November 2021 Portfolio Review Recap: Corporate Taxes, Inflation, and Supply Chains
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This week on the Mind of a Millionaire podcast, Zachary Bouck and I recap our November Portfolio Review Meeting (PRM).
For those new to the podcast, our Investment Committee meets on the first Tuesday of each month to review our portfolios. We discuss each fund, what’s working, what’s not, and our economic outlook. This month’s discussion revolved mainly around corporate tax hikes, inflation, and supply chains.
If you have questions about your portfolio or long-term financial plan, call our office at (303) 261-8015 or schedule a free consultation on our website.
CORPORATE TAXES
[1:12] The most significant conversation from our November PRM was regarding corporate tax rates—or the lack thereof.
I always caveat before delving into anything that remotely resembles politics by saying, this is not a partisan discussion. Instead, it examines how corporate taxes impact investors.
As a 2020 presidential candidate, Joe Biden promised to increase corporate tax rates from 21% to 28%. Many investors believed the White House would push that fiscal agenda item in 2021; however, that doesn’t appear likely thus far.
[1:45] How does this impact investors? Let’s say you own 100 shares of Company XYZ, and your share of the corporate profits for 2021 is $10,000. The 21% corporate tax will shave off about $2,100—a hike to 28% deducts another $700 from investor earnings.
[2:53] Growing corporate tax rates negatively impacts profitability. With two months to go, you may wonder if that information is already priced into the market. At the time of recording this episode, Goldman Sachs still gave lawmakers a 25% probability of raising corporate rates. Therefore, sure, they’ve been priced in, but not entirely.
Now, at the tail-end of 2021, the low prospect of raising corporate rates bodes well for equity investors. Suffice it to say that an additional 7% earnings to shareholders rather than corporate taxes is a tailwind for the market.
INFLATION & GROUP-THINK
[4:56] Inflation has hogged the limelight for most of this year; however, the headlines have changed. Looking back at May, most analysts and portfolios managers read from the same script: this is transitory—a few months, tops!
Fast-forward six months, and the script has flipped! Much like denim jackets and fanny packs, the 80’s high inflation has also re-emerged.
But, what sticks out more than rising prices is the nature of group-think in the financial industry. Seldom do folks want to take a contrarian stance on such front-and-center issues because people remember if they’re wrong. Whereas, if an analyst follows the consensus, and the consensus is wrong, they won’t stick out.
[7:34] That’s all to say that investors can’t base decisions on the group. Shoot, if you watch the financial news networks all day, you’d think there were only a handful of companies trading in the market.
You can’t make investment decisions based on the topic ju dour. In this case, don’t make decisions solely on the basis of inflation. There are some securities that perform poorly in inflationary environments, like fixed-rate bonds, and others that can perform well, like companies with pricing power.
So, if you believe that inflation will persist, then you’ll want to purchase securities that can outpace rising prices. That stems from your beliefs, though—not the voices of the media.
The final point I’ll make on that is diversification. Even if we believe inflation is coming fast and loud, we don’t want to put all of our money in inflation-protected securities (i.e., TIPS). Never bet the farm on a single idea.
SUPPLY-CHAINS & A TALE OF HEROISM
[11:13] Speaking of the topic ju dour—that’s the extent of my French literacy—I can’t scroll through my Twitter feed without seeing something about supply chains. One of those somethings, however, was Ryan Peterson’s brave journey to the Port of LA.
In a late-October Twitter thread, Peterson explained his exploratory trek to Long Beach, California, to witness the rows of cargo ships first-hand. After a few hours canvassing the area, Peterson saw the issue—and had a solution.
As it stood (pre-Peterson), Long Beach’s zoning code restricted stacking empty containers in a shipping yard to a maximum of two units high, which are now full. Thus, once a new unit is emptied, a shipyard worker cannot remove the vacant container from the chassis—there’s nowhere to put it. If they stack containers any higher, they’ll risk a complete shutdown.
Thus, Peterson pointed out that if the city were to expand the height restrictions—even temporarily—beyond two units, the dockyards could work more efficiently, alleviating supply chain bottlenecks on the front end.
The Mayor agreed, heightening restrictions to four units. A true story of bravery and heroism. Thank you, Ryan Peterson.
There is a financial incentive for suppliers to get creative—much like Ryan did—which is why most economists believe that a solution will arise.
2022: THE YEAR OF THE SMALL-CAP
[16:36] Small and mid-sized companies had a rough year compared to their large counterparts, which is no surprise coming off of an astounding 2020.
Periods like this will test investors—it’s tempting to sell the underperformers, chasing today’s high returners. That’s a poor approach. Right now is a great time to examine this year’s outperformers and consider reallocating into small- and mid-cap companies (the underperformers).
Small-cap companies are more interest-rate sensitive—if rates spike, small-caps take a hit. I would be surprised if rates increase in 2022, which means that solid small-cap investments may be poised for a strong year.
FINAL THOUGHTS
The market has trudged through numerous headwinds this year—almost to the point of, there’s no way it can keep going.
However, some of the mainstream factors that negatively impact investor sentiment are either short-term or avoidable. Corporate tax rates likely won’t rise this year. Suppliers will find a way to alleviate bottlenecks. And, even during times of uncertainty, the market still presents diversification opportunities into well-positioned categories.
If you have questions about your portfolio or long-term financial plan, call our office at (303) 261-8015 or schedule a free consultation on our website.
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