MRM Commentary


Monthly Investment Commentary

November 2021

      Economic Update

              • Inflation became the clear and predominant economic theme in October amid stubborn supply chain issues and emerging wage pressure
              • Fixed income markets are now pricing a much more aggressive Fed rate hike schedule for 2022-2023, including two 25 basis point hikes next year
              • Bond markets have put global central bank leaders in a difficult position, and future communication by monetary policymakers will be even more closely scrutinized

      MRM Group claims compliance with the Global Investment Performance Standards (GIPS®).
      Please contact MRM Group to obtain a Compliant Presentation and/or MRM's list of Composite descriptions.

      MRM Portfolio

      Market Theme
      If there was any question about what the predominant economic/market theme was heading into October, it was clearly affirmed by the end of the month. Inflation has been a hot topic ever since the global economy began to reopen earlier this year, fueled by pent-up consumer demand and trillions of dollars of fiscal and monetary stimulus. Up until this point, the position of the Fed has been that any rise in consumer prices would mostly likely be transitory and, therefore, not require an immediate policy reaction from the FOMC. The bond market, in general, extended credibility to the Fed’s stance, even as multi-decade high core inflation readings emerged starting in April.

      Global Supply
      As the summer rolled on, concerns over growing global supply chain issues moved to the forefront of the news cycle. At the same time, the labor market continued to tighten, fueling wage inflation worries. September policy meetings by the Fed, European Central Bank (ECB), and Bank of England (BoE) were all generally perceived as more hawkish, which fueled an upward shift in Treasury yields across the curve. This rise in Treasury yields coincided with a repricing of short-term rates in anticipation of the Fed having to act sooner on rate hikes to combat inflation.

      Market speculation over what the Fed and other major central banks will have to do from an interest rate policy (IRP) perspective has fueled a series of curve “twists” over the last several weeks, primarily pivoted around the 7-year part of the yield curve as the bond market prices for policy error. If the Fed does have to act sooner and more aggressive than it would like, as the market is projecting, it would not only work to suppress inflation pressures, but could also stifle/slow the economic recovery. As such, the 2-year/10-year Treasury yield spread two years forward flattened 15 bps in October to late 2017 levels, when the Fed initiated balance sheet normalization efforts following the last easing cycle. In short, the bond market is pricing for more persistent inflation.

      MRM'S VIEW

      While the market is speculating that inflation will be more persistent, Fed forecasts as of the September 22 FOMC meeting suggests otherwise. The minutes of that meeting revealed that the Fed’s Washington-based staff forecasted that inflation will be back below 2% in 2022, less than half of the September PCE year-over-year rate of 4.4%. While forecasts are always limited given an inability to accurately predict the future, the Fed has been better than most given unmatched resources relative to private firms. This scenario will help the equities.

      Source: ALM

      MRM model holdings as of September 30, 2021



      MRM Group, Inc. (“MRM”) is a state-registered investment advisor and an independent management firm that is not affiliated with any parent organization. Using quantitative selection methods, each MRM strategy searches within a well-defined universe of securities, using consistent investment criteria to identify attractive investments and create diversified portfolios. MRM seeks to provide long-term capital growth.


      The portfolios do NOT use inverse or leveraged ETFs. Universe vehicles may change, from time to time, when approved by the principal of MRM Asset Allocation Group at its sole discretion.


      Effective Nov. 1, 2016 the Dynamic Overlay benchmark was changed to Morningstar’s Tactical Allocation. The benchmark was applied retroactively to the beginning of the performance period, January 1, 2008. This change had the net effect of placing the Dynamic Overlay Model Portfolio in a more favorable light than would otherwise have been the case if we used the blended benchmark described below. Although this change had a favorable impact on the comparative effect on the model’s performance but we believe the change in benchmark more appropriately aligns with our Dynamic Overlay Strategy in that it is designed a tactical allocation rather than a static blended benchmark of 75% S&P 500 Index Total Return and 25% MSCI EAFE. Morningstar’s Tactical Allocation Category averages returns for the peer group based on the return of each fund within the group, for the period shown. The S&P 500 Index with dividends is an unmanaged composite of 500 large-capitalization companies whose data is obtained from the Standard & Poor’s website. S&P 500 is a registered trademark of McGraw-Hill, Inc. The MSCI EAFE Gross Index is a free float–adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada, with data from the MSCI website using price with reinvestment of dividends. The performance of blended benchmarks is shown for comparison because MRM uses securities which track indices related to these products. The Dow Jones US Select Dividend Index comprises 100 stocks and aims to represent the U.S.’s leading stocks by dividend yield. An investment cannot be made directly into an index.


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