The summer feels like it has kicked off. A spell of decent weather and the pubs and restaurants opening has contributed to a festival atmosphere, at least round where we live. It’s great to be catching up more with friends and family even if my social skills have got a bit rusty. The stock market seems to be rocking to a more languid vibe. Volatility seems to have come down again since the ups and downs of the first quarter. My portfolio has been idly shuffling backwards and forwards. The main challenge at the moment is to restrain myself from making unnecessary trades driven by boredom and post-pandemic mania. I’m rather struggling with this challenge and have quite a few trades to update on from the last month or so.

There continue to be signs of inflation. Many businesses seem to be reporting on increasing costs and difficulty in finding workers. The US consumer price index for May is likely to register almost 5% growth year on year. This measure is distorted by ‘base effects’ (ie the fact that the year of year comparison is to a period last year when prices were abnormally falling due to the Covid restrictions). This makes it difficult to tell to what extent the current inflation is transitory. To some extent it must be. However, there is still a concern that the current inflationary imbalance between excessive demand, caused by expansionary fiscal policy, and insufficient supply, caused by continued supply chain disruption and the lack of incentive for people to return to work is going to have a more lasting effect. It’s possible that bottlenecks in supply chains and the labour market will dissipate as everything goes back to normal but I’m not wholly convinced that is going to happen quickly. My main concern is that the Fed may not do enough to signal a credible stance on controlling inflation until it more drastic action is required.

While there is clearly a risk here, it is unclear precisely how likely and severe it is and how the stock market would respond. I don’t think any particularly bad outcomes seem very likely at this point to be honest but they are possible. It is somewhat reassuring that the market now seems very alive to the risk of inflation. It has been written about widely and there has already been a major shift away from growth to value over the last few months apparently largely as a result. Cyclical sectors are now leading the stock market while some of the ‘froth’ in highly valued growth stocks has evaporated. While there are still some speculative bubbles playing out in cryptos and meme stocks, like AMC, overall valuations do not seem demanding and the tech giants in particular seem notably cheap.

This leaves me still feeling cautious about the prospects for stocks in quality businesses but not quite as bearish as I have been. There is probably more weakness in store for growth in the short term but I’m encouraged that the overall market is holding up fairly well. I’m starting to lean back towards my default optimistic bias. It still seems sensible to retain much of the diversification I introduced in March, but I’m more open to returning to my traditional approach of selecting new investments based on momentum and/or (re)investing in some of the growth shares that have sold off where I have higher long term conviction.

I have a couple of trades to update on from May.

I sold out of Monster Beverage and replaced it with Etsy. I decided to sell Monster for an [x]% profit following its results in early May where it warned about rising input costs in sourcing aluminium cans. I don’t think this is a long term concern and the business is generally doing well but I think there is a risk that in the short term these supply chain issues get worse before they get better. Etsy’s last results seemed strong to me even though the market wasn’t so impressed with the forward guidance. This seems a little short-sighted. I have high conviction in Etsy and the valuation seems quite reasonable all things considered. I’m happy (and fortunate) to have bought back at a considerably cheaper price than I sold it at two months prior.

I made one additional breakout trade selling Tracsis and replacing it with Impax Asset Management. Impax was another investment I made a decent return on last year but in hindsight sold prematurely, missing out on a further price rise. Judging from Impax’s latest results I think I have underestimated the scope for it to continue to attract strong fund inflows for an extended period of time. The reward to risk from investing again as a momentum trade looks promising and I intend to sell out quickly if momentum reverses. I didn’t have a very strong rationale for selling Tracsis other than it seemed like the weakest link in my portfolio at the time and I’d already clocked up a decent return from the investment in a relatively short period of time.