Year to date, The Minimalist Portfolio is up 10,36%, while the S&P 500 is up 6.6%!
Let’s get straight into it by summarizing the full vision for the upcoming year. In the 3rdquarter of 2024, growth but especially inflation, will increase. In the 4th quarter, inflation will continue to go up to the point where it will start to eat into the growth numbers.
This will create an environment of slowing growth and increasing inflation. The goal is to avoid sectors that will not like this growth mix and build positions in places that benefit from rising inflation.
The growth companies like the big Tech superstars are clearly not liking the mixed signals. For that reason, we don’t have any exposure to them anymore.
The best part about our positioning is that if the Fed steps in to help growth, it will worsen inflation. That’s why, regardless of what happens, that is the place to be in the coming quarters.
Let’s examine the data on Growth and Inflation first, and then we will discuss how to incorporate this into our Minimalist Portfolio.
Growth
We had some key economic data releases, including the ISM Manufacturing and Housing numbers, so let’s get into those!
ISM Manufacturing
The ISM (Institute for Supply Management) is a crucial indicator of the health of the US manufacturing sector. Manufacturing trends often foreshadow broader economic shifts, making it a leading indicator for investors and policymakers.
The data is communicated with a number that is either above or below the 50 line. Above is expansion and below is contraction of the economy.
As you can see in the chart below this indicator tends to get drawn back to its center line (mean reversion). While this was considered positive on its way to the center line, it’s to be seen if we can stay above, it in a way that would be significant enough to have growth keep up with inflation.
In the chart below you, can see we have now fallen back to contraction after last month’s first expansionary print in 16 months.
As discussed in the introduction, inflation will be a drag on growth. The chart below is one of the most important charts this week as it clearly shows on a leading basis what is happening to inflation.
Prices Paid in the April ISM manufacturing index surged by approximately +9% month-on-month to a two-year high.
Housing
As expected, interest rates are once again in the spotlight. Recent increases in 10-year Treasury and 30-year fixed mortgage rates have led to a surge in rate volatility, which is causing a new challenge for affordability.
The progress that the housing market was making seems to have made way for a pause.
Inflation
The rate market is showing signs of anticipating interest rate hikes, while Bloomberg data indicates a decrease in inflation. Last week, various asset classes displayed mixed performances:
- The CRB Commodities Index corrected by -0.4%, but still showed a bullish trend, up +8.5% over the last 3 months.
- Oil (WTI) saw a 2.0% increase, maintaining a bullish trend at +8.3% over the last 3 months.
- Copper continued to rise, inflating by another +1.7% and standing at +18.7% over the last 3 months.
- Nickel saw another 4.0% increase last week, totaling +15.1% over the last 3 months.
A significant question arising in this dynamic is whether businesses can continue passing price increases to consumers. Recent reports from consumer-facing companies like Starbucks suggest challenges in this regard.
During their earnings call, the CEO described the environment as “highly challenged,” particularly concerning consumer pressures. With same-store sales dropping by -4 %, indicating a combination of higher ticket sizes (+2%) and fewer transactions (-6 %), it suggests that consumers may be resisting further price increases.
Let’s get into the portfolio to see how we can profit from these dynamics.
Portfolio
The Minimalist Portfolio is not only outperforming the S&P 500 but it is also doing it while having more global exposure what provides diversification and safety.
Year to date, The Minimalist Portfolio is up 10,36%, while the S&P 500 is up 6.6%!
As discussed at length above, higher for longer in terms of inflation is the play we want to build on!
For now, I’m confident we are optimally positioned. On the watchlist, I’m keeping a close eye on how growth is behaving as it moves more speculative assets like Bitcoin quite severely.
If this correction is already the start of a further sell-off, I will replace BTC with even more inflation-correlated assets.
Energy Sector (XLE) -3.55% Since Entry Fri 19 Feb 2024
This sector goes up along with inflation regardless of growth. It’s the only true all-weather inflation sector out there.
Weekly Chart XLE
US Insurance (IAK) +13.1% YTD
Investing in the insurance sector provides exposure to a stable industry that can withstand a decline in growth while delivering an excellent inflation hedge.
US Dollar Index -1.1% since Entry Fri 26th of April
Due to the relative strength of the US economy and high interest rates that might even get increased this is a great place to be.
Weekly Chart DXY
WTI OIL +2.7% Since Entry Fri 23 Feb 2024
While the U.S. Government keeps declaring victory on inflation, we’re going to keep buying inflation. The Global Industrial & Manufacturing Cycle bottomed in December of 2023 and remains Bullish for oil.
Weekly Chart WTI OIL
SILVER (SLV) -3% Since Entry Fri 26th of April
To build on the theme of inflation and taking advantage of price action, silver is a great addition to the portfolio.
Weekly Chart SLV
India (INDA) +8.5% YTD
The difference in real growth between India and the median G20 economy is set to reaccelerate in 2Q24, while India is already the global growth leader through 2024.
India (we remain long of India $INDA). All of these countries saw new orders accelerate, improvements in employment, and accelerating input costs.
Weekly Chart INDA
Gold 11% YTD
Gold has been solid historically in the given macro environment, especially relative to the S&P500. It’s a true classic for holding up as a haven asset in higher-volatility environments.
Weekly Chart Gold
Germany (DAX) 1.4% Since Entry Fri 19th of April
As we are bullish on Europe it’s great to have exposure to what is considered the engine of the continent Germany.
Weekly Chart DAX
China (SSE) +2.5% Since Entry Fri 8th of March 2024
China has strongly accelerating Cyclical Data. Including China to the portfolio increases upside while also making sure we include global diversification.
Weekly Chart SSE
Bitcoin (BTC) +44.53% YTD
Bitcoin is always a momentum play that is clearly starting. I’m not a crypto expert nor am I a long-term holder but the when the excitement about another bull market starts it makes more noise and draws more amateur investors in than anything else. This makes it a self-fulfilling prophecy and something we want to participate in.
Weekly Chart BTC
I hope you enjoyed this edition of The Minimalist Portfolio. I’m grateful you’re here from the start, and I’m looking forward to outperforming you together!
All the best,
Philippe.