Don Wettstein

2021 Second Quarter Commentary

 Economy, General Interest, Retirement Planning  Comments Off on 2021 Second Quarter Commentary
Jul 192021
 



It’s hard to believe but we’re halfway through 2021 already!


We’ve made it through fireworks, flash floods, hot weather, and whatever else has come our way over the last few months.

It appears that COCID vaccines can control the worst impacts of the virus. For many, the Fourth of July Weekend was a return to some much-needed normalcy.


The S&P 500 was up 14.4% in the first half of 2021, which I understand to be one of its strongest first halves.


Although there may be valid concerns about the pace of the stock markets climb, corporate earnings have been on a similar pace, which makes the current valuations sustainable, at least for now.


But not to worry, the market has found plenty of things to put on its worry list:

Inflation – The CPI is up much more than we’re used to on a year over year basis. But is this transitory, due to supply chain issues or other short-term factors? For now, the smart money seems to be suggesting it will be around 3% or so for the rest of 2021 then work back towards 2% next year.

Interest Rates – They’ve had a relatively large upward move since the beginning of the year but have slipped in the last few weeks. As an example, using the ten-year US Treasury Note, it’s yield started the year just under 1%, got as high as about 1.75%, and now its trading around 1.3%. {I know – on an absolute the basis this doesn’t amount to much, but on a relative basis, these are big moves}

Fed Policy – Another factor is when will the Fed end its current bond buying program. For the most part, the market wants it to be later, but there could be pressure for sooner if inflation doesn’t settle down.

Employment – Right now employees have the upper hand as employers are scrambling to re-staff their businesses. It is my understanding that employees are feeling so empowered that the “quit-rate” is at a
2nd Quarter 2021 remarkably elevated level. The availability of childcare is another factor that may be an ongoing issue at least until school begins again this fall and the pressure on day care eases.

International Pandemic Situation – The ‘Delta Variant” seems to be impacting both developed and developing countries especially those that have had limited success vaccinating their citizens.

China – This is a two-sided coin. It is well on its way towards its economic recovery, which is good for trade. But on the other hand, they continue to fully exploit their use of central planning to challenge capitalism.

Russia – I don’t know if their government is directly involved in the current rash of cyber-attacks, but this is something that has to be contained.


So, situation normal, lots of challenges mean lots of opportunities. But, is the current economic path transitory or sustainable?


I expect “things’ will be fine in the second half of 2021, maybe not as good as the first half, but fine, nonetheless.


❖ The current vaccines will most likely minimize the devastating impacts [hospitalizations, death] of the new variants with widespread adoption.

❖ As we get closer to school opening this Fall, the vaccination level will increase.


❖ Inflation will continue to moderate. It may be slightly higher than we’ve been accustomed to but nothing like the 1970’s.


❖ Interest rates will remain at historically low rates and will therefore remain stimulative for the economy.


❖ The employee / employer dynamic will most likely swing back to the employer sooner rather than later.


❖ I think we will get smarter regarding our issues with China and Russia.

Here’s hoping for a solid second half!

July 9, 2021

Apr 192021
 

April 10, 2021

Whew! March 2020 seems like a lifetime ago! We had just started on this COVID induced adventure. It’s turned out to be a series of personal, political, economic, and medical twists and turns. Hopefully, we’re getting a handle on the pandemic and can look forward to a more stable (normal) time period.

We had the deepest and quickest economic contraction at least since World War II. Now it appears we may post the best economic growth spurt in my lifetime. Of course, this will not be a straight line, but the promise is certainly there to make such a prediction.

Here’s a T-Chart with some of the pluses and minuses:

The current pace of COVID-19 vaccinations is providing significant support for the economy.Vaccine hesitancy and the COVID-19 variants risk stalling or at least slowing businesses reopening and leisure travel.
The labor market has made some steps toward recovery with almost 1 million jobs added last month.However, there are still about 8.4 million less people employed than a year ago.
The Federal Reserve Bank has effectively gone all in to keep the economy in recovery mode.Its balance sheet has increased substantially. How will that impact the economy longer term?
Interest rates will remain at extremely low levels supporting economic activity and asset values of all kinds.Someday, interest rates and asset values will return to a more typical relationship. Will this be a smooth adjustment?
In the short term, inflation is going to be higher than we’ve been used to. For now, this transient inflation is related to pandemic related supply disruptions.However, if it’s permanent due to monetary and fiscal policy actions, inflation will add another layer of complexity to the recovery.
The various stimulus/economic support payments have had a very positive impact on the overall economy.What happens as these payments come to an end?

For equity investors, the past twelve months turned out to be a ‘rainbow’ year. I don’t think anyone would have predicted the kind of equity returns we’ve seen, at least so quickly. On the other hand, you do have to remember how bad March 2020 actually was!

I believe I said last year not to get overly concerned about one month’s investment returns. This year, I would make the same comment – do not expect the recent returns to be a “new” normal.

As a reminder, Vanguard’s most recent outlook suggests US Equity returns of 3% to 5% going forward and bond returns to be in the 0.8% to 1.8% range. They also suggest the median volatility for US Equities to be around 16.9%. In essence, that means the stock market return could range from +21.9% to -11.9%. This could be a pretty wild ride.

Last summer, the prognosticators were giving us an alphabet soup of options for an economic recovery. At this point, I’m sticking with the K-shaped version. The people who could work from home are most likely on the upper leg of the K. On the other hand, if you lost your job and/or had COVID related challenges, you are most likely on the lower leg of the K.

For the remainder of 2021, the big factor will be the evolution of the coronavirus. When will the vaccine and other measures get the pandemic behind us?

Of course, as we deal with the pandemic, we still have our ‘normal’ economic concerns to deal with. It appears we’re on the edge of a long-term transition regarding energy. It will also be interesting to see if this tentative move from Reaganomics, pushed by the pandemic, is a longer-term phenomenon or transitory.

I see some suggesting that we are entering a Goldilocks stage of economic growth. This seems to me to be what the market wants to expect – low interest rates, economic stimulus, etc. will lead to a very robust recovery without long term inflation.

In the end, je ne sais quoi. But, what will be will be!

SPRING!

Year End 2020 Commentary

 Retirement Planning  Comments Off on Year End 2020 Commentary
Jan 162021
 

January 14, 2021

No matter how you look at 2020, it was a remarkable year!

As high as my hopes for 2021 may have been, two weeks of ice to start the month, among other things, have at least somewhat dampened my enthusiasm for the new year.

A lot will be said about 2020, but sticking to an investment review, it was actually an incredibly good year. Without paying attention to the disconcerting details, both fixed income and equity investors should be very pleased.

The stock market indexes ended the year at record highs. For the year, the S&P 500 had an excellent total return of 18.4%, while the Russell 3000 Growth Index turned in a stunning 38% total return. Even the MSCI World Index’s total return approached 16%. Given the debacle earlier in the year, these returns are even more remarkable. I’m not sure I can fully explain all of this, but the fiscal and monetary actions that were put in place to deal with the pandemic were major contributors to the US stock market’s performance. For international stocks, currency changes would have to be a significant factor as well.

Fixed income investors should also be quite pleased. The 2020 total return for the Bloomberg Barclays US Aggregate Bond Index was 7.5%, and for their US 5-10 Year Government/Credit Bond Index, it was even better at 9.7%. Of course, looking forward this needs to be tempered by the recognition that these returns were the result of the pandemic induced collapse of interest rates.

The market’s very strong finish to 2020 is based on the expectation of a quick recovery from the economic impacts of the pandemic during 2021.

Of course, the real question is what will 2021 bring for investors? The best answer I can reasonably give is – I don’t know. But why stop there? Here are some of my general thoughts.

  • It seems likely that an effective vaccination program will be in place soon.
  • Federal Reserve policy is likely to be accommodative until employment and inflation force it to change course.
  • Interest Rates are low and are going to be low for some time – maybe years rather than months.
    • Monitoring the shape of the yield curve may be a good idea.
  • Equity values have become much more volatile in the last few years.
    • This roller coaster ride will likely continue for some time.
    • At the very least prices are ahead of earnings! Earnings will improve, but will it be enough to sustain current price levels.
    • Historic risk measures will continue to suggest higher levels of potential volatility than we saw during the last decade.
  • Fixed income assets will still help stabilize an investment portfolio’s value.
    • But with the current low interest rate environment, bonds will not provide much current income and may have periods of negative total investment returns.
  • Ignoring potential inflationary impacts may be problematic.
    • With current inflation rates of under 2% and interest rates under 1%, purchasing power will steadily decline over time.
    • There is also the possibility that inflation accelerates, fueled by the current monetary and fiscal stimulus. Whether this is a real concern or not, I’ve suggested it as a possibility for some time. Why stop now. [Stopped clocks are right twice a day, and calendars repeat at most every 28 years.]

So, what to do? I listened to a speaker for my continuing education requirements earlier today who basically laid out the same case about the coming year in his response.

  • Short term predictions are awfully hard.
  • Long term forecasts aren’t easy, but more likely to hold up.
  • Therefore, following an investment plan you’re comfortable with and sticking with it, is probably the better course.

I know from the allocation models I built 20 years ago there are times when it seems like making a change is the only thing to do. I have made changes in the underlying investments, but the basic asset allocations have not changed. Since I’ve been following the same four allocation models it still surprises me when I see how similar the returns are over time.

So, is this time different? Maybe. But historically, the answer has generally been no. Find an asset allocation you’re comfortable with. Be slow to make changes, unless they are based on changes in your circumstances – not the markets.

Finally, I would be remiss to not mention the political environment. Clearly this is a significant moment for our democratic republic. However, I – maybe naively – believe the country will work through this and move forward

Here’s hoping for a successful and a little calmer 2021!

From today’s WSJ:

 Economy, General Interest  Comments Off on From today’s WSJ:
Apr 202020
 

Prescient or Pollyannaish? Explaining the market’s rally.

Blue chips rallied 2.2% last week despite a parade of grim news such as soaring claims for unemployment insurance and plummeting retail and industrial activity.

Is the stock market telling us something? Could it be fulfilling its role of predicting the future of the economy? Maybe its lulling into a false sense of hope for an economic recovery? Perhaps it is confused and as uncertain about the future as the rest of us!

I believe “To be or not to be” is from one of Shakespeare’s plays. The question today is “prescient or Pollyannaish”?

Not only do we want to know what the new normal is going to be, but as importantly – when?

Wishful Thinking?

 Economy, General Interest  Comments Off on Wishful Thinking?
Apr 142020
 

As ugly as this chart is, I can only hope its at least about right!

I’m confident of a recovery, but this looks a lot more optimistic than seems likely. Although the first stage of the recovery may be pretty strong, I think the remainder will be much more gradual.

Of course, the caveat to any of this is that it is dependent on the health care issues stabilizing. It would appear that amy be the case for some parts of the United States, others may have a long way to go.

So far, the, known, impact has primarily been in developed countries, many of which struggled with managing the health care issues. What happens when it takes hold in the less developed countries, who at best have limited health care abilities?

Let’s hope for the best, but we now know the worst case is possible.

Unemployment – Wow!

 Economy, General Interest  Comments Off on Unemployment – Wow!
Apr 132020
 

The rate of change and disruption caused by COVID-19 is stunning by almost any measure.

The first chart shows the extra-ordinary magnitude of the individuals filing for unemployment insurance the last three weeks.

Whether Google searches are a good leading indicator or not, I don’t know. But, at least for now let’s hope that it can be in this instance. This chart would suggest that number of claims filed may have peaked or will at least start a downward trend.

We will find a ‘new normal’ let’s hope its soon!

The big known, unknown – when!

 Economy, General Interest  Comments Off on The big known, unknown – when!
Apr 062020
 

This is from the NYT – Morning Briefing. I believe the Q&A is with Ron Lieber.

Will the U.S. economy bounce back to where it was before, or do you expect lasting changes?
If we continue to believe that capitalism and market economics are the right way to structure our country, then there probably ought to be at least some way our economic activity will revert to some level of normalcy. I would not believe anybody who is trying to predict when that will be.
You’ve written in the past couple of months that despite the tumult in the stock market, most people should pretty much sit still. Is that still the case?
All the best economic science tells us that if — and it’s a big “if” — you’re willing to stay invested in stock for decades and decades, if you just sit still more or less, keep putting money in at regular intervals, and sell some stock when stock prices get too high and buy some stock when the prices fall, you will do better and earn more than most professional brokers.
Now, that’s a science-based answer — it’s not quite a behavioral-science-based answer. I recognize that there are people who have never been psychologically tested in this way.

It would seem the bottom line answer is if you have faith in our market economy and democracy, things will eventually return to ‘normal’.

Right now, we may not know what ‘normal’ will look like, but we will get there.

The bigger challenge will be when and that is the big known, unknown.

Standard Deviation, Variability and You

 General Interest  Comments Off on Standard Deviation, Variability and You
Apr 012020
 

The following chart visually shows the variability of S&P 500 since Janaury 2019. Cleary the ‘market’ has been quite volatile in the last few weeks. We’ve has extreme up days and extreme down days. Unfortunately, way too many of the downs rather than ups.

I have used Standard Deviation information as a proxy for Variance for quite some time. Today I took the time to check out a YouTube video to refresh my understand of definition of arithmetic mean, variance, and standard deviation. Check it out if you are interested.

Without getting too deep in the weeds on the details, I’ve used the three arithmetic mean compared to the standard deviation for that data set as a short hand proxy for variability. In essence, one standard deviation gives an indication of what the historical results were approximately two thirds of the time. The closer this number is to the historical mean, the closer I think you could expect the future mean to be to the historical mean.

For reference, two standard deviations provides an indication of the range for the historical mean 95% of the time. Clearly the volatility in the stock market is resulting in return variance significantly beyond what we have experienced in recent time periods.

That about sums up my knowledge and capabilities with statistics. However I’m sure you have seen the chart for unemployment insurance claims that came out last week. Somewhere I saw that the weekly number was 12 standard deviations from the expected variation based on the entire history of that data set.

Clearly these are uncharted times!

Trading Activity and Spreads

 Economy, General Interest  Comments Off on Trading Activity and Spreads
Mar 272020
 

From the Wall Street Journal Today

Traders make money when the market moves. All they have to do is be on the right side of the market. Its like leverage, when you are on the correct side of the fulcrum you can make a bunch of money. On the other hand, if you if you are on the wrong side, it gets bad very, very quickly!

Certainly we have had plenty of activity and very big changes. The result has been the wide bid-ask spreads per the following chart.

High-Frequency Traders Feast on Volatile Market By Scott Patterson and Alexander Osipovich
Fast-trading investors have made big profits during the market’s volatility, with strategies ranging from sophisticated computer algorithms to ones as simple as “selling the rips and buying the dips.” High-frequency traders, which typically deploy sophisticated algorithms and powerful computers to move in and out of markets at lightning speeds, tend to do well when markets are volatile. Virtu Financial, one of the largest high-speed traders, last week said it expects to post trading income of between $509 million and $519 million in the first quarter, more than double the amount from the same period last year and its highest quarterly trading income since the company went public in 2015. Virtu’s results are “a quarter for the record books,” Piper Sandler analyst Richard Repetto wrote in a note. Virtu’s stock is up 42% this year while the S&P 500 is down 19%. The only other publicly traded high-speed trading firm, Amsterdam-based Flow Traders, is up 22% year to date. High-frequency firms have struggled in recent years amid a period of low volatility and steadily rising markets. Still, they are estimated to account for around half the trading volume of the U.S. stock market, having largely replaced the floor traders who once controlled exchanges’ ebb and flow. Virtu is a designated market maker for the New York Stock Exchange. Like market makers, high-speed traders often make money on the difference between buy and sell orders, known as the spread, by selling high and buying low as stocks tick up and down. Spreads in heavily traded stocks, such as Apple, which are typically 1 or 2 cents, have ballooned to 30 cents or more in recent weeks because of the highly volatile, fast-moving markets. While wide spreads indicate riskier market conditions, firms that can exploit the difference can earn sizable profits. Some plain-vanilla rapid-trading strategies are also faring well, traders said. “Our traders are having some of their best months in years,” said Dennis Dick, a trader at Bright Trading, a Las Vegas broker dealer that provides computer-driven trading platforms for day traders. He said one of the strategies that has worked best is “selling the rips and buying the dips”—selling stocks after big moves higher and buying after sharp downturns

Recovery – When, How

 Economy, General Interest  Comments Off on Recovery – When, How
Mar 252020
 

I remain convinced the coronavirus’s health and humanity issues will need to be under control before an economic recovery can even be fully contemplated. Quite frankly, I’m not certain we have reached that point yet.

Nonetheless, we do need to be making plans to increase the likelihood of a strong economic recover now! It appears Congress and the White House have agreed to a strong economic package that along with the Fed’s very aggressive actions should go a long way towards addressing the economic impact of COVID-19.

The stock market has a fairly well deserved reputation for being a predictor of the economic well-being of the economy. Although it was not very far in advance of the potential impact of COVID-19, this chart makes it very clear that it very quickly realized it was going to be very big and very bad!

At this point, all I can offer is hope that the market is comfortable with the situation and has found a bottom. Give me a couple of months, I’ll be able to give you a more confident answer.

The next question / concern is the shape of the recovery for the economy and the stock market. This chart from Danske Bank [I don’t know who that is] would suggest a very sharp decline in GDP followed by a very sharp increase and recovery. At this point, I would say I’m positive they’re right about the decline.

However, for the shape of the recovery, I’m not so sure. Some of the commentary I’ve seen suggests it is certainly possible to have a sharp recovery as personal consumption resumes. I’m pretty confident we will makeup some of the purchases that were delayed. I also believe we will soon go back to our favorite restaurant, but are we likely to order two meals to make up for the one we missed?

I certainly hope this very “V” shaped recovery is the probable outcome. But, the stock market will likely be our early predictor of what the data will ultimately tell us.

Time will tell the story. In the meantime, stay safe and stay well!