Insight & Commentaries

What Matters Most

In the very long run, it is growth that dominates other drivers of return. In this commentary, we look at why valuations and profit margins matter less than growth over time. With profit margins and valuations at or near highs, we conclude that we should not depend on further increases in margins or multiples for return. Instead, growth and dividends will become more important for us as long-term investors.

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As the consumer price index rises faster than any time in 40 years, we look back at how American economist Milton Friedman and statistician Janet L. Norwood helped shaped today’s understanding of “inflation.”

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After an initial strong run, signs of stress may now be emerging in the global recovery. Moreover, we note that financial markets appear priced for strong growth, record profits, and limited financial stress among corporate issuers. Given this backdrop, we now tactically reduce equity exposure to neutral following fourteen months of significantly overweight equity exposure.

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The pandemic provides a test for our crucial proposition that dividend growth points to quality. We look at recent evidence since the pandemic’s beginning to test this proposition. We find great similarity in performance of dividend growers and high quality on the one hand, and dividend cutters and low quality on the other. We also question whether the risk of owning this year’s outperforming low-quality, dividend cutters is really worth the much higher volatility of such stocks.

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Amid an otherwise positive backdrop, supply shortages, uncertainty over economic policy, and high valuations for financial assets are apparent. We remain tactically overweight stocks, but reduce exposure, shifting somewhat toward bonds. This report addresses how WCA tactical portfolios are positioned now to address short and longer-term factors.

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Dividend growers outperformed all dividend categories for the past 48 1/4 years with less risk. This is our conclusion based on data provided by Ned Davis Research. The research focuses on dividend payers, non-dividend payers, and dividend cutters. Note that the pattern of dividend growers outperformance holds for both the entire period of analysis and each sub-period (First Table). It also holds that growers experienced lower volatility for both the entire period and each sub-period (Second Table). In this note, we address why we think this phenomenon exists and what it could mean to investors. Return By Dividend Category (Annual)…

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Have you noticed more crowded roads and airports lately? The benefits of reopening are now seen across many sectors, and the municipal bond market is paying attention. This report explores how the process of reopening the economy is impacting municipal bond issuers and investors. Highlights The Muni curve steepened in the third quarter, slightly underperforming U.S. Treasuries, in very quiet trading activity. Flows into Muni Mutual Funds continued their torrid pace as increased taxes become more certain. The reopening economy has benefited Munis, too. Part 1 of our Muni Market Education Series: Why the High Coupon?

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We discuss the recent record-breaking rally, what is driving it, and the potential impact of higher prices on future returns. Also considered is the impact on wealth and appropriate portfolio strategies are suggested.

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Downshift

A slowdown in business spending and concerns about slowing employment and services add new challenge to growth story. Our near-term forecast of conditions weakens somewhat, causing us to tactically reduce equity exposure from a large overweight to a small overweight in tactical portfolios.

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There is more risk in the world than most people realize, and it is often inadequately measured. Here we look at how we measure risk and how quality can help address both volatility and unwanted surprises.

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Basic Math

Investing is not just about creating high returns but consistent returns. Therefore, we must contemplate how to address risk well in advance of demanding markets. This commentary addresses how some basic math can help explain the value of investing in high quality.

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Easy money policies and rising debt lead us to focus on quality first. In past commentaries, we made a case for owning high-quality firms over low and offer an alternative to “growth and value.” This week, we want to explore how we think about what we pay to own high quality. How We Asses Quality When we say “quality,” we really mean flexibility, resilience, and consistency. To find these characteristics, we test firms for low debt, productive assets, and operating consistency. Each quarter we examine the largest 1,000 U.S. companies along these lines, rank the results, and assign quality grades…

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This week, the Federal Reserve meets to decide on interest rates. Most expect no change in rates, but inflation worries are leading to calls for the Fed to ease off the monetary throttle. The debate centers on whether recent inflation signs are permanent or transitory. The causes of today’s inflation may be linked to bottlenecks, federal spending, or a sharp rise in the money supply. Whatever the reason, the debate is likely to shape policy and market returns. Evidence of Inflation’s Return Inflation is the change in purchasing power of money, reflected in prices. The consumer price index (CPI) basket…

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