The money supply and stocks
Investing,  Portfolio Updates

Portfolio Update #2 – Rising Stocks and The Money Supply

Rising Stocks and The Money Supply

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Hello and welcome to my second portfolio update. In this series, I track my two M1 Finance portfolios, one focused on growth stocks and another focused on dividend growth stocks. Think of these as my quarterly fund letters as I discuss portfolio results and topics of interest like the money supply this time around!

If you missed the first one, you can check it out here. That one dives more into what makes up the portfolios, why I choose to invest in these two portfolios and why I use M1 Finance to do it.

What’s happened since then? Well, stocks continued to ignore the economic pitfalls and trucked along. Growth stocks soared some more and even my dividend aristocrats started to play catch up after a few months of mediocre results.

It’s certainly an interesting time to be an investor. The world is in a lot of turmoil, earnings aren’t all that impressive and the future is uncertain and yet the money continues to flow into stocks. It’s weird but if you think about the financial world today, it does make some sense.

After all, the fed’s response to the economic crisis was swift and included quite an increase in the money supply. You can see that in the graph below from the St. Louis Fed.

money supply boost

In the early days of March, the supply of money available in the economy started to rise at an impressive rate. Between the end of March and today, the M1 money supply rose more than 31%. Now the money supply is something that does go up over time but it took more than 5 years for that type of growth before this crisis and now it happened in a few months. The M2 money supply(which includes household financial assets) also went up 19% in the same time frame.

Now if more money is available, it goes somewhere and one of the places it can go is the stock market. That’s especially true when alternative options for that money are suddenly looking a lot worse. I speak of the two main culprits; alternative investments in the form of bonds, money market accounts or even physical property and pure old casual spending.

The first became either less attractive(in the case of bonds and money market accounts due to 0% interest rates) or harder to get and less attractive(in the form of physical property). The second became harder to accomplish as stores, restaurants and all other things shut down.

So where did that money go? Probably, in some manner, into stocks.

Is it really that weird that stocks are flirting with all time highs despite all that’s going on out there? After all, money increased, money had no great spots to funnel into and therefore, that money went into stocks. Casual investors saw the big jumps off the market lows(which coincidentally happened March 23rd, a few weeks into the money supply boost and right before it really took off) and jumped in so they wouldn’t miss out.

The number of discussions I saw about the next easy money making opportunity was suddenly at an all time high. It seemed like everyone wanted to invest in stocks again.

In the end, at least in the short term, those that bought in then were entirely right. The weeks passed and the stock market, driven often by growth stocks, soared. It’s been a rather good time to be an investor lately. That is however, in start contrast, to what’s happening on main street. Unemployment is still at unthinkable levels, many places are closed, evictions are right around the corner, and the health crisis is far from over.

My last update already some some of that boost as my growth portfolio had a 35% 1 year return(despite the recession) and this update is likely no different.

After all, the S&P 500 is up another 9.6% since that last update in May and while there’s been some turmoil, it has continued to do relatively well despite all the negatives out there in the world.

So what happens next? After all, the money supply can’t go on forever and earnings will eventually start to catch up with reality. Does that matter? Right now, it doesn’t seem like it does but one has to remember that the 2008 crisis took a while to become real in the minds of investors.

Money can flow out of stocks pretty quickly when market mentality changes even if no great alternatives exist.

There were signs of trouble long before the stock market crash happened. There’s certainly signs of trouble now too but we’re also dealing with a faster to respond fed here too so who knows.

In fact, a second round of stimulus and potentially more money is about to flow into the system. Will that cause inflation or will the lack of spending eventually cause deflation? It’s a crazy year and all sorts of things could happen.

Perhaps we’ve already passed the worst of it and the market will continue to ride the high money supply and lack of alternative investments. Or it’ll all crash 50% burning at ton of casual investors expecting to get rich quick off their 20x sales growth stocks. Who knows!

However, this blog is about long term investing and such short term thinking doesn’t concern me. I know that it’s quite likely that 10 to 15 years from now, today’s prices will be a good deal.

When I talk about portfolios like these, especially the one focused on growth stocks, I am very aware that what goes up so quickly can come down just as quickly and an investor buying today should be aware of that too.

It’s been an interesting time to be an investors and I’m just along for the ride. After all, I’m one of those who is 10+ years away from needing this money so whatever happens in the next few months or even years isn’t too concerning for me.

Speaking of growth stocks, let’s take a look at that portfolio now.

Growth Industries Portfolio

Link to portfolio right here.

Portfolio Total as of 7/28/2020 : $22,889.16(+25.8%)

Growth stocks and money supply

The portfolio is up nearly 26% since the last update two months ago but that includes contributions. Still, even excluding contributions, the portfolio is up 15.9% in that same time frame. That speaks to the power of growth stocks in recent months as most of the stock market’s positive results have come from certain growth sectors.

There was certainly volatility in this portfolio during the crash but the recovery since then has been swift and impressive. In fact, the portfolio itself is up over 31% in just three months. Since 9/18/2019, the furthest back I can go due to some stocks that IPOd then, the portfolio is up 59.4%. It’s hard to imagine a world where one can get a 60% return in a diversified set of stocks in less than a year but here we are!

I did mention potentially making some changes to the holdings in the portfolio and I did just that.

First, I removed my sin stock allocation as it didn’t really fit the theme of this portfolio and also removed a few other stocks that didn’t fit the bill either(or I just didn’t care for the company). The overall goal here is to find companies that focus on innovation and have the potential for explosive appreciation and these just don’t have that. They’re not bad companies by any means and I own some of them in other ETFs or index funds already but they’re not ones I want to focus on here.

That means I sold PM, BF.B, SBUX, MO, STZ, DEO, SAM, IBM and LYFT. I was sad to see a few of these go(especially SAM which I think is a great stock) but I sold most of them at a small(or large in the case of SAM) gain and shifted the focus to growth bets in industries I was interested in more so than sin stocks.

On top of that, I changed the name of the aerospace technology slice into random industries and will use that as a catch all to increase holdings of companies I like that may not fit in the other slices(or be limited by the size of the other slices). Aerospace technology just didn’t have enough companies I was interested in to fill a full pie and while I’ll still own that industry in that slice, it’ll also include other bets that I may want to be overweight on.

To replace those leaving the portfolio, I added SE, NET, DDOG, LVGO, CUB, TWLO and CHGG. Most are small positions except for SE and LVGO which are higher conviction bets. All of these are growth stories that I think have a lot of runway ahead of them. SE and LVGO have already proven out that thesis as they’re up 25% and 55% respectively since I acquired them. I wish I had more time to build out positions in some of these!

Overall, the portfolio shrunk one holding but is now more focused on growth industries than it was in the past and that shows in the results.

I’m happy with the gains but also a bit sad that the valuations have exploded so quickly on a lot of these companies. After all, this portfolio is still well into the accumulation phase. However, I’m always aware that what comes up can come down and now that I’ll potentially get more opportunities to buy at lower prices due to the volatility of some of these stocks.

These also aren’t all no name bets as most of the holdings are household names that I don’t expect to lose big on. However, there are certainly some stocks in there that could lose big but also others that could be ten-baggers without a problem. I think long term, that might be a winning strategy. However, as always with growth stocks, the risk of short term loss is there especially at the valuations some of these guys are at today. Invest with caution!

The top 10 holdings by size are Amazon, Microsoft, Google, Visa, Alibaba, Shopify, Apple, Sea, Adobe and Nvidia. All ten of those have been big winners but MercadoLibre, Square, Tesla, have also contributed quite a bit to the overall returns.

Dividend Growth Portfolio

Link to portfolio here.

Portfolio Total as of 7/28/2020 : $21,733.19(+21.3%)

This is a much simpler strategy. While the growth industries bets are based on analysis, gut feeling, guesses and all the other BS that goes into stock picking, this one is simple.

There’s a list of stocks that have raised and paid dividends for 25+ years, they’re called dividend aristocrats. There’s 65 of them. I invest in all of them. This is the portfolio!

It’s simple, easy and has historically beaten the S&P. I’ve discussed the strategy in detail here so check that out if you’re interested.

The thesis here is simple. These stocks can not only pay but raise dividends for 25+ years, perform well and do it with less volatility. That seems like a good long term bet.

Has it proven out during this crisis? Has the volatility been lower?

Well, not really, as you can see by the graph above. The drop in March was still quite big and the recovery wasn’t as sharp as the growth stocks above. In fact, as of last update, the performance was a bit lacking. The reason for that is simple, there’s a big drought of tech in this portfolio and this year tech has been the winner. There’s also some exposure to industries which have really been impacted by the economic issues arising this year. However, most companies have still done well and almost all have continued to pay their dividends.

Since the last update, things have improved a bit, likely as people try to search for safer bets now that the market has run up a little bit. The portfolio is up over 20% since then and 12.4% if you exclude contributions. That’s not a bad results given the circumstances and the market’s recent reliance on growth stocks to fuel rallies as it has eclipsed the S&P 500 in the same time frame.

The idea behind having these two portfolios is that often when one zigs, the other can zag. This portfolio is definitely safer but totally has less upside although, in theory, it should perform better in times of volatility. That wasn’t really the case this year but it has played out in the long term. Still, it’s nice to see both doing well right now.

There’s still some risk involved as many of these companies are valued a bit more highly than the market averages for similar companies due to their stellar dividend track record.

When that changes(as was the case with ROST this year), that premium valuation can drop quickly. I make sure to keep an eye out for any dividend cuts and remove them ASAP as the track record is why I’m investing in these. I want companies I can trust in good times and bad.

This is certainly a good time to test the resiliency of these companies. The 2008 crisis sliced quite a few dividend aristocrats as companies had to cut or suspend dividends and I’m sure ROST won’t be the only domino to fall in this group.

I know that some won’t continue to raise their dividends through this crisis and those will be removed but those that keep it up through this will be the ones I want to keep anyway. While the other portfolio is focused on growth, this one is more focused on income and stability. It’s less about capital appreciation(although there is some) and more about income generation and re-investment.

On that front, I’m starting to see some decent results here now that the dollar totals are higher. In June, I had $72.57 in dividends, a big boost over the $16.73 I had the same month last year. On July 15th alone, I had $19.76 in dividends flow into my account. It’s days like that really show the value of a strategy like this in a turbulent market.

I know that investors are less likely to sell during times when stocks are soaring when these dividends keep coming in allowing me to buy at lower prices. We haven’t seen much of that yet but who knows what the year has to bring.

Overall, I’m quite please with the performance here but know that turbulent times can be ahead. Still, it’s hard to find other spots to invest in and because time in the market beats timing the market, I’ll keep investing through the ups and downs and end up a winner in the long run.

I do like having both of these strategies and following them along to see how they do and hope you enjoy following along.

Disclosure : I am long all companies discussed within this article and contained in the linked M1 Finance portfolios. These portfolios may change at any time and I will not update this article with those changes(you’ll have to wait until the next update to see changes). Investing in stocks via these portfolios comes with risks of loss and you should discuss any investment plans with a qualified investment advisor.

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