The House View: TFG’s Monthly Investment Update (June 2021)

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The House View: TFG’s Monthly Investment Update (June 2021)

These markets continue to shock and awe. Aside from the entertainment value of cryptos and other asset classes
bouning around, there sure is plenty to keep an eye on. With that in mind, see below three themes we are watching
closely for the remainder of June, as well as our current asset allocation tilts.

Job Openings Skyrocket – Will This Lead to Wage Inflation?
One indicator that the US economy is experiencing a strong economic recovery is the amount of job
openings. Job openings soared to record-highs in April to 8.14 million (an 8% increase since February),
signaling that more and more employers are looking to re-hire positions previously vacated during the
pandemic. Although the increases in job openings have been strong, it is important to understand some of
the underlying reasons why job openings may have not been filled.

For one, a common belief amongst labor economists is that potential job candidates remain cautious for in-person jobs such as food services and warehouse jobs, which make up a majority of the job openings. While remote working has suited many companies and employees, the job openings listed as remote only make
up approximately 10% of available positions (per Ziprecruiter.com).

Another potential challenge faced by hiring employers is the additional unemployment benefits slated to be
available until September. Strong unemployment benefits have likely prevented potential job candidates
from returning to work, which forces hiring employers to either increase wages or leave a position vacant.
With that being said, up to 21 states have already canceled the federal benefits to incentivize unemployed
Americans to re-enter the work force.

Inflation Spike: Transitory or Permanent?
One of the most notable debates occurring in the finance world is surrounding inflation. On one side of the
debate, many economists and financial institutions project that the spikes in inflation seen over the past 6
months are merely transitory, meaning that inflation is temporarily rising due to the US economy
rebounding following the pandemic. On the other side of debate, a seemingly equal number of voices
believe that the extreme actions taken by the Federal Reserve and Congress will lead to a long-term
increase in inflation.

There is no disputing that the inflation numbers that have come out recently are quite shocking, and the
sharp increases in commodity prices such as gasoline, lumber and copper have also affected the purchasing
power of consumers. For example, consumer prices rose +4.2% in April 2021, which was the largest
increase since 2008, and well above the estimated +3.6%. However, it is also important to remember that
year-over-year numbers will be artificially high due to subdued inflation during the pandemic.

Implementation:
We believe that the drastic actions taken by the Federal Reserve and the Federal government will
lead to higher inflation over time, even if the inflation is not as severe as some voices in the
financial industry are describing. Within our in-house models, we have shifted away from US
Treasuries and other government-backed fixed income and into credit and multisector fixed
income which has shorter duration and is less sensitive to interest rate increases. On the equity
side, we have continued to bolster our position in cyclical equities, which have historically
outperformed growth during periods of increased inflation.

Commodities Extend Run as Demand for Raw Materials Surges
Copper, a key component of traditional industry and infrastructure, has seen a double whammy increase in
demand over the past year: (1) The base metal has seen demand surge from traditional infrastructure
needs as the US economy re-opens and many infrastructure projects resume and (2) The metal is a major
component in electric vehicles, which have also seen sharp demand increases in the past 12 months. This
demand has put pressure on the supply of Copper, which cannot be easily increased due to extremely high
costs in discovery mining.

On top of the boom in demand and pressure on supply, high year-over-year inflation has led to a broad
increase in commodity prices, including Copper.

The US Copper Index Fund (CPER) has returned +28.57% year to date, compared to +12.48% for the S&P
500, -2.55% for the Barclay’s Aggregate Bond Index and -1.13% for Gold. We believe this trend will continue
as Copper demand remains steady and supply remains under pressure.
*Performance data is from Morningstar.com and as of 5/25/2021*

Implementation:
We implemented an allocation to Copper into our in-house investment models earlier this year
(mid-January 2021) and plan on maintaining (and potentially increasing) the allocation for the
foreseeable future. We remain neutral on Gold and other commodities.

Pulling It Together: Asset Allocation Recommendations

Overall: Overweight stocks relative to bonds when risk tolerance allows

EquitiesBalanced Value and Growth
o Balanced between the US and Global
o Overweight US Small & Mid Cap relative to Large Cap
o Overweight International and reviewing Emerging Markets

Fixed Income
o Overweight Multisector and Convertible bonds, reviewing Emerging Markets Bonds
o Underweight “Core” bonds, including Treasuries
o Balanced Investment Grade and High-Yield

We will continue to frequently review portfolios to ensure that they reflect our best and most current ideas. As
always, if you have any questions or would like to discuss the above topics further, please do not hesitate to
contact us.

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