2021 Second Quarter Commentary

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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

Year End 2020 Commentary

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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!

Prime Age to Employment Ratio

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Mar 112019

This looks like a really solid recover since the “Great Recession”!

It looks like this employment ratio is back to its 2009 peak, but it still has a way to go to get back to its late 1990s level. To me, it just seems unlikely that wage growth acceleration won’t be coming soon. The real question; will be whether inflation follows shortly thereafter.

GDP Update

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Jan 162019

This chart was part of today’s Wall Street Journal Daily Shot.

Looks like Oxford Economics is expecting at least somewhat of a slow down this year. They also had some information on the potential impact of the government shutdown. However for now, the year over year comparisons will be harder due to the impact of the tax cut impact in 2018

If I recall, they were suggesting that the shutdown might result in around a 0.4 tenths of a percent reduction per quarter.

Lets hope that gets resolved soon.

Hindsight is Wonderful!

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Jan 152019

Who knew at the start of 2018 that the stock market’s ride would be this wild? Although after a very lucrative 2017, it should have been reasonable to expect a change.

The challenge is always to try to determine which way to go – going forward. It turns out that hindsight is not very helpful looking forward. Looking backwards, I would say it was easy to see that a trade war with tariffs and the resulting business disruptions and uncertainty were going to be a problem. But, the timing, magnitude, and duration of the challenges were and actually still are hard to quantify.

If foresight was any good, we may have known when to make some changes, but I’m pretty sure art and fine wine would not have been my alternate investments.

Luxury Goods Outperform as Markets Swoon WSJ 12-31-2018

On the other hand, in spite of its lumps and bumps our democracy and capitalism based economy will almost certainly continue to work going forward. And, although Art and Fine Wine may be perfectly good asset classes, I think I’ll stick with Equity, Fixed Income, and Cash along with some real estate for my investment assets.

Have a Happy New Year!

Quite the Ride

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Jan 152019

The last three months of 2018 would have been a great roller coaster ride. But, maybe not so much fun for investors.

S& P 500 WSJ Chart

Hopefully we are on the up hill climb for now. With a little luck the next slope won’t be near as exciting.

Its been a brutal year

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Dec 262018

It appears that investors have been much more cautious this year when it comes to adding to their investment accounts. This Wall Street Journal chart indicates a pretty significant decline in additions to US mutual and ETF assets this year.

WSJ 12 26 2018

Inflation – Which Way?

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Nov 162018

The October CPI update is out.

For the past year, the consumer price index is up 2.5%.

The Core CPI, which is generally less volatile, was up 2.2%.

US CPI – End of October 2018

So basically, we are about where the Fed wants inflation to be.

The challenge or concern of course will they be able to keep it around it 2% target rate.

With oil dropping significantly the last few weeks, lower gasoline prices should help lower future CPI readings.