Monthly Market Commentary - Unique Wealth
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Monthly Market Commentary
July 2021
Where We Are
In 44 BC, the Roman Senate changed the name of Quintilis (the fifth month) to Julius Mensis — what we
now call July — to honor the Roman military commander, author, historian, and statesman Julius Caesar and
to recognize his introduction in 46 BC of the 365-day Julian calendar to ensure that the civil year could
properly keep pace with the seasons. In the Northern Hemisphere — with its celebrations of Independence
Day in the United States (on the 4th) and Bastille Day in France (on the 14 th) —July is considered a festive
month as it marks the beginning of summer and the second half of the calendar year.
Spurred forward by optimism (i) that the post-pandemic U.S. economic recovery is continuing, (ii) that
inflation appears to be transitory, and (iii) that the Federal Reserve will keep interest rates low for a while
longer, June has confirmed a festive span for U.S. equities. The S&P 500 index rose +2.2% for the month,
+8.2% for 2Q21 (its fifth quarterly gain in a row, and all five of these gains have exceeded +5%, only the
second time since 1945 — the other time was in 1954 — that the index has managed such a performance),
and +14.4% for 1H21. This is the S&P 500’s best six-month period in 23 years. (Source: The Wall Street
Journal)
Two-year U.S. Treasury yields in June reflected recent higher CPI, PPI, and Personal Consumption
Expenditures inflation reports, rising 11 basis points from 0.14% on May 28 th to 0.25% on June 30th.
Nevertheless, during the month of June, indicating that these price increases may be temporary,
intermediate- and longer-term U.S. Treasury yields actually declined. Ten-year U.S. Treasury yields fell 13
basis points in June, from 1.58% on May 28th to 1.45% on June 30th, and 30-year U.S. Treasury yields
declined 20 basis points, from 2.26% on May 28th to 2.06% on June 30th.
Over the course of the month, following the course of the higher inflation readings and higher two-year U.S.
Treasury yields, in June the six major currencies DXY U.S. dollar index rose +2.6%, from 90.06 on May 28 th to
92.44 on June 30th.
As shown in the table on the following page, the technology-heavy NASDAQ Composite index finished 1H21
+12.5% and had its best month of the year in June, rising +5.5%. The Russell 2000 index of small- and mid-
cap companies rose +1.8% in June and is up +17.0% YTD for the first half of the year. Pummeled by rising
short-term interest rates and a stronger dollar in June, gold experienced its worst month of the year,
declining -7.3% and is now down -6.5% YTD through June 30th.
Buoyed by (i) disciplined management of supply by OPEC and its allies, as well as by U.S. shale producers,
and (ii) significant demand growth from the developed world more than offsetting still-soft oil demand from
the developing world, West Texas Intermediate crude oil prices closed at $73.47 per barrel on June 30 th,
+10.8% in the month and +51.4% YTD for 1H21.
Past and projected performance
1
does not guarantee future results.
MARKET COMMENTARY - JULY 2021
Monthly and Year-to-Date Price Performance
YTD
Index/Commodity Jan. Feb. Mar. Apr. May Jun. (through 6/30)
S&P 500 -1.1% +2.6% +4.2% +5.2% +0.5% +2.2% +14.4%
Nasdaq Composite +1.4% +0.9% +0.4% +5.3% -1.5% +5.5% +12.5%
Russell 2000 +5.0% +6.1% +0.9% +2.1% +0.1% +1.8% +17.0%
Gold -2.6% -5.9% -1.6% +3.6% +7.9% -7.3% -6.5%
West Texas Int. Oil +7.5% +18.0% -3.8% +7.3% +4.4% +10.8% +51.4%
Source: The Wall Street Journal.
After a classically powerful price rebound from the March 23rd, 2020 pandemic-induced stock market lows,
financial market participants appear to be well into embarking on “Phase Two” of the equity market’s story
while continuing to search for some sort of coherent narrative during the month of June. During the month,
stocks experienced both their worst week since October 2020 as well as their best week since February of
this year. Amidst rather subdued equity market volatility, investors seem to be looking for a directional
catalyst, all the while seeking a degree of clarity, some sort of definable trend, and rational insights as to the
path of asset prices.
In June, equities, bond yields, and currency exchange rates have tended to trace a seesaw, teeter-totter,
roller-coaster, zigzag pattern in reaction to economic data. This is because virtually every piece of positive
news has in many cases tended to be accompanied by an offsetting qualification, and every piece of less-
favorable news has not infrequently also carried a silver lining.
For instance, while monthly U.S. employment gains have risen from +269,000 in April to +583,000 jobs in
May, and +850,000 jobs in June (of which government hiring represented +193,000), the U.S. labor market
still is not yet experiencing broad-based and inclusive full employment. And despite June’s robust pickup in
overall hiring, the labor force participation rate of 61.6% remains 1.7 percentage points below its pre-
pandemic ratio and the employment-population ratio, at 58.0%, came in 3.1 percentage points below pre-
Covid levels. Based on careful analysis of the numbers comprising the June jobs report, bond market
investors subsequently sent intermediate- and long-term U.S. Treasury yields lower, not higher.
Still another example of “sweet and sour” economic results involves the June ISM Manufacturing index —
which registered a quite strong reading of 60.6, down from 61.2 in May (with any reading above 50.0
indicating expansion). When the details are subjected to closer scrutiny, the ISM-Manufacturing number
represents another example of headline strength, albeit with modification. The Prices index — an
important data point in an atmosphere of heightened concern over inflationary pressures — rose 4.1 points
to a very elevated 92.1, which represents the highest reading in 42 years, and the Employment component
of the report declined by 1.0 point to enter contraction territory for the first time in seven months.
As shown in the two adjacent charts on the next page, each of which covers the 1950–2020 time frame, (i)
despite the third quarter generating historically the lowest quarterly returns for the S&P 500 index
(averaging only +0.7%, with 62.0% of the third quarters in positive territory), (ii) July as a month has turned
out on average to be very strong month generally, particularly in post election years.
Past and projected performance
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does not guarantee future results.
MARKET COMMENTARY - JULY 2021
The following sections examine how asset prices may be influenced by The Inflation Outlook, Corporate
Profits, and Investor Liquidity/Exuberance.
Inflation Concerns
Opinion remains divided on whether consumer and producer price inflation rates are likely to be transitory
or enduring in the months ahead, and to our way of thinking for the time being, “the jury is out,” in terms of
attempting to arrive at a definitive conclusion. Set forth below are some of the arguments adduced on
either side of this important question.
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does not guarantee future results.
MARKET COMMENTARY - JULY 2021
Factors indicating that inflation rates are likely to be elevated and enduring include:
i. Reported Consumer Inflation metrics have risen — the May 2021 Personal Consumption Expenditures
price index rose +3.9% year-over-year, while the May Consumer Price Index increased +5.0% year-over-
year;
ii. The May Purchasing Managers Index from the Institute of Supply Management showed the prices
subindex at 88%, slightly below April, yet appreciably higher than November (65.4%) and December
(77.6%), suggesting that prices may continue to rise;
iii. Semi-permanent to permanent structural changes (such as retirement and career changes) in the
supply of labor may be putting more long-lasting than anticipated upward pressure on labor costs;
iv. Because the Federal Reserve has altered its monetary policy from a forecast-based approach to
becoming “data dependent,” it is possible that it could fall sufficiently “behind the curve” in countering
inflationary pressures to such a degree that actual and expected inflation rates could become
embedded in market participants’ expectations; and
v. As shown in the accompanying chart — depicting house price increases in the United States, the
United Kingdom, Australia, New Zealand, and Canada — record house price inflation could produce
increased inflationary expectations and inflationary pricing behavior.
Factors indicating that inflation rates are likely to be declining and transitory include:
i. Recent high inflation data in large part reflect year-over-year base effects, supply-side bottlenecks,
commodity shortages, and inventory management shortfalls, all of which are expected to diminish with
the passage of time;
ii. The trimmed mean Personal Consumption Expenditures price deflator (which removes extreme price
gains, as well as extreme price declines) has not been exhibiting any sharp acceleration;
iii. The Federal Reserve has indicated that it will begin tightening monetary policy to bring inflation under
control if price pressures exhibit signs of becoming permanently embedded rather than transitory;
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does not guarantee future results.
MARKET COMMENTARY - JULY 2021
iv. Whatever final form the proposed physical infrastructure bill takes, it is much smaller than the Covid
Relief and Economic Security payments, and is targeted to be spread over 5 to 8 years rather than
being immediately injected into the economy;
v. The significant degree of labor market slack could take several years to work off and help keep wage
price inflation contained;
vi. Among other materials, copper and lumber prices have begun declining from their recent peaks;
vii. Clamping down on rising domestic prices, the Chinese government in late May expressed “zero
tolerance” for “abnormal transactions and malicious speculation” in commodities markets;
viii. Rising short-term interest rates relative to intermediate- and long-term interest rates (known as a
flatter U.S. Treasury yield curve) generally indicates slower economic growth;
ix. Recent strength in the U.S. dollar currency index tends to exert downward pressure on the price of
imported goods;
x. Although the May University of Michigan Consumer Sentiment Survey reported one-year Inflationary
Expectations at +3.7%, the Survey’s five-year Inflationary Expectations registered +2.8% — indicating
that consumers view inflation as transitory rather than becoming structural; and
xi. As shown in the accompanying chart, a late June 2021 survey of 52 economists found that 70%
estimated that the likelihood of market inflation expectations exceeding +3% in 2022 was “somewhat
unlikely” or “very unlikely.”
In coming weeks and months, financial markets’ attempts to determine whether inflation is transitory or
enduring are likely to exert significant influence on asset prices. For example, cyclical sectors (such as
materials, financials, and industrials) that would be expected to do well (or poorly) in an inflationary
environment would be expected to appreciate (or decline). It is our view that inflation rates may peak and
come down from recent fairly high levels, yet we hasten to point out that such a slowdown is not equivalent
to disinflation and may in fact end up producing an average rate of increase in the general price level that is
higher than the pre-pandemic experience.
Past and projected performance
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does not guarantee future results.
MARKET COMMENTARY - JULY 2021
Corporate Profits
As of July 2nd, according to FactSet, a record number of S&P 500 companies have issued positive revenue
and earnings guidance for 2Q21. Securities analysts were carrying the following forecasts for S&P 500
revenues and earnings, respectively: 1Q2021, +10.9% and +52.5%; 2Q2021, +19.6% and +63.6%; 3Q2021,
+12.3% and +23.6%; 4Q2021, +9.2% and +18.1%; and for the full 2021 calendar year, +12.4% and +35.5%.
Following the passage of Federal Reserve-administered stress tests, 23 of the nation’s largest banks are in
the process of announcing stock repurchase and dividend increases likely to reach up to $200 billion.
Corporate after-tax earnings could potentially be reduced by the early July agreement among 130 countries
to make significant changes to the international tax system (with the proposed rules, if passed, targeted to
be put in place in 2022 and implemented in 2023), including: (i) Pillar 1, which would grant countries the
right to tax large companies based on where they generate revenue; and (ii) Pillar 2, which would establish
a global minimum corporate tax rate of 15%.
Pillar 1 may have to be dealt with as a separate bill (and would need support from at least two-thirds of the
U.S. Senate), since it alters America’s agreements with other countries and means the United States must
change existing treaties or create new treaties. Pillar 2, which alters U.S. domestic legislation, could
potentially be passed using the so-called reconciliation process (which can be used by the U.S. Congress
once each fiscal year and bills passed by this route can clear the Senate with a simple majority). Passage of
these proposed tax changes is by no means certain, with numerous lawmakers having already expressed
opposition to a tax aimed primarily at U.S. companies and to a tax policy that in effect shifts to other
governments revenue which America might otherwise check claim for itself.
And as tabulated by Yardeni Research, Inc. at the end of 1Q2021, S&P 500 companies’ forward net profit
margins stood at a record high 12.8%. In our opinion, as 3Q21 and 4Q21 progress, and the economy
continues to reopen, analysts may slow down or halt their upward earnings revisions and these profit
margins may come under some degree of pressure owing to rising commodity prices, labor and other cost
pressures, supply chain issues, and especially, higher corporate taxes.
Another source of S&P 500 profit uncertainty is represented by potential regulatory, legislative, anti-trust,
and other state and federal legal challenges to the corporate sector, with particular emphasis on social
media and large-cap technology companies. Among other issues, the U.S. House of Representatives as of
early July is considering a package of bills that would severely limit the ability of tech megacap companies
to expand via acquisition, and could force them to sell some existing businesses.
While the currently wide profit margins and the cheerful revenue and earnings profit forecasts presented
above represent a tailwind for equities prices, we nevertheless continue to emphasize caution, quality, and
active security selection in the styles and sectors highlighted in “Equity Emphases and De-emphases,”
“Focus on Strength and Quality,” and “Balancing Growth and Value Sectors” In the Portfolio Positioning
Tactics section at the end of this Commentary.
Investor Exuberance and Liquidity
Entering the second half of the year, it is worth keeping in mind that summer equity and bond trading
volumes tend to be lighter than average and as a result, thin trading activity can on occasion exacerbate
volatility and price movements, as numerous investors remain on the sidelines. Among the key questions
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does not guarantee future results.
MARKET COMMENTARY - JULY 2021
investors are pondering at the turn of the second half of the year are: (i) how much good news is already
reflected in market prices; (ii) will financial asset prices be able to cope with and digest the next
pronouncements and policy actions by the Federal Reserve — whether they delay, or accelerate, reducing
monetary policy stimulus; and (iii) what fresh catalysts — earnings, taxation, legislative, public health,
and/or geopolitical — can produce a meaningful move in equity prices and interest rates.
As depicted in the accompanying chart, since the bottom of the Global Financial Crisis on March 9 th, 2009,
U.S. equities (as measured by the MSCI U.S. share price index) have risen by a significant amount — both in
absolute terms (+556.1%), and relative to Emerging Markets, European, Japanese, and U.K. equities.
And over the past year, as shown in the nearby chart of the VIX volatility index, despite episodic instances of
high volatility in certain stocks and industry groups, on an aggregate basis, overall equity market volatility — as
measured by the VIX index — has traced essentially a downward pattern since spiking to a level above 80 at the
beginning of the pandemic-induced economic lockdowns. As goes the time-honored saying in the futures
trading pits in Chicago and globally, “When the VIX is high, it’s time to buy, and when the VIX is low, it’s time to
go slow.” Recent low levels of the VIX volatility index reflect a preternatural (from the Latin for “beyond nature”)
degree of investor calm, complacency, and nonchalance. Such conditions call for an extra degree of investor
caution and vigilance.
Past and projected performance
7
does not guarantee future results.
MARKET COMMENTARY - JULY 2021And with U.S. equities having generated stellar price performance over the past 12 months and VIX volatility
at low levels, it is not surprising to note how popular stocks have become among the household sector. The
accompanying chart shows that U.S. households’ equity allocation as a percentage of total financial assets
has reached a record-high 36.5% in 1Q2021, well above previous secular bull market peaks of 29.7% in
4Q1968 and 32.5% in 1Q2000. These percentages should strike an admonitory note while seeming to
confirm one of the precepts of the legendary Merrill Lynch Investment Strategist Bob Farrell: “The public
buys the most at the top and the least at the bottom.”
In an acronym-laden investment environment (e.g., YOLO = You Only Live Once; FOMO = Fear Of Missing
Out; and TINA = There Is No Alternative), it is also worth keeping in mind the built-up spending power and
potential investing flows represented by the absolute level ($17.16 trillion) and 18-month growth (+$3.5
trillion) of liquid assets on consumers’ balance sheets.
Past and projected performance
8
does not guarantee future results.
MARKET COMMENTARY - JULY 2021Over several cyclical and secular asset pricing movements, we have maintained that the principal drivers of
asset prices are: (i) fundamentals; (ii) valuations; and (iii) psychological/technical/liquidity factors.
And in the time interval leading up to asset price zeniths (where investor psychology is highly optimistic and
euphoric) and leading down into asset price nadirs (where investor psychology is quite despondent and
despairing) by far the most important driver of asset prices is psychological/technical/liquidity factors.
We want to emphasize the importance of recognizing that buoyant investor psychology — evidenced by
such developments as crowd-sourced trading activity, enthrallment with meme and “story” stocks, elevated
initial public offering and options trading volume, fascination with Special Purpose Acquisition Companies
(”SPACs”), and highly unrealistic long-term equity returns expectations, among other aberrations — has
become an increasingly important influence on assets’ investment performance. Reflecting these sanguine
developments, and partly due to abundant global liquidity and massive monetary stimulus, in contrast to
the nine corrections of -5.0% or more during 1999 (itself quite a euphoric year, leading up to the dotcom
bust of early 2000) as of early July, the S&P 500 has not experienced even one -5.0% drawdown in the
previous eight months, representing the longest interval since early 2018.
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Prior to this month’s discussion of Portfolio Positioning, the following two sections describe the essential
features, advantages, risks, and investment performance of: (i) Real Estate Investment Trusts; and (ii)
Inflation-Protected Securities.
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does not guarantee future results.
MARKET COMMENTARY - JULY 2021REAL ESTATE INVESTMENT TRUSTS
Description
In its broadest sense, real estate refers to tangible property including land, buildings, oil and mineral rights,
and/or crops that give its owner the right of possession, enjoyment, lease/rental to another party, and
disposal. Real estate may be distinguished from moveable possessions and personal property such as
automobiles and livestock and encompasses a large, fragmented, diverse group of property types,
geographic locations, direct and non-direct ownership structures, and financial characteristics ranging from
highly predictable income-producing properties to speculative assets whose return is purely a function of
changes in capital value. Three related and sometimes imprecise methodologies for valuing real estate
include: (i) the predictability, amount, growth, and financial engineering potential of the cash flow a
property can generate, and the multiple that buyers are willing to pay for this cash flow (this method is
known as the Net Present Value Approach); (ii) reviewing prices for comparable property types; and (iii) the
cap rate, defined as a property’s net operating income before debt service and deprecation, divided by its
purchase price. Two important legislative acts affecting real estate include: (i) the Real Estate Investment
Trust Act of 1960, intended to foster public share ownership of real estate; and (ii) the Tax Reform Act of
1986, which eliminated a large number of real estate tax shelters.
Choices
Public securities markets exposure to real estate and other real assets is available through direct or mutual
fund investment in: (i) REITs dedicated to the apartment, office/industrial, hotel, retail, and other sectors in
the U.S., Europe, and Asia; (ii) non-REIT real estate operating companies; (iii) equities with significant real-
estate assets, in the lodging, gaming, and healthcare industries; and (iv) real estate-related companies such
as homebuilders, construction firms, and title insurers. The non-public markets for U.S. and non-U.S. real
estate and other real assets are many times larger than the public markets and include leveraged or
unleveraged exposure to: (i) owner-occupied residential homes, second homes, single-family rental
properties and smaller commercial assets; (ii) outright ownership of real estate properties, participation in
real estate opportunity funds, core funds, and other types of funds that focus on underperforming assets,
or co-investment with partnership sponsors; and (iii) farmland, forestry and timber, and oil and gas
properties.
Rationale for Investment
i. Due to their relatively straightforward pattern of income generation, several segments of the real-
estate asset class possess important defensive characteristics. The opportunity for cash flows to
increase over time may also allow real estate to prosper in favorable economic and demographic
environments. The returns of Real Estate Investment Trust (REITs) tend to exceed bond returns and at
times are competitive with equity returns.
ii. Due partly to the fact that their returns are largely driven by asset-specific supply and demand
influences, real estate assets generally have low correlations of returns with U.S. and developed non-
U.S. equity, and slightly negative correlations of returns with U.S. and non-U.S. bonds, high-yield bonds,
and emerging-markets equity; they thus may act as an effective diversifier within a portfolio. The
heterogeneity of real estate types and locations also allows diversification within and across real-estate
sectors.
iii. As a tangible, visible, and possibly aesthetically pleasing asset whose supply is reasonably fixed or
which may not be readily expandable due to zoning laws, development restrictions, or land
management and conservation policies, and whose income-generating ability and/or capital values
Past and projected performance
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does not guarantee future results.
MARKET COMMENTARY - JULY 2021REAL ESTATE INVESTMENT TRUSTS
respond to such forces as employment trends, immigration, new-household formation, and long-term
changes in the general price level, many forms of real estate may function as a hedge against changes
in the general price level.
iv. Owing in part to the relative infrequency and subjectivity of the appraisal process for many property
types, the standard deviation of real-estate returns is generally lower than the standard deviation of
equity returns, and for REITs, may be higher than the standard deviation of the bond returns.
v. Because to some degree it is a relatively inefficient market, real-estate offers the opportunity for skilled
participants to identify and capture value through understanding the structure and potential of specific
properties, financial and operating expertise, market knowledge, and access to relationships.
Risks and Concerns
i. Real estate may not function well as an effective investment in disinflationary or deflationary global,
national, or local economic environments. Although operating income from property tends to lag
changes in the economy due to the nature and tenor of lease terms, during highly adverse times
lessors may cut back on their space commitments, possibly reducing or skipping their real-estate rental
payments without declaring default on their other outstanding debt.
ii. In response to cycles of expansion and contraction, shifting supply-demand conditions, interest rate
movements, borrowing and lending practices, capital gluts and capital vacuums, real estate may at
times be subject to feast-or-famine prices and returns, with substantial divergences between: (i)
property prices and replacement values; and (ii) (for REITs) share prices and per-share net asset values.
iii. Many real estate assets are not divisible and are characterized by illiquidity, high transactions costs,
lengthy time periods to effect the sale or purchase of a property, and significant price discounts
associated with distressed sales.
iv. Certain real-estate properties and forms of ownership may be expensive and/or complicated to locate,
research, value, finance, maintain, manage, lease out, pay taxes on, recapitalize, improve, transfer, and
calculate returns and identify sound exit strategies for.
v. Due to the single-asset, single-region, single-type nature of real estate, its virtual immovability, and
shifts in the relative popularity of certain property types and locations, real estate may be subject to a
number of special considerations, including: (i) bubble-like asset price movements, possibly followed
by sharp price declines; (ii) environmental laws and claims relating to the property itself or its building
materials; (iii) depreciation, depletion, or obsolescence; (iv) the quality of funds from operations (FFO);
(v) localized tax codes, zoning requirements, legal rights, and customs; (vi) exposure to uninsurable
losses stemming from acts of God, terrorism, cybersphere outages and other risks; (vii) the somewhat
shorter lease terms for hotels and apartments than for other properties; and (viii) the generation of
Unrelated Business Taxable Income for tax-exempt U.S. investors.
Past and projected performance
11
does not guarantee future results.
MARKET COMMENTARY - JULY 2021REAL ESTATE INVESTMENT TRUSTS
Source: YCharts and Morningstar
(1) Vanguard Real Estate ETF (VNQ). Seeks to track the performance of the MSCI US Investable
Market Real Estate 25/50 Index measuring the performance of publicly traded equity REITs and other
real estate-related investments. (2) Vanguard Global Ex-US Real Est EFT (VNQI). Seeks to track the
performance of the S&P Global ex-U.S. Property Index, a float-adjusted, market-capitalization-
weighted index measuring the equity market performance of international real estate stocks in
developed and emerging markets. (3) Real Estate Select Sector SPDR (XLRE). Seeks to track the
performance of publicly traded equity securities of companies in the Real Estate Select Sector Index.
(4) iShares Core US REIT EFT (USRT). Seeks to track the FTSE NAREIT Equity REITs Index. (5) Wilshire
US REIT Price Index (WUSREITP). Represents the performance of the Wilshire REIT index that does
not reinvest dividends.
Past and projected performance
12
does not guarantee future results.
MARKET COMMENTARY - JULY 2021INFLATION-PROTECTED SECURITIES
Description
Inflation-indexed securities refer to bonds whose principal and/or coupon payments are adjusted with the
general level of prices as measured by a commonly accepted price index. In January 1997, the U.S. Treasury
began auctioning capital-indexed bonds, known alternatively as Treasury Inflation Protection Securities
(TIPS) or Treasury Inflation Indexed Securities (TIIS). Originally issued with maturities of 5, 10, and 30 years,
TIPS generally pay semiannual fixed real coupons multiplied by a principal amount that is adjusted upward
monthly by an accretion amount paid to the investor at maturity and determined with a 3-month time lag
by the non-seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U). TIPS are usually
noncallable securities and often have fairly long durations relative to their maturities because a significant
portion of the total return is in the form of the inflation-adjusted principal amount paid at final maturity.
Any interim price deflation accruals are deducted from inflation accruals; in the arguably tumultuous and
highly unlikely event of cumulative deflation over the life of a TIPS security, its principal amount is
guaranteed to be repaid by the U.S. Treasury at its original face value.
Choices
In addition to TIPS, other capital-indexed bonds (and in a more limited number of cases, interest-only
indexed bonds and indexed-annuity bonds) have been issued on a limited basis in a variety of maturities
and structures by federal agencies, corporations, and municipalities, and sometimes in meaningful
quantities by non-U.S. issuers in more than 20 foreign capital markets. Several inflation-protection mutual
funds seek to add value in excess of annual management fees through sector, issuer, and maturity selection
and other tactics aimed at benefitting from supply-demand imbalances, seasonal factors, yield-curve
movements, and changing expectations for the general price level. Some investors monitor the equivalent
maturity, preferring TIPS if the actual inflation rate is expected to be above the breakeven spread, and
conventional U.S. Treasury bonds if the actual inflation rate is expected to be below the breakeven spread.
Subject to annual per-person limitations on new purchases, Series I inflation-indexed accrual security U.S.
savings bonds have a number of TIPS-like features.
Rationale for Investment
i. TIPS offer an effective hedge against inflation through a reliable stream of real income payments and
adjustments to principal that can keep pace with the price increases in a market basket of consumer-
oriented goods and services.
ii. Due to their high degree of correlation with unanticipated inflation episodes over the course of
multidecade economic and financial cycles, TIPS have tended to exhibit very low or meaningfully
negative correlations of 1- to 10-year returns with U.S. and non-U.S. equities, similar-duration
conventional U.S. bonds, and alternative asset classes, and moderate to high correlations of 1- to 10-
year returns with cash instruments.
iii. Because of the relative stability of real interest rates, which have tended to be approximately one-third
to one-half as volatile as nominal interest rates, TIPS generally behave as low-volatility assets, with
standard deviations of annual returns that tend to be one-fourth to one-fifth those of equities and
similar-duration bonds.
iv. Owing to their low standard deviations of annual returns, their low or negative correlations of 1- to 10-
year returns with most asset classes, and their frequently favorable real-yield comparisons versus the
real yields of conventional bonds, TIPS may reduce the overall long-term risk level of a portfolio of
assets.
Past and projected performance
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does not guarantee future results.
MARKET COMMENTARY - JULY 2021INFLATION-PROTECTED SECURITIES
v. As a result of their different degree of price responsiveness compared to other asset classes in varying
financial environments, and their positive return characteristics in periods of stable-to-falling real
interest rates coupled with rising inflation, in appropriate circumstances, TIPS can serve as an effective
diversifying substitute for conventional bond-like asset classes, in some cases allowing potentially
greater emphasis on equity-like and/or alternative asset classes.
Risks and Concerns
i. For taxable investors, the semiannual real interest payments on TIPS are taxed each year as ordinary
income, even though the monthly inflation adjustments to principal are not received until the final
maturity of the bond; the amount of this “phantom income” is also fully taxable each year. In
sufficiently high tax brackets and at moderately high CPI inflation rates, TIPS may very well generate
negative current cash flow. As a result, taxable investors may need to hold TIPS in tax-deferred
accounts and/or to consider instead tax-exempt inflation protection securities (TEIPS).
ii. Depending upon the duration of the TIPS and the magnitude of the real interest rate rise, higher real
interest rates may cause capital losses on TIPS. The level of real interest rates is generally influenced by
fluctuations in capital supply-demand factors such as real economic growth rates, federal budget
and/or balance of payments surpluses or deficits, and monetary policy.
iii. For a series of holding periods of one year of less, TIPS may lose some of their beneficial diversification
features due to moderate or high correlations of returns with conventional bonds caused by short-term
common movements in real and nominal yields, flight-to-quality effects, and other factors.
iv. During periods of declining inflation expectations, falling inflation rates, or outright deflation, TIPS may
underperform conventional bonds of the same maturity or duration.
v. TIPS possess certain potentially complicating features associated with: (i) their post 1997 status as a
relatively new, untested, not widely understood, and somewhat lower liquidity instrument sometimes
featuring wider bid-asked trading spreads; (ii) the behavior of, and interaction among, expected
inflation, inflation risk premiums, nominal interest rates, and real interest rates; (iii) the risk that a
decline in the external purchasing power of the U.S. dollar may exceed its domestic adjustment for
inflation; and (iv) the efficacy of various index contingencies available to the U.S. Treasury in the event
that the applicable Consumer Price Index is discontinued or fundamentally altered in a manner
materially adverse to TIPS investors.
Past and projected performance
14
does not guarantee future results.
MARKET COMMENTARY - JULY 2021INFLATION-PROTECTED SECURITIES
Source: YCharts & Morningstar
(1) Seeks to track the investment results of the Bloomberg Barclays U.S. Treasury Inflation Protected
Securities (TIPS) Index (Series-L) which is composed of inflation-protected U.S. Treasury bonds. (2)
Seeks to track the total return of the Bloomberg Barclays U.S. Treasury Inflation-Linked Bond Index
(Series-L) SM. (3) Seeks to track the performance of the Bloomberg Barclays U.S. Treasury Inflation-
Protected Securities (TIPS) 0-5 Year Index. (4) Seeks to track the price and yield performance of the
Bloomberg Barclays U.S. Government Inflation-Linked Bond Index. (5) Seeks to track the investment
results of the Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index
(Series-L). (6) Seeks to track the price and yield performance of the FTSE International Inflation-
Linked Securities Select Index.
Past and projected performance
15
does not guarantee future results.
MARKET COMMENTARY - JULY 2021PORTFOLIO POSITIONING
Portfolio Positioning Strategies:
In the current moderately slowing economic expansion and somewhat softer yields environment, we
believe that careful thought, planning, and attention needs to be devoted to the investor’s most
appropriate forms and vehicles for implementing the fundamental elements of Asset Allocation and
Investment Strategy, which include:
i. Diversification: which means having sustainably low- and negatively-correlated investment exposures
that truly counterbalance price movements in other assets, particularly during times of great financial
stress and/or market volatility;
ii. Rebalancing: which encompasses using concepts of reversion to the mean to trim exposures to assets
that have grown to represent too large a portion of the overall portfolio, while at the same time,
adding exposure to high-quality assets that have fallen out of investor favor and suffered significant,
though deemed not permanent, price declines vs. intrinsic value;
iii. Risk Management: which involves recognizing when markets become consumed by meme securities,
momentum plays, “story stocks,” and information overload — a situation that has pertained in recent
months to more than a few companies in the technology space — and understanding the degree of
liquidity, the true pricing realism, and the appropriate roles of short-term liquid securities, real assets,
financial assets, and alternative assets in decades-long (or longer) regimes of inflation, stagflation,
deflation, monetary disruptions, and currency resets;
iv. Reinvestment: which encompasses knowing when to emphasize and trade off income versus capital
growth, all the while keeping in mind the critical importance of discipline, equanimity, patience, tax
awareness, and longevity in capturing and compounding dividend, coupon, rental and other income
flows; and
v. Asset Protection and Husbandry: which encompass considerations of income and capital gains
taxation at the state, local, federal, and possibly international level; estate planning; relevant insurance
design and structuring; cybersecurity shielding; portfolio monitoring and reporting; administrative
costs; forms, frequency, and means of access; and custody.
Portfolio Positioning Principles:
We continue to allocate to a considered and considerable exposure to equities, with judicious shifts
between styles, sectors, geographies, and — where appropriate from a cost, timing, tax, liquidity, and size
standpoint — public versus private markets. Expressed below are a number of themes that we believe
should be taken into consideration over the next few years in selecting asset categories, asset classes, asset
managers, sectors, companies, and security types:
i. Paying Attention to the Value of Money: Taking advantage of (rather than being taken advantage of
by) the likelihood of money printing, internal and external currency debasement, government debt
monetization, and the ‘Modern Monetary Theory’ approach that to some degree in the pandemic-
response era has been pursued by the Authorities — within shifting money and credit cycles — to
service America’s massive explicit government and corporate indebtedness and the enormous implicit
obligations of pension and healthcare promises;
Past and projected performance
16
does not guarantee future results.
MARKET COMMENTARY - JULY 2021PORTFOLIO POSITIONING
ii. Concentrating on “All-Weather” Sectors and Companies: Seeking investments with balance and
flexibility, that are able to thrive regardless of: which political persuasion informs the thinking and
policies of the White House and/or Congress; evolving Environmental, Social, and Governance (ESG)
priorities and values; wealth distribution initiatives and public health conditions; and wider
socioeconomic trends;
iii. Distinguishing Between Temporary and Permanent Change: Focusing on the commercial and financial
implications of new social and political power structures, alliances, and geopolitical relationships; new
energy sources and resources; new trade patterns; new on- and offshoring channels; new “WFH” and
“WFA” (Work From Home and Work From Anywhere) employment modalities; and new business
models, pathways, digitalizations, and forms of person-to-person and business-to-business work,
leisure, learning, and wellness activity;
iv. Taking Advantage of Demographic Tailwinds: Through U.S. and select non-U.S. companies, gaining
exposure to, and meeting the rising needs, aspirations, and spending power of, the rapidly expanding
global middle class, especially in Asia;
v. Comprehending and Verifying Past Success: Emphasizing companies and sectors that have
demonstrated successful track records and past experience in: capital allocation; balance sheet
strength; risk management; sustainably defendable business models; and the ability to generate and
sustain high multiyear returns on equity (derived from revenue growth and favorable margin
preservation, rather than through overly high levels of leverage) meaningfully above the companies’
and sectors’ weighted average cost of capital; and
vi. Identifying Innovative and Disruptive Technology Hegemons: Focusing on technology enablers,
disrupters, and dominators in biotechnology, diagnostics and therapeutics based on CRISPR (Clustered
Regularly Interspaced Short Palindromic Repeats) public health, artificial intelligence, data analytics,
machine learning, 5G cellular network technology, the Internet of Things, infrastructure, robotics,
quantum computing, battery inventions, alternative energy, electric vehicles, and cybersecurity, while
not least, also taking account of the Environmental, Social, and Governance (ESG) characteristics of
companies in these and other fields.
Past and projected performance
17
does not guarantee future results.
MARKET COMMENTARY - JULY 2021Important disclaimers and disclosures
Unique Wealth (“Unique”) is a registered investment adviser with the Securities and Exchange
Commission. Any reference to the terms “registered investment adviser” or “registered” does not imply
that Unique or any person associated with Unique has achieved a certain level of skill or training. A copy of
Unique Wealth’s current written disclosure statements discussing our advisory services and fees is
available for your review upon request.
This message is intended for the exclusive use of clients or prospective clients of Unique Wealth. It should
not be construed as an attempt to sell or solicit any products or services of Unique or any investment
strategy, nor should it be construed as legal, accounting, tax or other professional advice. Different types
of investments involve varying degrees of risk, and there can be no assurance that any specific investment
will either be suitable or profitable for a client or prospective client’s investment portfolio.
This material is proprietary and may not be reproduced, transferred, modified or distributed in any form
without prior written permission from Unique. Unique reserves the right, at any time and without notice,
to amend, or cease publication of the information contained herein. Certain of the information contained
herein has been obtained from third-party sources and has not been independently verified. It is made
available on an "as is" basis without warranty. The content of this communication is provided solely for
your personal use and shall not be deemed to provide access to any particular transaction or investment
opportunity. Unique does not intend the information in this Presentation to be investment advice, and the
information presented in this communication should not be relied upon to make an investment decision.
The views expressed in the referenced materials are subject to change based on market and other
conditions. This document contains certain statements that may be deemed forward‐looking statements.
Please note that any such statements are not guarantees of any future performance; actual results or
developments may differ materially from those projected. Any projections, market outlooks, or estimates
are based upon certain assumptions and should not be construed as indicative of actual events that will
occur.
Historical performance results for investment indices and/or product benchmarks have been provided for
general comparison purposes only, and do not include the charges that might be incurred in an actual
portfolio, such as transaction and/or custodial charges, investment management fees, or the impact of
taxes, the incurrence of which would have the effect of decreasing historical performance results.
Past and projected performance
18
does not guarantee future results.
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