August 2021 Newsletter to Clients

Enjoy this month’s edition that features a performance review of financial markets and the domestic economy, and a mutual fund spotlight.

U.S. stocks continue to thrive with the S&P 500 index of large companies returning 18% through the end of July and smaller companies in the Russell 2000 index earning over 13%. Similarly, international companies as measured by the popular Morgan Stanley index that tracks Europe, Australasia (the index’s term) and the Far East, have returned over 10%. If the S&P 500 finishes 2021 with a double-digit return that will be three years in a row – only the fifth time that has occurred in history.

The economy is humming too – stocks and the economy don’t always run in-sync with each other – with real GDP expanding at an annual rate of 6.5%, according to JP Morgan. This measure of economic output has now fully recovered its pandemic losses and was driven, in part, by an 11.8% surge in personal consumption expenditures – a key driver of economic growth. And the federal Labor Department announced that 943,000 people joined the workforce during July, the best gain in 11 months. That brought the national unemployment rate down to 5.4%.

Although the Federal Reserve is still monitoring inflation levels as some prices have jumped in recent months, they have not yet announced any plans to curtail their bond purchasing program or to increase short-term interest rates. Oil has increased over $52 per barrel since the first of the year; gasoline has increased from $2.20 per gallon to $3.14; corn has increased from $4.74 per bushel to $5.70 per bushel. Yet, gold has decreased over 3% this year and bond yields – as measured by the 10-Year U.S. Treasury – decreased by over 14% during July. The bond yield – the income a bond pays - is often an indicator of expected inflation or deflation. Lower bond yields indicate the bond market does not believe there will be ongoing, rampant inflation.

Fund Spotlight: Dodge & Cox Income (DODIX is the ticker symbol) is one of the mutual funds we employ in the Income category of clients’ portfolios. The fund’s objective is to “seek a high and stable rate of current income, consistent with long-term preservation of capital.” This contrasts with our fund spotlight in July, T. Rowe Price Blue Chip Growth Fund (TRBCX) that we use to help drive growth in clients’ portfolios.

DODIX pools money from investors and purchases a variety of income securities such as U.S. Treasuries, securitized debt such as mortgages, and corporate debt. The credit quality of the investments is quite high with almost 60% rated AAA. Most of its investments mature in less than 10 years, making the fund a bit less sensitive to interest rate changes than its benchmark, the Bloomberg-Barclays Aggregate Bond Index.

DODIX has total net assets – the value of the securities it owns – of over $70 Billion. The fund has been operating since 1989. The five largest credit issuers of the fund are Charter Communications, Petroleos Mexicanos, Ford Motor Credit, HSBC Holding, and JP Morgan Chase.

Over the last year, DODIX has returned 3.39%, versus its benchmark return of -0.33%. The 3-year return of the fund was 6.42%, versus the benchmark return over that period of 5.34%. As you know, past returns do not indicate future performance.

Thank you for your continuing confidence.