On Friday, April 15th, Astoria’s John Davi appeared on Wharton School of Business’ Behind the Markets podcast. He discussed:
- Where we are in the inflation cycle
- Why portfolios are still not prepared for higher inflation
- The construction of AXS Astoria Inflation Sensitive ETF (ticker = PPI)
- Summarized the Exchange: An ETF Experience conference in Miami
Listen to the entire podcast to hear what John had to say (click here).
Alternatively, here are some main points that John discussed at the conference.
Inflation in a nutshell
- March PPI (Producer Price Index) – the biggest gain in history
- March CPI (Consumer Price Index) – a 40-year record high
- In March, the PPI increased 11.2% year over year, exceeding the 10.5% consensus estimate and up from February’s gain of 10.0%. This reading marks the largest gain since annual data were first calculated in November 2010.
- Month over month, March PPI rose 1.4%, coming in above the expected 1.1% increase and topping February’s 0.8% rise.
- The CPI rose 8.5% year over year in March, coming in above the 8.4% estimate and topping February’s gain of 7.9%. This annual reading marks a new four-decade high.
- Month over month, March CPI rose by 1.2%, exceeding the expected 1.1% increase and above February’s 0.8% rise.
Inflation Hitting Americans Hard
- Higher costs of living for average Americans, including the expenses at the supermarket, the gas station and other day-to-day living costs.
- Oil and gas hikes sparked by the Russia-Ukraine war tipped the March CPI even higher.
- We detailed our latest inflation thoughts in this blog (click here).
Other talking points that John discussed:
- Our view is that the single biggest portfolio construction debate in 2022 is the concept of where you want to be on the duration curve. Do you want to own short duration assets or long duration assets?
- Investors are still not “all in” on the inflation trade. We see many portfolios that remain tilted towards growth/technology and long duration assets.
- Many bought TIPS (Treasury Inflation Protected Securities) last year which isn’t a great inflation hedge as TIPS are underperforming CPI YTD.
- Commodities were largely ignored for the past 10-15 years. This year, commodities ETFs have had a sizable increase in. However, they are notoriously volatile and difficult to model. We view cyclicals as an attractive inflation hedge as well.
- The Energy sector is approximately 3% of the S&P 500 Index. When John started his career, it was approximately 20%.
- The typical 60/40 model has a lot of deflation risk. It hasn’t done well in rising rate environment (down approximately 7% YTD) and will likely continue to struggle as front-end rates move up.
- There is a bear market in long duration assets (nominal bonds, unprofitable tech, etc.) and a bull market in shorter duration assets (dividend paying stocks) and inflation sensitive assets.
- Buy and hold passive model portfolios should be more diversified in 2022.
- YTD, the AGG ETF is down over 8% and is on par for its worst return in half a century.
- Investment Grade bonds have had their worst quarter since 1980.
- Many oil & gas exploration companies are trading at single digit PE ratios despite their huge rallies this year and last. We believe there is still room for further upside. The XOP ETF is currently trading at an 11 PE ratio despite its gain of 67% in 2021 and over 50% so far in 2022.
Other risks portfolios may face:
- Will rising wages hurt corporate profits?
- How will the higher discount rate impact 60/40 portfolios?
- Macroeconomic indicators are turning south
- Bearish sentiment (AAII sentiment at 30-year lows) – contrarian indicator?
- If Fed funds gets to 3%, what does that mean for junky assets like High Yield bonds?
John’s Takeaways from Exchange: An ETF Experience conference
- Front and center topics
- ESG strategies
- How to protect portfolio against rising rates/higher inflation (click here)
- Spot Bitcoin ETF – tons of crypto players are entering the ETF ecosystem
- How to hedge a 60/40 model portfolio
- Active management back in vogue: big Mutual Fund to ETF conversions have taken place. One commentator said, “This is the golden age of active management” (click here)
- Good macro discussions
- There are notable portfolio risks prevalent. We are late in the cycle plus huge 10+ year bull market in US equities.
- One panel highlighted how extreme S&P 500 Index returns versus bond and commodity index returns have been the past 10 years. This panel suggesting buying the Rest of the World while trimming exposure to the US market.
- A good recap of the conference can be found here
Astoria Portfolio Advisors
Photo Source: Astoria Portfolio Advisors