Allocation and Investment Committee Meeting 04/29/26
Notes on the Economy
To Stay or to Go...that is the question. At least it is if you are Jerome Powell whose term is up next month. However, Powell does have the option to state that he wants to finish his complete term which does not end till January 31, 2028. Most expect him to resign as soon as this afternoon. The Senate Banking Committee just cleared the way for Kevin Warsh to be voted on by the Senate, and he could potentially be in place by the Fed’s meeting in June. We all expect the Fed to remain steady on the rate front keeping the target rate between 3.5% and 3.75%.
Our discussion on the bond markets:
The bond market has drifted here and there but yields between 1 year and 5 years have not moved much and getting over 4% on Treasuries in this time frame is not to be had at the moment. The yields start moving and getting higher at the 7-to-10-year range. We typically do not go too far out beyond 10 for most clients as we like keeping our duration around 5 as a whole. Some better yield was found in high grade corporates and occasionally we found some yield in AAA rates insured Muni bonds that are taxable. I think most of the capital gains we see are in place, and the low hanging fruit has been picked. I am content to simply sit back and collect that interest now.
Our discussion on the equity markets:
The markets are smack dab in the middle of earnings season as I type with Microsoft, Amazon, Alphabet, and Meta all reporting after the bell. Believe me, these announcements will have an oversized effect on the markets' direction as they are such large holdings. Much of what the market will be paying attention to, however, is beyond the earnings of the companies. Most everyone is eagerly waiting to hear the discussions on what these big boys think and spend on data centers for AI buildouts. The “Hypersclalers” as they are known make up a whopping 60% of the entire growth rate in this space. Where we see the trickle down and have been able to take advantage is by investing in the construction companies that are taking on these projects for them. Every time you hear about a new data center project that involves LOADS of infrastructure, thus helping many companies keep their sales force working 24/7. And the earnings have shown it. The growth has been so fast that most of the companies that supply the materials and construction have a backlog that stretches out to 2028. This of course has placed over 50% of the projects to be delayed. The manpower and supply chain simply cannot handle the load which we especially see in the electrical equipment areas. Many of you have seen the great gains we have in these stocks that you hold in your portfolio. The runway looks long, but each company must deliver to meet expectations that are being placed on them to deliver on time. I am looking at other areas of data center construction to find an area that is being overlooked. There might be some value still left in the aggregates (crushed rock and stone) as this plays a heavy role. It reminds me of the way people made money in sand when fracking took off.
Another reason why I like the electrical equipment sector so much is not just due to data centers. The EIA reports that electricity demand has increased by over 2% from 2025 and is expected to continue to grow by 2% annually through 2030. The grid is strained. Both electric and natural gas infrastructure spending will need nearly $2 billion in investment. That creates additional tailwinds for these companies, and we are staying long.
Look similar? It should. SO many people were scrambling to the exits because we had a new president. That was a mistake.
All market turmoil is hard on the stomach. It has been difficult for some but honestly not for most of our Redfish investors. This is simply because we remain properly allocated across all sectors and markets, and we have a long-term viewpoint. Trading in and out of markets based on what we think may happen or because of the headlines is generally a loser's way to invest. We simply do not do that. We maintain a healthy amount of money (in % terms) allocated to very safe investments, fixed income, and cash equivalents. It is not a very sexy way to invest however in times like these it does give us plenty of dry powder to deploy into names we like when they are down like the above-mentioned Microsoft.
Interesting Thoughts We Discussed
You have heard me and others use the term “black swan” to describe an event that could be completely disruptive to the markets. Going to war with Iran has always been one of the top names on these potential black swan lists. Well, it happened. What did the markets do? They got volatile of course but dang we are close to all-time highs. That tells us something. I think it says that the overall health of the US economy and business is extremely strong. Often these black swans set off bear market and corrections to the tune of at least 10%. Not so here. The markets shot down that swan like a teal in September. Had you posed this war to me a year ago and said it was guaranteed to happen, I would have pulled out and cut equity exposure down to at least 40%. We are amazed at the resilience the markets have shown. All eyes will be on earnings and so far it looks as though new records could well be in our future.
Allocation Suggestions:
Taking in all the above and we maintain that our portfolios will have a base allocation that is comprised of:
50%-55% Stocks
30%-40% Fixed Income
10-20% Private Investments or Alternatives
All investors and their plans are created differently, and every investor should have an allocation that fits their needs. The above allocation is what we call our “base” which primarily is for people looking to grow their assets. The percentages will change depending on where clients are in their lifecycle and plans.
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