Friday, Sep 24th 2021

A healthy dose of macros


At Titan, we aim to be macro-aware but not macro-driven in our investment process.

As investors, we recognize the importance of tracking the policy factors shaping the broader investing environment. But we believe that there is no need to react to all — or some, or even any — of these changes as they occur. Our long-term, research-driven outlook enables us to stay level-headed in the face of macro shifts: new information is digested and incorporated into our existing theses and models.

Today, for instance, monetary policy remains accommodative and fiscal policy is growing more restrictive. Markets are bracing, however, for a shift in monetary policy for the first time since March 2020, the early days of the pandemic.

It’s worth outlining the impact these shifts may have on market dynamics, which could inform portfolio changes in the months or years ahead. The dynamic that Federal Reserve policy injects into markets at any one point in time boils down to a simple question: Is monetary policy getting “looser” or “tighter”?

In broad strokes, “looser” policy means the Fed’s next move is likely to include a reduction in interest rates or an increase in asset purchases which aims to stimulate economic growth by increasing the supply of money (liquidity) in the markets. “Tighter” policy would correspond to measures such as higher interest rates or a reduction in asset purchases which removes excess liquidity and tends to slow economic activity.

All else equal, looser monetary policy provides better conditions for risk assets like stocks, while tighter policy provides better conditions for safe assets like fixed income.

Against this backdrop, the market’s present focus on “tapering” should be clear: a slowing in the pace of asset purchases is, on the margin, a tightening of monetary policy. And a tightening of monetary policy can lead to substantial changes in which kinds of assets investors want to own.

Currently, the Fed is purchasing $80 billion of Treasury securities and $40 billion of mortgage-backed securities each month. But in its policy statement, announced on Wednesday and again during a press conference held by Fed Chair Jerome Powell the same day, the central bank clearly signaled that a reduction in this pace of purchases will likely be announced in November.

In other words, we are likely on the cusp of a new era for monetary policy. And while the price of some assets might already reflect this expected change, all new policy regimes are capable of jolting markets in unexpected ways.

Another key question for markets and the Fed in the year ahead will be whether the central bank can decouple its tapering of asset purchases from increases in interest rates. New projections from the Fed published Wednesday showed that officials at the central bank expect to begin raising interest rates by the end of next year. By the end of 2023, three more interest rate increases are expected.

At Titan, our investment philosophy is centered on finding what we believe are great companies run by excellent management teams that have the ability to compound earnings over time. We believe the businesses we’re invested in today can and will perform well through this cycle and the cycles still to come.

But exiting a period of extraordinary monetary accommodation is a major policy shift, and one that bears close watching in coming quarters. And like all prudent investors, we stand ready to follow the apocryphal words of John Maynard Keynes and change our views as facts on the ground change with time.

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