken by bonds this year. If you have traditional bonds or bond funds, you’ve likely seen your bonds values fall and accordingly the AGG is just 17 basis points shy of being in an official correction. For bonds, that is serious because many have been led to believe they are a “safe haven” for retirees desiring a less risky investment.
If you recall our presentation from September 2020 entitled “Dangerous Times”, you’ll remember we illustrated and warned of a perfect storm forming due to 40 years of falling/low interest rates and low inflation that led to all-time low interest rates and all-time high stock market values. The perfect storm is now on our shores. Rising interest rates and inflation are sending markets tumbling and bond values crashing.
In this storm, it seems like there is no good place to hide and wait it out. Historically, when inflation grips our economy, cash loses purchasing power and commodity prices rise as a hedge against falling market indexes.
What is a commodity?
A commodity is a basic good used in commerce that is interchangeable with other like-commodities. Traditional examples of commodities include grains, gold, beef, oil, and natural gas. The basket of commodities is varied and wide ranging; so, not all commodities will be a worthwhile inflation fighter.
Here are a few Exchange Traded Funds (ETFs) that represent various commodities and their results. The percent return is for 2022 year-to-date through 4/29/2022.
Agriculture / Food
· WEAT (Wheat) ETF 41.00%
· CORN (Corn) ETF 39.18%
· SOYB (Soybeans) ETF 25.63%
· TAGS (Agriculture) ETF 27.69%
· CANE (Sugar Cane) ETF 4.13%
· JO (Coffee) ETF -1.65% (NEGATIVE)
Energy / Oil / Alternatives
· UNG (US Natural Gas) ETF 100.16%
· USO (US Oil Fund) ETF 41.94%
· XOP (Oil & Gas Exploration & Production) ETF 37.49%
· TAN (Solar) ETF -16.55% (NEGATIVE)
Natural Resources / Metals / Mining
· JJN (Nickel) ETF 52.54%
· SLX (Steel) ETF 17.07%
· GLD (Gold) ETF 3.48%
· URA (Uranium) ETF 1.62%
· WOOD (Timber/Forestry) ETF -2.07 (NEGATIVE)
· SLV (Silver) ETF -2.19 (NEGATIVE)
· LIT (Lithium) ETF -22.8% (NEGATIVE)
While many commodities can be good inflation fighters, they can also be volatile. As a result, you may have seen or will see RFS purchase an ETF and sell it rather quickly. Our buying and selling rules are in place to prevent catastrophic losses while attempting to capture as much upside as possible. This requires trends and indicators take root…which usually means we need to allow the ETF to solidify its direction over several days. Once the direction seems solid, we act accordingly.
Nearly all of the above commodity ETFs are constrained by low daily volume and/or tax reporting complications. As a result, Research Financial Strategies is limited to investing in diversified commodity ETFs such as energy and agriculture.
· IXC (Global Energy) ETF 28.97% YTD
o Purchased 2/3/2022 is up 8.27%
· PDBC (Commodity ETF 32.65% YTD
o First lot purchased on 3/22/2022 is up 4.19%
o Second lot purchased on 4/27/2022 is up 0.17%
These returns may sound small; however, when you compare them to what is happening to the markets overall, then you’ll find they are going in the opposite direction which is the right direction.
Do you have bonds?
If so, then you may have noticed we sold many ETFs and mutual funds a while ago and purchased TBT. TBT is an ETF that benefits from the 20-year treasury decreasing in value. As mentioned above, rising interest rates negatively impacts bond values. With the expectation that the Federal Reserve will continue to raise rates several times over the remainder of this year, it looks like bond values will continue to fall. As bad as that sounds, your bond portfolio will benefit. Since TBT was placed in our bond model portfolio it has earned 9.04% through 4/29/2022.
You may have noticed our equity and bond models both have large cash positions. This is done on purpose. Cash is a good loss-avoiding hiding place and better than bonds currently. Inflation may erode some of your purchasing power while in cash but at least it won’t be exacerbated by bond losses.
How are we fairing?
2022-YTD as of 04/29/2022:
· RFS Bond Model -1.35% (NEGATIVE) vs AGG Index -9.83% (NEGATIVE)
· RFS Equity Model -13.56% (NEGATIVE) vs S&P 500 -13.31 NEGATIVE)
· RFS Equity Model -13.56% (NEGATIVE) vs NASDAQ -21.16% (NEGATIVE)
RFS is beating the AGG and NASDAQ handsomely and keeping pace with the S&P 500. Going forward we imagine a favorable rest of the year.
Bottom line, you, as an RFS client, are poised to potentially benefit as bond values fall and commodity prices rise. No matter how long this turmoil lasts, we’ll be there fighting for you.
Questions? Please call us. 301-294-7500
ETF and Index returns calculated using TC2000
Spotlight: Come On, Commodities by Direxion Funds
Commodities on Investopedia.com