Portfolio Update

 We hope you are doing well and have had a great spring.  We are making some changes in your investment accounts and wanted to send you a brief update explaining the changes.

On the equity side of the portfolios, this year has been a better year than last but as inflation has persisted, the Federal Reserve has continued to raise rates (albeit at a slower pace than last year), and a continued “worry” about a potential recession, equities have begun to stagnate and move sideways. 

As you are aware, we strive to use best in class funds in all of your accounts.  One of our large value funds has slipped out of the top of its peer group and in our investment committee meeting this month we decided to sell this fund.  This position represents anywhere from 2.58% to 10%[i] of the overall equity allocation in your account. We sold this position in your account on Friday and you may have noticed the trade confirmation.

Once the decision to sell this position was made, we turned our attention to where to go with this portion of the equity allocation.  With the equity markets moving sideways, the risks associated with a potential recession along with other head winds in the equity market, we have decided to move this position in your equity allocation to the 30 day US Treasury-Bill (T-Bills)[ii] (see next paragraph for more information on this short term T-bill).  We will continue to monitor the equity market to find an appropriate time to put this portion of the equity allocation back into the appropriate investment. In the meantime, the best answer seemed to be a decrease of the overall exposure to equities while earning historically significant treasury yields on the cash.

On the fixed income side of the portfolios, this year has been much better than last year, and yields on all the bond funds we are using have increased substantially.  Currently, the bond allocation in your account is yielding approximately 5.14%[iii].  We will be making one change in the bond allocation.  We are selling the Pimco Low Duration bond fund and replacing it with the Holbrook Income Fund.  This is a relatively short-term corporate bond fund that has been in the top of its peer group.  As we visited with the manager of this fund, they expressed that they are currently in a short duration posture but looking for opportunities to extend the duration once conditions are more favorable.   

With the increase in interest rates, there has been an increase in the yield in short term US T-bills and even money market accounts.  The money market account we use in your account is currently yielding 4.2%[iv] and the 30 day US T-bill is yielding in excess of 5.2%.[v]  For this reason, we have decided to put all additional cash in all accounts, in excess of the 3% allocation to money markets, in the 30 day US T-bill.  As these 30 day T-bills mature, we will continue to roll excess cash over to new 30 day T-bill until it is time to put the excess cash to work in other parts of the account.  To the extent you have previously had us protect cash in your account we will not invest any of your protected cash and that cash will remain in the money market account.

To the extent you have cash “on the side lines” waiting to be put to work and would like that cash to earn in excess of 5.2%, please let us know, and we can arrange to have that cash moved into your Fidelity account and added to the 30 day US T-bill trades we will be making over the next few days.

As always, please do not hesitate to reach out should you have any questions or comments.

[i] Percentage of equity allocation in a portfolio is based on the overall risk tolerance

[ii] T-Bill is a short-term U.S, government debt obligation backed by the Treasury Department with a maturity of one year or less.

[iii] Calculation is based as of May 10th, 2023 by taking each of our bond holding funds SEC 30-Day yield (current yield) multiplying it by its portfolio weight to get its weighted yield and adding those weighted yields up to get the our bond allocation’s current yield.

 [iv] FDRXX as of close of market on May 10th, 2023

[v] https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_bill_rates&field_tdr_date_value=2023

Portfolio Update

We hope you are doing well and have had a wonderful fall.  We are making some changes in your investment accounts and wanted to send you a brief update explaining the changes.

As you are aware, this year has been difficult for both the stock and fixed income markets.   As the Federal Reserve has continued to raise interest rates, bond prices have fallen but yields have increased.  This increase in interest rates has continued to make equities volatile.  The Federal Reserve has said that they will continue to raise rates well into 2023. 

While the economy is not technically in recession, we believe there is a significant probability of a relatively short and shallow recession sometime in 2023.  Typically, as the economy enters a recession, equities and bonds will begin to rebound as the markets anticipate recovery.  While we believe we are approaching the end of the bear market cycle, we want to take steps to remain in positions that will hold up well through the volatility.

Our team is conducting an overall rebalance of all accounts, but the primary changes you will be seeing are in the equity allocation.  There are three funds in the equity lineup that have slipped out of the top of their category.  When that happens, we typically replace those positions.  After extensive due diligence on these replacement funds, we believe these positions will outperform within their category in the coming months.  The replacements are in the top of their peer groups currently in performance-relative-to-expense and provide the broad diversification we are seeking to mitigate risk in your accounts.

Another reason we are making these changes before the end of the year is for the purpose of tax harvesting.  There will be some tax losses realized by making these trades and those losses could be beneficial to you as you prepare your 2022 income tax return.

Remember, the end of the year is a great time to update your overall financial plan and keep score regarding your finances.  If we can help you with any of this “score keeping” please do not hesitate to reach out. 

Again, we wish you and your family a very Merry Christmas and a prosperous New Year.

-          The Trinity Team

Portfolio Update - Upcoming Virtual Meeting Announcement

We’d like to update you on some modifications to the equity portion of your account.  These changes will slightly adjust the weighing of the portfolio to an over-weight in Value and Large Cap.  You will see these trades occurring over the next few days.

Additionally, we will be conducting a brief Virtual Investment Update on Monday, May 23rd at 4 PM CT.  This will be a live online presentation to bring our client up to date on the present environment, our outlook, and current strategies.  This presentation will be approximately 30 minutes in length and will be recorded if you cannot watch live.  Login credentials will be sent later this week.

As we mentioned in our email last week, we continue to be aware the damage inflation and the Federal Reserve’s commitment to fight inflation is having on the equity and bond markets.  We believe the changes we are making in the equity allocation will help position the equity holdings to perform throughout this season of volatility… and participate well in the recovery when it inevitably comes.  We will remain fully invested in the appropriate allocation of equities in your account.   The changes involve rebalancing and adding one new international position to all accounts that contain equities.

Specifically, we are adding a position in all accounts with equities the Goldman Sachs International Opportunities Fund.  This is a Large Cap Blend fund that invests in companies with an international footprint.  When you look at this fund’s current holdings they are equally proportioned between value and growth companies, which makes this fund a Large Cap Blend.   This fund has outperformed its benchmark by an average of 5.49% every year since its inception and has been in the top tenth percentile of its peers in every period since inception.  Currently (as of 3/31/2022) this fund is over-weight energy, materials, consumer staples, financials, and health care and is under-weight technology, consumer discretionary, and communication services.   While this is an international fund, it currently (as of 3/31/2022) has most of its performance attribution from Europe and the United States.  We will be buying ticker symbol GSIMX, which is the institutional share class with the lowest net expense ratio of all shares at 0.77%.

For fixed income, we remain very low duration in the current bond allocation.  Our decision to stay low duration has helped our bond positions to outperform the benchmarks.  However, we will look to stretch out duration once we see interest rates begin to level off. 

As always, if you have any questions, please don’t hesitate to reach out anytime.

Market Update

A season of volatility in the equity markets has now stretched for several months.  As of this morning’s open, the three major indices (DJIA, S&P500, and Nasdaq) are all beneath where they were 12 months ago.  Many large Growth stocks in the Technology sector have dipped to 2020 pre-pandemic levels.  Wild daily swings in both directions are happening and the days of little volatility are few and far between.

 We thought it might be useful to readdress the causes of this volatility, talk about our current strategies, and discuss our plan forward.

 The root cause is inflation, and the Federal Reserve’s efforts to stem the tide.  As you are well aware, price inflation is caused when Demand exceeds Supply. 

 During the pandemic, both sides of the equation led to a harsh uptick in inflation.  With workers staying at home and companies shutting down production, supply chains became severely constrained.  The problem has persisted.  On top of this came sharp increase in the money supply, which was the result of aggressive stimulus in the early stages of the crisis.  The following chart of money supply illustrates the “dry powder” that is looking for home.

A lot of this money wants to be unleashed now that the world is emerging from the pandemic, and demand is extremely high.  Intense Demand + Constrained Supply = Harsh Inflation, the likes of which we haven’t seen in several decades.

The Fed is trying to slow down the Demand by raising the Federal Funds Rate incrementally, put a halt to its bond-buying (i.e., stop feeding the money supply), while at the same time reducing its balance sheet (i.e., reclaiming a portion of the money supply).  They want to make borrowing more expensive in an attempt to cool a Demand quotient that has been running hot.  This three front approach to fighting inflation will undoubtedly succeed but the question is will it put the overall economy into recession. 

 Whenever interest rates increase, the value of bonds goes down.  While the downward pressure is no where near as significant as it is on stocks, bonds are currently losing value but the higher interest rates will eventually mean more interest being paid on the bonds.  In anticipation of rising interest rates, we shortened duration on our bond portfolio last year.  Currently the average effective duration in our bond portfolio is 2.23.   This is down from 3.97 as of the end of 2021.  We have made some adjustments to the bond portfolio to reduce duration and the managers of the bond funds have also reduced duration.  The shorter duration helps reduce the losses in bonds as interest rates go back up.  Once rates stop increasing and level off, we will increase duration and begin receiving better yields.

 The stock market is attempting the digest what all of this means for current valuations.  Borrowing costs for publicly traded companies are increasing.  Interest expense is going up, which will eat into profits (at least in the short term).  At the same time, the market is attempting to gauge what a cooling of Demand means for these companies… and speculating on whether increased pricing will enhance or damage their cash flow.  The valuations on companies that are not profitable and not cashflow positive are getting crushed.  This is particularly evident in the high tech, growth, sector. 

 What are our current strategies? 

 For the short term, our Investment Committee continues to evaluate our allocations and make appropriate changes.  Recently we have tilted our equity portfolio more towards Value versus overweight in Growth, which has helped.  We are striving to remain balanced in Large Cap, Mid Cap, and Small Cap to stay as diversified as possible.  We are also monitoring our Fund Managers and evaluating their outlooks against one another.   We may be taking a bigger position in value and that shift would move the portfolio to slightly overweight value.  Value should perform better during inflation and recessionary times.

 As mentioned previously, we have shortened duration on the bond portfolio and will continue to keep durations short as interest rates increase.  We will lengthen duration as rate increases level off.

 One of the Funds we are closely monitoring is our Morgan Stanley Insight Fund, which has suffered due to its overweight in Growth Technology.  Though the fund has taken a hit the past 18 months, it remains in the top of its peer group over a 5-year period.  In conversations with the manager, and while we realize these positions are the most volatile in seasons like this, we believe these positions have great long-term upside.  However, we continue to monitor this ever-changing landscape and will adjust accordingly.

 Finally, we like alternative positions.  For particular investors, a position related to multi-family real estate, where rent-increases are available in an inflationary environment, where generating income is key, and where demand should stay strong during a cooling housing market, makes for a potentially stabilizing addition.

 For the long-term, history tells us that equities eventually do well following periods of inflation.  As has been the case in every correction for decades, a market recovery is highly likely.  Furthermore, the past several dips have resulted in a dramatic V-shaped recovery.  As investors in equities, we expect seasons of volatility.  The most successful investors are those that avoid making short-term decisions based on dire headlines and maintain a sound philosophy during these turbulent seasons.

Market Update

The start of 2022 has certainly been eventful.  Between domestic, economic shifts and international geopolitical upheaval, the markets have experienced substantial volatility.  The focus of this update is to provide you with a brief overview of what we see happening as the first quarter of 2022 continues to unfold.

Inflation is becoming entrenched in the economy. A hot discussion topic for the first time in decades. Inflation is defined as the rate of increase in prices over a given period of time. The Consumer Price Index (CPI) is widely accepted as the leading measurement of inflation. The U.S. Bureau of Labor Statistics’ economic news release on February 10, 2022, stated that during the month of January, the inflationary rate has continued its climb to 7.5%[i]. Historically, U.S. markets have not experienced this extent of decreased purchasing power since February of 1982, as seen in the charts below.

[i] https://www.bls.gov/news.release/cpi.nr0.htm

Consumer Price Index (CPI): 5 Year Period

Consumer Price Index (CPI): 50 Year Period

With inflation comes a reaction from the Federal Reserve.  During the fourth quarter of last year, the Federal Reserve signaled that it would begin tapering their purchasing of bonds by a systematic decrease of $30.0 billion per month. The tapering process is completed once the Federal Reserve is no longer buying bonds, thus, no longer stimulating the economy by adding to their balance sheet. The taper is estimated to conclude by the end of March 2022.  The Federal Reserve has also indicated it is likely they will not raise the Federal Funds Rate until the taper is complete. As the following chart shows, this rate has been essentially zero for quite some time.

Effective Federal Funds Rate: 20 Year Period

Since the communication of the Federal Reserve’s intentions to taper their purchasing of bonds as well as an increase of the Federal Funds Rate, the market has reacted.  Initially, the market expectations around the increase of the Federal Funds Rate was to be accomplished through four to six periodic increases of 25 bps between now and year end.  Most recently, expectations shifted due to indications that the Fed may increase by a margin of 50 bps come March. As inflation established itself as a material concern of the Federal Reserve, the market proceeded to yield higher and higher interest rates.  The expectations of rising Federal Funds rates as well as increasing market interest rates have significantly contributed to the decline of growth stocks. Growth stocks as a whole returned a negative 11.28%[i] in the month of January 2022. [ii]

On the geopolitical front, as you know by now, Russia invaded Ukraine this past Wednesday evening with the stated purpose of “demilitarizing” Ukraine.  The underlying purpose seems to be occupying Ukraine as a portion of President Putin’s overall strategy of re-uniting the old USSR.  NATO and the rest of the Western Nations have unanimously responded with significant economic sanctions.

What is interesting is that with the geopolitical upheaval in Europe, the likelihood of a 50 bps increase of the Federal Funds Rate in March has decreased.  The market now appears to anticipate a reversion to the initial increase of 25 bps.  Following the news of Russia’s invasion of Ukraine, evidence of these shifting expectations emerged in yesterday’s market performance. On February 24th, the market opened substantially lower and then ended substantially higher.  The market rewarded equities for the probability that interest rates are more likely to rise at a lesser rate.

With all of this market turbulence, now is the time to remain invested and well diversified.  While our short-term indicators are negative, our longer-term indicators remain positive.  The recent portfolio adjustments made over the last few months are performing well and we are pleased with the current structure of the portfolio.

We hope your 2022 is off to a great start.  Should anything covered in this email bring questions to mind, we are certainly happy to schedule a call with you to discuss in more detail.

[i] https://www.morningstar.com

[ii] https://www.federalreserve.gov/newsevents/pressreleases/monetary20211215a.htm

Portfolio Update

Good afternoon and happy Holy week. We hope your 2021, is off to a great start. We have certainly been busy as the economy begins to open up.

After a successful 2020, in the equities portion of your portfolio, 2021 has brought continued growth, albeit amid some uncertain times around the end of the pandemic and reopening of the economy. This week we are rebalancing the equity portion of your account and moving a portion of your equity investments from the Morgan Stanley Insight Fund (ticker CPODX) (a large cap growth fund) to the AMG Yacktman Focus Fund (ticker YAFIX) (a large cap value fund).

Over the last few years we have been over weighted towards growth in our large cap allocation through the use of the Morgan Stanley Insight fund. It has performed very well (substantially outperforming its benchmarks and peers) and remains in the top of its peer group. We are not selling out of this fund but merely reducing and rebalancing your position in this fund. We believe that with re-opening on the horizon now is the time to take profits in the Morgan Stanley Insight fund and re-deploy them in the Yacktman fund. The gains in Morgan Stanley Insight are significant and as you know, there is never a bad time to take profits. To the contrary, we believe this is a good time to take these profits and put them work in an area of the market that should outperform in the coming re-opening.

All signs seem to point that the economy is on the verge of rapid growth, even in the face of the possibility of increasing taxes. The following chart shows the growth of deposits at commercial banks since the mid 1970’s:

As you will see there has been tremendous growth in deposit balances over the past year. In fact, since the pandemic induced recession began last year, deposit accounts have grown over 3 trillion dollars. The rate of increase is unprecedented over the last 50 years. We believe this is the “dry powder” that will help fuel dramatic growth in the economy. Large Cap Value companies (like what the Yacktman Fund invests in) should benefit from this type of growth.

If you have any questions about this reallocation, or any other questions about your investment accounts or your financial plan please do not hesitate to give us call. Have a safe and Happy Easter!

Portfolio Update

2020 has proven to be an extraordinary year.  We hope and pray you and yours are staying safe.  As the pandemic progressed, we heard from several clients and loved ones of people who have been directly affected by Covid-19.  Our prayers are with those of you who have been directly affected by tragedy associated with the pandemic.  If there is any way our office can help you or your family during this time, please do not hesitate to reach out.

 Covid-19 and the national election have dominated the news and the markets throughout this year.   Over the last couple of weeks, the markets have begun to see some resolution of these issues.  While the outcome of either issue isn’t fully known at this point, the market seems to be looking ahead to a divided government (depending on the outcome of Senate runoff in Georgia) and encouraging news about a vaccine from both Pfizer and Moderna. 

 The pandemic and its effect on our economy seems to be a much more important factor in the direction of the markets than the election results.  We continue to believe that when the general public feels confident and safe to begin to travel and go out in public without precautions such as masks and social distancing we will see tremendous economic growth.  It now appears that there will be at least one viable vaccine within the next several weeks.  With the government stimulus that has come into the economy since March of this year and with the economic shut down this past spring, the deferred demand in our economy is tremendous and should lead to dramatic economic growth once confidence is restored.

 This deferred or “pent up” demand is best seen in several of the following charts:

The above chart[i] shows a dramatic increase in Money Market Funds during the second quarter of this year.  In fact, money market funds increased by over 2 Trillion dollars in just over 3 months this year.  Money market funds are almost twice as much as they were at the height of the “great recession” in 2008. 

 The following chart[ii] shows you how all this money made it into money market accounts.  The savings rate in our country jumped to over 30% during the shut-down.  This is the combination of not being able to go out and spend money and the fact that the government stimulus was coming by the trillions of dollars during this same time.

This last chart[iii] is of the M2 Money Supply.  M2 Money Supply is the measure of liquid resources in the economy such as cash, checking deposits, savings deposits, money market securities, mutual funds, and other time deposits.  As you can see, M2 Money Supply has grown by almost $3 Trillion dollars since the first of April of this year.  This chart tracks M2 Money Supply since the fourth quarter of 2009 and it has been in a slow and steady increase… until the recent spike.

After looking at all of this information we conclude that when the pandemic is “over” there could be significant economic growth.  This potential boom seems to be a much more significant factor in the direction of the markets than the possible tax increases that may come from a Biden presidency.  We will consider the pandemic over when there is an effective vaccine or cure for Covid-19.  Until then our economy will coast along in a stalled mode.  Meanwhile the stock market is anticipating the end of the pandemic, which we believe explains the significant rebound we have seen over the last few months. 

 Even throughout these very turbulent times your portfolio has performed well.  The equity portion of your portfolios that we help manage have dramatically outperformed the benchmarks due to our decision to overweight large cap growth during the last 18 months.  Now that the market appears ready to price in the end of this historic pandemic we believe we should rebalance the equities in the portfolio back towards a more balanced alignment.  We will still be overweight large cap growth but not to the extent we have throughout this year.  This means we will be taking profits in some of the equity funds and adding to our position in other equity funds.  You will begin to see these changes over the next few days.

 We certainly hope you and your family are remaining healthy and safe.  Should you have any questions or comments please do not hesitate to contact us any time.

[i] Federal Reserve Chart Money Market funds

[ii] Federal Reserve Chart Personal Savings Rate

[iii] www.stockcharts.com M2 Money supply