Much ado about inflation

We believe the markets are in a period of transition, from a world of pandemic-driven emergency settings to something resembling a new normal.

The contours of this post-”peak COVID” world are still emerging, but one prominent feature of the transition is clear: higher inflation and rising interest rates.

In October, prices for consumers rose 6.2% from the year prior, the fastest pace since 1990. Consumers are, understandably, less than thrilled with this development.

According to the University of Michigan’s widely-followed survey, consumer sentiment is at its lowest level in a decade amid rising prices for homes, vehicles, and other durable goods like furniture and appliances. A recent Harris Poll of U.S. consumers revealed that a staggering 90% of respondents were either “somewhat concerned” or “very concerned” about inflation.

To state the obvious: what we don’t know is the ultimate magnitude of these price increases and how long they’ll stick around. But we believe we can confidently prepare for a more volatile period for financial markets amid this transition.

As discussed in last week’s Quick Thought, diversifying Titan clients’ exposure across sectors of the economy is one key way we believe we may mitigate some of the risks that emerge in today’s transitional moment.

Our recent purchases of Thermo Fisher (TMO) and Avantor (AVTR) for clients in Titan’s Flagship and Opportunities portfolios are, respectively, examples of what we believe to be high-quality businesses operating in the healthcare space, an area to which our portfolios previously had no exposure.

Healthcare is a sector we believe may be positioned to benefit in a higher-cost environment, as spending in this sector is less discretionary than other components of household or corporate budgets. As a result, these companies may be able to raise prices to cover their costs and protect profit margins.

According to data from Goldman Sachs, healthcare has historically been one of the best performing sectors in the market during periods of high inflation.

As we wrote to clients back in September, at Titan we aim to be macro-aware, not macro-driven. Historical data on similar market environments may help inform and reinforce our conviction in owning a given company against a given macro backdrop. But as investors, we don’t view inflation as a black-and-white backdrop that tells us we must buy this or sell that company.

For instance, higher inflation and higher interest rates may result in high-growth tech companies temporarily falling out of favor with investors. But as long-term investors, that doesn’t mean we don’t still see opportunities in some of these businesses.

For example, we recently increased our position in CarGurus (CARG), a company at the center of digitizing the auto market, for Titan clients in our Opportunities strategy. Late last month we also increased our holdings in Twilio (TWLO), a leader in cloud communications, for Titan clients in our Flagship strategy. We believe that in every period of transition, there may be opportunities.

As consumers, we understand today’s frustrations with inflation: whether you’re worth $1 or $1 billion, a bigger bill at the grocery store or the gas pump is never a welcomed sight. As investors, we believe the question to answer is not whether higher prices are good or bad, but whether this inflation backdrop warrants a change in our current holdings.

And as is often the case, the answer can be both yes and no, and as active, long-term, research-driven investors, we’ll keep tabs on your portfolio through this transition so that you don’t have to.