Quarterly Client Letter – 2nd Quarter 2021

The U.S. stock market closed the second quarter at a record high, as measured by the S&P 500, which enjoyed a total return of approximately 15% for the first half of the year, marking the best first half of a year since the tech boom of the late nineties.  However, very much unlike the late nineties, this year’s gains have been led by previously out-of-favor sectors like energy, financials, real estate, and industrials, while the mega-cap technology stocks have taken a bit of a breather.  As a result, value has outperformed growth so far this year, and small-caps have done better than large.  Indeed, several of our value and small-cap funds have delivered returns well in excess of the S&P 500.  International stocks have delivered solidly positive, respectable returns but continue to lag the U.S.  Bonds, on the other hand, have been slightly negative so far this year.

As for stocks, we confess to being a little perplexed by the strength in the market.  Admittedly, our economy is enjoying a robust recovery as vaccinations roll out, the pandemic recedes, the world returns to some sense of normalcy, and demand is surging for, well, seemingly everything.  On the other hand, though, the market seems to be dismissing the potential impact of the new administration’s tax and economic policy, not to mention the unintended consequences of unprecedented stimulus, the most worrisome of which is inflation.

Regular readers of our commentary will recall that we have long believed that inflation presented the most likely threat to the current level of stock valuations.  Earlier in the year, we might have called it a clear danger, if not a present one.  But in recent months, it has become present as well, with prices of most things rising, and some, like lumber, rising sharply enough to alarm inflation hawks.  As inflation concerns have increased, longer-term (5+ year) bond yields have risen, resulting in the negative returns for the year.  Our position on bonds continues to be one of shorter maturities and higher credit quality, recognizing that their role in a portfolio is to provide downside protection during major stock market declines.  Stocks sold off a bit as inflation fears became more tangible.  But in the most recent weeks, the Fed signaled that inflationary pressures are “transitory,” lumber prices dropped 40% from their recent peak, and headlines claiming “Inflation fears may be starting to pass” scrolled across our news feeds; and just like that, stocks resumed their climb. 

We still think inflation is a credible threat, and at some point, we believe the Fed will engineer enough inflation to justify higher interest rates, which is now among their stated goals.  And higher interest rates, all else being equal, means lower prices for both bonds and stocks. 

So what do we recommend?  Well, first of all, we strive to prepare, not predict.  Rather than bet the farm on a specific outcome, we prefer to acknowledge uncertainty and be well-positioned for a wide range of possible outcomes.  And while there are several “inflation trades” that could be incorporated into portfolios, we agree with Dr. Michael Burry (made famous by The Big Short) who said, “[M]y firm opinion is that the best hedge is buying an appropriately safe and cheap stock.”  We would add that we believe one of the best hedges against inflation, in particular, is to own companies that are “best of breed,” competitively advantaged, and have pricing power.  Combine our take with Dr. Burry’s and you have the formula employed, in one form or another, by our fund managers:  find the best companies and buy them when they are undervalued. 

Over the last decade, the S&P 500 has earned an average annual return of nearly 15%, well above the longer-term historical average closer to 9%.  Also consider that in the previous decade, the return was near zero.  Going back nearly 100 years, the S&P 500 has achieved its long-term record with prolonged periods of both above-average and below-average returns.  Given where we are in that cycle, coupled with a historically high level of valuation, it does not take an oracle to conclude that we may be in for a stretch of below-average returns, at least for the index

We emphasize that final point because our caution about the level of the index does not imply that we don’t want to own stocks.  To the contrary, a period of above-average index valuation and below-average index return is an environment well-suited to our style of active management and good, old-fashioned stock picking.  While a lofty market and uncertain future might make some want to sit on the sidelines, we are reminded of famed investor Howard Marks’ warning that “When taken too far, ‘risk avoidance’ condemns you to ‘return avoidance.’”   



Share on:

Share on facebook
Share on twitter
Share on linkedin

Sissy Moreland

Client Services Trading

A graduate of Mississippi State University, Sissy joined Medley & Brown in 2017, but her career goes all the way back to 1990 when she was the merchandise director for four years at Phi Theta Kappa. She was also Customer Service Manager and Marketing Development Manager at Crystal Springs Apparel from 1994 to 2005. From 2005 to 2017, she was Manager of Sales Administration at Skyhawke Technologies. Thanks to her considerable operations and administrative experience, Sissy oversees trading and assists with most back-office operations for the firm. Staying so busy at work requires Sissy to recharge her batteries outside the office from time to time which she does by running, reading, enjoying a leisurely brunch, and watching the Saints play football.

Beth Braswell

Client Services Coordinator

Beth spent four years in the investment world before joining Medley & Brown in 2004 as our operations coordinator. She and her husband Robbie are busy parents to identical triplet daughters, so not surprisingly, some of Beth’s favorite things to do are napping and relaxing on the beach when she actually finds the time. Beth also enjoys taking short walks to the pool, attending concerts, and going out of town for long weekends. Beth loves her Mississippi State bulldogs and currently has four dogs, three cats, and three grandcats because having three children simply isn’t enough. No wonder her operational skills are so exceptional.

Doug Muenzenmay, CFA, CFP®

Senior Advisor   |   Principal

When he’s not enjoying the outdoors or attending his children’s school and sporting events, you can find Doug studiously researching investments for his clients. His career began in 1991 after graduating from the University of Iowa with a bachelor’s degree in economics. He spent 17 years in trust investments at three different banks before joining Medley & Brown in 2010. Doug also got his MBA from Mississippi College and served as an adjunct professor in finance there from 2007 to 2013. Married to his wife Sharon since 2001, Doug is a Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), and a board member of the CFA Society of Mississippi.

Eddie Carlisle, CFP®

Senior Advisor  |   Principal  |  Chief Compliance Officer

Eddie’s extensive education includes a B.S.B.A. in accounting, with special distinction, from Mississippi College in 1994, along with a J.D. from Vanderbilt University and LL.M. (Master of Laws) in taxation from the University of Florida. But it’s what he’s learned outside of school and work that really stands out. He’s an Eagle Scout, which taught him a great deal about honesty and hard work from an early age. He learned even more earning black belts in Taekwondo, Hapkido, and Hanmudo. Oh, and he studies the Korean language in his spare time as well. Additionally, Eddie serves as an adult leader for Scout Troop 164 in Madison. He is a past board member of Hope Hollow Ministries, the Central Mississippi Down Syndrome Society, and the Mississippi Corporate Counsel Association. Eddie is currently a board member of the Woodward Hines Education Foundation. He enjoys spending time with his wife, Sarah, and their three children—Andrew, Caroline, and Emma. 

Julius Ridgway

Senior Advisor   |   Principal

Judging from his background, you’d think investments and other financial matters were all Julius cares about. After all, he has two decades of direct investment experience and spent the previous ten years involved in banking and real estate. Julius also received a masters degree from the London School of Economics in 1998, an MBA from Millsaps College in 1993, and a history degree from the University of Mississippi in 1990. But his true passions include driving sports cars on racetracks or twisty mountain roads, running ultramarathons, and taking road trips with his wife and son. He’s worked here since 2002 as a Chartered Financial Analyst (CFA) and member of the CFA Institute while also serving as an adjunct instructor at Millsaps College and board member of New Stage Theatre. It takes major dedication to tackle all these responsibilities—sort of like training for all those long distant runs—but Julius enjoys every minute of the grind. And when it’s time to slow down, Julius finds the best way to clear his head is taking long hikes in the mountains on all those road trips.