1) Overall: Last week was a great one for risk assets. Both stocks and bonds had been oversold from a technical perspective since perhaps the middle of March, but the previous rally attempts consistently collapsed in short order. The rally that began on May 20th, has been supported (as the previous rallies weren’t) by falling treasury bond yields – in this case underpinned by the expectation that interest rate hikes after July’s will be only 25 basis points. The 10 year is now around 2.75%, and as long as it doesn’t move back to the 3% range again, the stock market rally can continue. Of course, the stronger risk assets perform, the better the prospects for increased consumer spending and higher inflation, so falling bond yields cannot support the rally for long. Stock market bulls are hoping for signs of either moderating wage costs and/or improving productivity. This Friday we will get another employment report. I suspect bad news (fewer jobs added or a higher unemployment rate) will be good news (within reason).
2) Bonds: I believe that there is room for a more lasting risk-on rally in the bond market. Municipal bonds and high yield bonds are much more “retail” driven than treasuries and high grade corporates. Individuals panicked out of munis and to a lesser extent high yield corporates this Spring as total returns turned negative to an extent not seen in at least 40 years (probably ever). Interest in these bonds at “bargain” levels has ramped up sharply in recent days, so if one cannot move sooner rather than later, best to let it go. Floating rate has outperformed corporate high yield fairly substantially year to date, but this is a time for the latter to partially catch up. I am more bullish on municipal bonds gaining back lost ground right now than I am on corporate bonds.
3) Stocks: I believe stocks have a chance to rally back near the support levels they broke in March over the next several weeks. Inflation peaked in the late March-mid April period, so economic reports should be friendly from now to at least August in terms of showing inflation falling from 8% down towards 4.5%-5.0%. The problem comes later in the year when progress on inflation seems to stall as the economy responds negatively to restrictive monetary policy. In other words, it will be much harder to get from 5% inflation to 3%, and the very effort itself through tighter monetary policy risks recession. Stagflation is a tough environment for equity prices. I think of the U.S. market as being in a trading range now where the downside is S&P 3600-3700 and the upside is 4800. Breaking below the range indicates something is very wrong and therefore a more defensive strategy is appropriate, while moving above the range suggests the inflation situation has been resolved and a “get long and hold” approach is again the most optimal. I think we will spend the next six months between 3850 and 4450.
4) Investment Approach: I began my investment career in 1986. Inflation was falling sharply due to a plunge in oil prices. Successful money managers had portfolios completely different from what they would have looked like five years earlier. Interest rates were volatile and business cycles were short, so one could and did enhance returns by trading along the business cycle. The skill set and mindset one developed during that era was of absolutely no help to you from 1995 through 2000 and from 2011 through 2020. Whatever short term interest rate volatility one might see during those periods, the big picture was that interest rates were headed lower long term and credit was plentiful, so one should get fully invested in growth assets and keep one’s foot on the gas pedal! I believe that this decade will be more of a hybrid between the 1980s and the 2001-2007 period where U.S. stocks will be at best a “middle-of-the-pack” asset and investors will need to be more active with regard to adding risk when credit conditions improve and scaling back risk when they deteriorate. Moderate growth with next to no inflation, such as we experienced last decade, will not be possible going forward without a significant breakthrough in productivity (technology of some sort), because there is no new “China” that we can import deflation from. In fact, “re-shoring”, which is the trend these days, is in-flationary.
Disclosure
Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).
For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio. No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them. Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.
Market Perspective
The stock market recovery that began on March 15th has stalled out as comments by Fed Governor Lael Brainard on Monday scared investors in terms of the amount of Quantitative Tightening that might occur later this year and into next year. The stock rally had as its narrative underpinning the idea that while the Fed might say they were going to hike rates seven times or more, economic and market weakness would never permit that. Stock investors are uncomfortable with interest rate hikes and the Fed contracting liquidity at the same time. The analog is the fourth quarter of 2018. When the Fed actually began withdrawing liquidity, stocks dropped about 8% (9/20/18 to 10/25/18). The market then rallied for two weeks for the same reasons it has recently – stocks were technically oversold, the economy continued to grow, and though the yield curve had modestly inverted, the timing of weakness was uncertain. A strong-ish unemployment report in early December 2018 confirmed the Fed was right to tighten, and stocks began to fall in earnest. The employment report we received last Friday (4/1/22) confirmed to the Fed that a 50 basis point move at the next meeting (May 4th) was probably warranted. Brainard’s speech was the catalyst for short term interest rates to soar (since she implied that the Fed was going to be rapidly moving from modest purchases of short-term bonds to fairly heavy sales). This is obviously not good news for any security whose valuation depends on lower interest rates, including growth stocks and homebuilders. The concern now, of course, is about a rapid stock sell-off like the one we got in December of 2018 as stocks protested Fed policy. And lest you conclude that the Fed will capitulate this Spring as it did back then, I would point out that reported inflation was around 2% at that time versus upwards of 7% today. The Fed knows it screwed up last time. It won’t want to make that mistake again.
Commodities continue to outperform both stocks and bonds. The War in Ukraine is a major part of this as it has lit a fire, so to speak, under both energy and agricultural prices. The problem is that even before the invasion there were structural issues – underinvestment, transportation snarls, etc. – affecting commodity prices. Commodity-driven inflation is going to moderate, even if the war is swiftly concluded, but it is not going away for the foreseeable future. The energy and materials sectors may be outperformers for a considerable period of time. Note that commodities are up 27% year to date, yet gold is up less than 5% and bitcoin is negative. This suggests that the commodity surge is not about the general level of inflation; it is about demand exceeding supply and supply not being either able or willing to fill that gap.
It’s probably an oversimplification to say that value is winning and growth is losing this year. 2022’s winning sectors tend to have lower price-earnings ratios because they are cyclical (energy, materials, etc.), but not all low P/E stocks are winners (financials and industrials are single-digit down this year). The vast majority of high P/E stocks are losers, especially technology, biotech, financial tech, and consumer discretionary). Cybersecurity is the only high P/E subsector that is beating the market right now, though there are many consumer staples companies like Procter and Gamble that have high P/E ratios and are outperforming.
Most bond managers that I’ve talked to recently expect interest rates to peak, and soon, especially at the long end (10 to 30 years). They believe the economy cannot withstand rates much higher than where they are now for very long, and once it is more broadly felt that the economy is headed for a rough landing (May or June?), long bonds will be an exciting capital gain opportunity. Michael Collins of PGIM said this morning that he expected the 10-year bond to fall back below 1.50% in the next easing cycle. This is regardless of where inflation is (though it should be noted that he expects it to fall back to the 2-3% level). According to Schwab’s Jeffrey Kleintop (as reported by Lyn Alden), only 17% of the yield curve have inverted (there are many, many yield curves). Historically, 50% or more of the yield curves inverting has signified recession.
Disclosure
Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).
For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio. No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them. Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.
Follow-ups and New Thoughts:
• My first investment thought today is that TIPs just became more interesting. TIPs started to fade as investors contemplated 5-7 rate hikes, because coupon bonds would then provide more inflation protection. If we assume that the Russian invasion means high prices on raw materials and fewer rate hike as the global economy slows, the inflation protection TIPs provide is more valuable.
• The dollar, at least in the short run, is going to be strong. Unhedged foreign bonds are just not going to do well right now. There is still going to be a great opportunity to play the falling dollar, but that time is not now.
• One of the first reaction to a chaotic global situation is often to buy gold. I think this would make a lot of sense if I were a euro or yen or EM currency investor, but as a dollar-based investor I am only mildly enthused. A currency flight-to-quality generally doesn’t do much for gold in the country with the highest quality currency. Given Ukraine’s status as a potash producer, I would rather speculate on the agricultural implications of the invasion. Consider buying fertilizer companies
Today’s market action has been buy growth and sell value in the U.S., because long term rates declined sharply overnight and the yield curve flattened. I am very skeptical that this is a good trade for all but the shortest-term investors. In fact, I believe today is a bad day to trade overall. There is a lot of knee jerk activity, and the price of anything you think you might want to buy or sell has probably already moved quite a bit. We came into today with stocks already well off their most recent highs, so there isn’t a lot of “air” underneath prices. Much of the speculative premium has been beaten out of the market (just ask Cathie Wood). Also, the nature of events like invasions where power is asymmetric is that the market impact doesn’t last long.
Disclosure
Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).
For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio. No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them. Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.
Follow-ups and New Thoughts:
Bill Hinch is a 35-year investment veteran who now runs the First Eagle Small Cap Opportunity Fund after a long, successful stint at Royce Funds. I took the following notes from his presentation last Tuesday night:
• Inflation tends to favor smaller companies
• Small and mid-size banks can often times be more accurately characterized as real estate companies
• To win in small caps you need to have nerve, because the best returns occurs as you come out of the worst environments. You not only have to resist the urge to sell during price declines, but you have to have the guts to buy them. Very few people do. Therefore…
• Good small cap managers will underperform in down markets, because they will be the only ones disciplined enough to buy weakness.
• Small cap investors need to get paid a premium for illiquidity and lack of management depth.
• Concentration doesn’t work in small caps. You can get out of a mistake in a large cap with a modest penalty, but having a large position in a small, illiquid stock that blows up will kill you.
• Some of the best opportunities come from investing in companies that are temporarily losing money
• That said, avoid investing in companies that have never earned money.
• Value managers almost never get to invest in a great company with great management; that’s why most managers don’t like that sector.
• In a tough small cap market, there will be no bids. You have to buy companies as if you are never going to sell them, because occasionally you can’t.
As I thought about this afterward, I recalled my education in the securities business back in the 1980s. Studies had just come out that showed that small stocks outperformed large stocks by several percentage points per year over time. These studies also showed that buying stocks with low price-to-book-value ratios was the best way to outperform the market. In the late 1980s and early 1990s, almost everyone invested this way.
As we now know, this was a sure recipe for under-performance. Why? Because those academic studies contained biases the authors didn’t allow for. The so-called small cap effect didn’t take into consideration survivorship bias. In other words, the data collected did not include the many small companies that went out of business in the 1930s and to a lesser extent the 1970s. By only counting the returns of the survivors, they overstated the returns anybody investing at the time would have received because they couldn’t have known which businesses would fail. The value bias stemmed from the fact that detailed investment recordkeeping really didn’t begin until about 1927. Interest rates were quite low then, around 2%. Studies done in the mid-1980s (made possible by big advances in computing power), with inflation around 9% after having risen to more than 14%, favored asset heavy companies because the value of their raw materials, equipment, and property had inflated at very high rates. Growth companies did not do nearly as well because with a double-digit cost of funds, they couldn’t fund losses anywhere near as long as companies can today.
The point of this is that we can’t know what the future will bring, or which of the assumptions that we all have with regard to the markets will prove to be dead wrong in hindsight. That said, investing in areas that have been thirty-year winners – like large cap growth (and U.S. stocks in general) – is more dangerous because it is easy to make the assumption these areas will continue have systematic advantages that the future is sure to reward. I have seen consumer staples and pharmaceuticals command premium multiples in the late 1980s and early 1990s, technology in the mid-to-late 1990s, financial services and real estate in the early 2000s, and energy in 2007 and 2008. Every one of these sectors gave up their premiums when costs, competition, regulation, and/or commodity prices changed the game.
So far, a good year for diversification. The U.S. stock market under-performed Europe, Japan, Asia-ex-Japan, Frontier Markets, and especially Latin America in January. Let’s see if that continues. Commodities were the strongest sector, though gold did not participate in the commodity rally. A lot of things are touted as inflation hedges (even bitcoin lately) that are actually fairly miserable in this regard over short and intermediate time periods.
Disclosure
Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).
For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio. No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them. Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.
Follow-ups and New Thoughts: 1) November Employment Report
The number of jobs created in November (210,000) may have been a disappointment but I believe there are big questions about how that measure accounts for home businesses. Unemployment claims keep falling and the household survey is up over 1.1 million, so that the implication is lots of people are working but not receiving paychecks per se. The upshot is that the evolving narrative of a faster taper has not been negated by the payrolls figure. A faster taper, if it occurs, is most detrimental for high P/E securities. Second tier growth stocks, especially in long dated industries like biotech and fintech where companies are not yet seeing positive cash flow, are faring the worst these days as a result.
2) November CPI
Inflation remained at relatively high levels in November. Core CPI, at 4.9%, is the highest in over 30 years – and, because of the way owners equivalent rent is calculated, might well be understated. Bond yields responded to this information by FALLING! I have to believe that in the days and weeks to come that this move will be reversed; traders might have been braced for even worse numbers.
3) Seasonality
Typically, the stock market does well in November and December. We are usually ramping up out of the September/October economic slowdown and as we approach the new year, analysts start focusing on the next year’s earnings estimates. In the past, positive seasonality has been superseded by negative liquidity developments, as happened in 2000, 2008, 2015, and 2018. We are flirting with that in 2021 too, as the market awaits announcement from the Fed (December 15th) whether the taper timeline will be sped up or not. Again, valuations of growth stocks are sufficiently high such that a negative surprise in this matter would almost certainly be problematic.
4) Biotech on Sale
Perhaps no area of the stock market has done poorer over the last few months than biotechnology. ARK Genomic Revolution is down almost 50% from its early February highs, with the decline accelerating after Labor Day. Clearly the sector got way ahead of itself early in the year as the Covid vaccine showed the promise of mRNA technology and investors believed that many new cures and therapies were on the verge of being revealed. Unfortunately, it hasn’t played out that way. The FDA has so prioritized COVID that other therapies are being ignored for the time being. Investor patience with firms that are currently losing money (as most biotechs do) seems to have run out. Yet it is difficult to believe that this won’t be a leading sector over the next 10-20 years as our understanding of our individual genetic make-ups increases. Buying biotech today looks like the proverbial “catching a falling knife” attempt, but I believe this sector may be a good opportunity for aggressive (but patient) investors.
5) Poor International Stock Performance
We are on the verge of concluding yet another year where the promise of greater returns from outside the U.S. went spectacularly unfulfilled. As of the end of November, the U.S. stock market has edged non-U.S. by a mere 17.3%. Sarcasm intended. Every year it seems like the brightest investment minds note that foreign markets are far cheaper than U.S. markets and thus set to outperform in the year ahead but every year that doesn’t happen. Clearly, other forces are at work. According to Statista, the U.S. represents about 56% of global stock market capitalization. That is actually a higher percentage than 5, 10, 20, and 30 years ago. We have underweighted international stocks from Day 1; our average equity portfolio is about 72% U.S/28% foreign. And yet I still wonder if I shouldn’t have even less overseas exposure until something changes. It doesn’t seem like a country representing about 4.5% of the world’s population should hog the lion’s share of its equity returns year after year, but here we are.
6) Emerging Markets
On the subject of poor international performance, I’m trying to determine whether or not Europe or Emerging Markets are more disappointing. Europe doesn’t grow, while emerging markets grow and then spectacularly collapse, giving all of their investment returns back. Case in point this year is China, which gained 20% from the start of the year to February 17th. From that point, it has surrendered 35%. We can and have reduced our China exposure but the question always comes down to – where do you put it? Some of the fastest growing emerging market countries have stocks that have risen and declined very sharply, such as Argentina’s Mercadolibre and Singapore’s Sea Ltd. India has been on a very strong roll lately, but can that be trusted? One of the odd things about emerging markets is that smaller countries may actually be safer because they tend to stay out of the government’s crosshairs and are less susceptible to the boom-bust of foreign investment.
7) Strength of the US Dollar
In retrospect, a great trade in 2021 would have been to sell all bonds and buy the US dollar ETF (UUP). It has returned 6.35% year to date, surpassing all categories of bonds including TIPs. It yields nothing; one simply receives the difference between the value of the dollar and a basket of foreign currencies. Because the U.S. dollar is the highest quality currency that has at least some yield to it, it continues to attract inflows from foreigners. It is overvalued on a purchasing power parity basis, so when (if) the global economy recovers, you would not want to own it as its long term expected rate of return is the T-bill rate less fund expenses.
8) In FAAMG We Trust
Investors want growth because interest rates are low. Investors want pricing power because inflation is a concern. Investors want quality because tapering will reduce liquidity, meaning companies that need to borrow are more vulnerable. FAAMG (Should it be GAMMA now that Facebook has become Meta?) provides all the things investors want. Plus, one of the fastest growing sectors of the equity market is hedged equity, which is essentially FAAMG with an options overlay. When the tide finally goes out here (and I have no idea when this will happen but it IS inevitable), it may take a decade to work off the overvaluation. Consider the spectacular underperformance of the S&P 500 from 2000 through 2010.
Chart 1: S&P 500 now more concentrated in the 5 largest stocks than ever
Per Morningstar, the S&P 500 was up 23.18 through November versus 5.84% for MSCI EAFE.
Disclosure
Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio. No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them. Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.
Follow-ups and New Thoughts:
So little happened this summer that every time I sat down to write about the concern of the moment, it quickly faded and the market made new highs. I do think the current environment merits some commentary, however:
1) The current stock market high close, 4532, was recorded on September 2nd. From there to the October 4th close of 4286 was a decline of 5.4%. For the S&P 500, the current decline is the largest so far this year. Declines of more than 3% but less than 5% occurred in the 4th week of January, the last two weeks of February, the second week of May, the third week of July, and of course more recently. Dips of slightly less than 3% occurred in March (3rd week) and June (3rd week). Short declines are frequent. They only become a concern when the market cannot rally from the bottom to new highs. One should never react to an initial decline; only get concerned when there is no meaningful buying of the dip and the market rolls over and falls below the previous low. We are below the 50-day moving average, but we also did that in March and June, and in September and October of 2020. I don’t expect that significant selling would begin unless we crossed the 200-day moving average, which is around 4200. We didn’t even touch that level intraday yesterday, October 4th. I believe history is still on the side of “buy the dip”.
2) One of the other indicators I like to monitor is the high yield bond index, especially the CCC-AAA yield spread. Though the spread has widened lately, it is still lower (6.59%) than it was on August 23rd (6.63%). Bonds do not see danger coming. (This spread exploded between February 21st and February 28th, 2020).
3) Switching gears to emerging markets: Sure, emerging markets are oversold. Unfortunately, that has been the case for most of the last 13 years. The simple fact is that emerging markets don’t perform well (in dollar terms) while the dollar is rising. The currency hedged EM ETF (ticker: HEEM) has trounced the EM benchmark since its 2014 launch. The current period of dollar strength suggests that while EM (especially China) might have an oversold bounce in the near term, there will be no major rally unless and until currency stops being such a headwind.
4) China’s private sector crackdown this year might seem bizarre, or at least counter-productive given the growth that their major companies (Tencent, Alibaba, etc.) have brought to China over the past 10 years. A casual observance of the current U.S. Senate hearings on Facebook should start to make Chinese actions a little clearer. The United States has basically said that its government either cannot or will not support its people against a company with harmful technology. China is saying it absolutely will. I am dubious about the wisdom or eventual success of telling people what they are allowed to know or do and how they should live, indeed “pro-social” (as China deems its actions) is obviously in the eye of the beholder. That said, I am sure that the Chinese Communist Party looked at the role of Facebook, Google, Twitter, and other American companies in the spread of lethal misinformation leading to all kinds of social dysfunction and told themselves, “whatever mistakes we might make, we are not letting that happen here.”
5) India’s 3-year return exceeds that of the U.S. George Friedman of Geopolitical Insight points out that there have been 30-40 year cycles in which an emerging market country comes to dominate low cost production for the world until its rapid growth drives its costs to where it could no longer fulfill that role. At that point, it needs to change its economic model toward domestic consumption, which is generally a difficult process. The U.S. from 1890 to 1930, Japan from 1950 to 1990, and China from 1990 to last year embody this. Is it India’s time to step in?
6) Switching to inflation: The 10-year Treasury yield bottomed at 1.17% on August 2nd. Its current surge to 1.53% is not enough to derail the stock market, but it is enough to prompt a modest shift from growth to value. This happens because value stocks are more a play on current earnings and assets whereas growth stocks derive most of their value from future cash flow. The proximate cause of the upturn in rates was an uptick in oil prices and the belief that the Federal Reserve will begin to taper its bond purchases by the end of this year.
7) Inflation is both a measure and a mindset. The market only has a problem when inflation becomes a mindset. In other words, when people change their behavior on the belief that they need to keep up with rising inflation. Surveys done by the NY Fed and the University of Michigan suggest this is happening. Supply chain disruptions happen all the time, so they have to persist for quite a while before people stop dismissing them as being temporary. We appear to be at that point. Wages are rising too, as employees want a bigger slice of the pie and companies know they can pass this cost on to their customers.
8) The final part of the inflation story is commodity prices. Goldman Sachs suggests that the case for cyclical stocks – materials, chemicals, energy, etc. – is becoming a structural because of chronic under-investment in productive capacity. Long bear markets in commodities cause the companies in these sectors to scrap capacity and delay upgrades and repairs. As demand returns, companies are temporarily unable to meet it, driving prices way up. As capacity returns, investors anticipate the next down cycle and they bail out. Most investors avoid these situations because the window to make money is often very short (months, not years). Increasingly, investment houses are calling for this cycle to be protracted because the ability to ramp up capacity is being held back for a variety of reasons. Carefully, I believe that investors should build commodity exposure.
As measured by the S&P 500
The NASDAQ has had declines of 11.5% and 7% in February and May, respectively. Its current decline is 7.8%.
The CCC-AAA spread is a measure of the extra yield bond buyers demand for the risk of holding CCC-rated debt, which has a not insignificant risk of defaulting.
As shared with John Mauldin in his Over My Shoulder report, October 2, 2021
Cyclical means a year or so, structural means 3-5 years or longer.
This is so much harder than growth stock investing, what has become “buy a platform company and take a long nap as it inexorably rises”.
Disclosure
Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio. No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them. Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.
Follow-ups and New Thoughts: 1) On July 7th the 10-year Treasury traded at less than 1.30% for a short time before closing near 1.32%. Some of the factors behind the decline are:
Reduced expectations for 2022 and 2023 growth
Systematic buying by the U.S. Treasury and insurance companies – the former due to the ongoing QE program and the latter practicing asset re-allocation following a period of strong equity returns and weak bond returns.
Capitulating short sellers. Inflation may or may not be transitory, but if you get into a crowded trade and it starts to move against you, it doesn’t matter whether or not you will be proven right in the long term. Another thing to watch is the Federal Reserve meeting on June 16th. This may give us guidance as to whether the Fed has begun real discussions on eventually tapering their bond purchases. Similar talk roiled the stock market back in the fall of 2018.
2) June tested us with a disappointing May jobs report early in the month and then an awkward Fed meeting in the middle of the month, yet it finished on a high note. July has a much more favorable historical win rate. There hasn’t been a major stock market top in July in a very long time.
3) High yield bond yield spreads are the lowest since 2007. Until very recently, lower quality credits outperformed despite Treasury yields falling, but investors should know that they are not being adequately compensated for the risks they are taking. With inflation rising well over 2%, however, that statement could be made about most bonds. If you look to CCC rated bond spreads for a sign of impending economic stress, you will not find it. This is why I believe the decline in bonds yields is not a reflection of investor fears about economic weakness, but rather due to the aforementioned technical factors.
4) Emerging markets as a whole have been among the worst places to invest lately, largely because of the Chinese crackdown on internet firms, but also because of poor responses to COVID and some moderation of commodity prices. That said, Taiwan, India, South Korea, and Brazil are doing quite well. Index performance shows the overwhelming influence of China on the benchmark. It also suggests, given that the Vanguard EM Index ETF is in the 51st percentile YTD and the 62nd percentile on a 10-year basis (per Morningstar), that this area still lends itself to active management. 5) Cryptocurrencies’ price peak coincided exactly with the IPO of Coinbase back on April 14th. Could the coming IPO of Robinhood mark the top for meme stocks? Or perhaps for stocks in general? Just a thought.
6) Municipal bonds have had a great rally on the back of tax increase concerns, but their valuations have reached lofty levels. Anecdotally, many fund managers have turned cautious on that space. Some are even increasing exposure to taxable munis.
7) I think the market consensus is right about the economy slowing but wrong about the extent to which inflation will be “transient”. Many goods prices are volatile and respond to temporary supply disruptions. Markets have been correct over the past 20 years to ignore hurricane-related lumber and energy surges as transitory, so that appears to be the playbook investors are working from. This time, however, we are seeing labor shortages that so far seem to be difficult to remedy simply by temporarily raising wages. Rising costs are being more easily passed on in the prices of goods and services than at any time since the 1980s. Neither stocks nor bonds are priced for an environment of slowing economic growth yet stubbornly above trend price increases. We better hope this stagflation (obviously at a lower level than what we experienced in the late 1970s) does not take hold.
Finally, two charts and related thoughts:
Figure 1: Real S&P Composite: 1871-Present with P/E10 Ratio
Source: Advisor Perspectives
At 170% above the long-term regression line, stock prices are extremely expensive on a historical basis. It can take a long time for valuation peaks to fall back to the trend line, but they always have. None of us know how long we have until a great reversion begins, but any investor with less than a 15-year time horizon really needs to take this into consideration.
The second chart shows how much investors have shoved into equity markets this year so far. As equity exposure as a percentage of one’s investment assets passes the roughly 62% level peak of the late 1960s and again in early 2000, one should consider how confident we should be that we can continue to defy history.
Figure 2: Equity Fund Flows
Source: SentimenTrader.com
Disclosure
Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio. No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them. Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.
Follow-ups and New Thoughts: 1) Everything revolves around interest rates. On June 1st the 10-year treasury rose from 1.58% to 1.61%, and stocks were mixed overall, with growth stocks faring the worst. Last week the 10-year fell from 1.65% to 1.58%, with growth beating value. That tells you all you need to know about what is moving the market on a daily basis. So, what changes this? A surprise in Friday’s Unemployment Report perhaps. Last month’s report was very weak, but many economists thought there were systemic anomalies that would be adjusted on the next report. We shall see. A second consecutive weak number would probably crush the strong recovery narrative, but it might also be what it takes to break the Congressional logjam in favor of a bigger budget plan.
Another thing to watch is the Federal Reserve meeting on June 16th. This may give us guidance as to whether the Fed has begun real discussions on eventually tapering their bond purchases. Similar talk roiled the stock market back in the fall of 2018.
2) June is the market’s worst month since 2000 in terms of average winning percentage. More Junes have finished lower than higher. In the 20th Century, September was the worst month. Not a prediction, just an observation.
3) Today’s closing price of $29.54 was the lowest of the year for the Grayscale Bitcoin Trust. The same cannot be said for other cryptos such as Ethereum, nor can it be said for the stock of Coinbase (the crypto trading platform) or for BLOK, the largest ETF focused on the digital ecosystem. I’m not sure what this means, but I do find it interesting. Maybe it’s a reminder that distributed ledger technology is bigger than one particular cryptocurrency.
4) Environmental wins at oil companies made big news last week. A Dutch court ordered Royal Dutch Shell to sharply cut emissions by 2030. Also, proxy fights at Exxon and Chevron resulted in new directors in the former case and new proposals in the latter case, both aimed at greater climate friendliness. Expect these decisions to result in less drilling in the near future which should translate into higher prices for oil and gas. Energy stocks were terrible investments post 2008 because every uptick in prices was met by a big increase in production as firms sought to capitalize. Oil’s enemies may have finally forced the discipline that these companies could never manage on their own. I believe this is an area you want to over-weight right now.
5) May always brings the annual Strategic Investment Conference, put on by John Mauldin’s organization. The biggest debate revolved around how temporary the current surge in inflation was going to be. There were a lot of anecdotal evidence presented, but no consensus was reached. The biggest wildcard was wages, since most people agreed that in time supply would catch up to demand. Some decried “paying people not to work” while others felt labor’s newfound power was more than a transitory thing.
Liz Ann Sonders was troubled by extreme speculative behavior, saying “This is how market cycles end”.
David Rosenburg was skeptical of the idea of pent-up demand; “We spent like crazy in 2020”.
Two camps. One says economic growth will stall later this year, bringing us back into a deflationary environment where growth outperforms. The other says, yes, growth slows, but inflation does not. The latter scenario results in a modestly stagflationary environment where interest rate in-sensitive (think materials & energy but not utilities & telecoms) value stocks fare best. Both sides agree that a slowing economy later in the year hurts the dollar.
MoneyChimp.com
Disclosure
Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio. No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them. Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.
Follow-ups and New Thoughts: 1) The decline in the 10-year bond yield from 1.74% on March 31st to as low as 1.53% on April 15th has done wonders for growth stocks. Though I don’t believe that the value stock rally is over, it is interesting to note that growth has outperformed value approximately 7% to 3.8% so far this month. Long term bond yields rose way above their upward sloping 50 day moving average in March, indicating that the uptrend had maybe gotten ahead of itself. April’s yield decline took the 10-year right to that average ten days ago, but it has bounced upward in recent days suggesting that the move toward higher rates will continue.
2) As growth stocks have seized leadership back from value stocks this month, so also have large stocks regained the upper hand over small stocks. The S&P 500’s 6% gain has bettered the Russell’s 3.7% gain . I believe you can also attribute this to moderating interest rates and the concern that second half economic growth may not quite be the blow-out everyone expected a month ago. This belief has also been borne out by a 3% dip in the U.S. dollar, erasing more than 75% of the first quarter gain. I do not believe the small cap rally is over either; sometimes a rally just needs to consolidate a bit.
3) Morningstar’s style box invention was revolutionary when it came out because it helped users understand that market capitalization and investment style could have a dramatic impact on performance. From my observations, they could go a step further. I believe that there is a big difference on the growth side between momentum growth, in which one selects for the fastest growing companies regardless of price, and growth-at-a-reasonable-price, where one computes a “PEG” ratio, or P/E to growth, to determine if one is paying too high of a price for future earnings growth. Last year there was tremendous out-performance on the part of momentum-oriented stocks (many of which, like Uber and Twitter, had yet to turn a profit). This year has favored the type of growth funds that own only profitable companies and whose P/E multiples are not unreasonable given current growth rates.
On the value side, one could separate the stocks according to whether they were cyclical value plays, where the attraction is their leverage to earnings recovery as the economy moves from recession to expansion, and defensive, where the stability of the underlying business, its yield and its relatively reasonable price provide something of a cushion when the economy is weakening. Typically, defensives do better throughout the economic cycle until the economy moves out of recession into early expansion. In that one phase, cyclical value outperformance tends to be dramatically better.
I like to have at least one fund/ETF of each type in my portfolios. I may adjust the weighting a little bit depending on where I think we are in the economic cycle.
4) Following on the idea of economic cycle rotation mentioned in the previous section, we may be at a point where cyclical value gives way to defensive. Many deep cyclical companies have seen their prices double or more from last year’s lows. Engineered wood products maker Louisiana Pacific (LPX) has gone from a pre-Covid peak of $33 to a pandemic trough low of less than $15, before rebounding to $69 today. Sometime soon, investors are going to book profits in companies like LPX. If you anticipate where deep cyclical money might be heading, it might be the real estate sector. Real estate has been a little under the radar as investors were concerned for a long time about whether the work at home crowd would ever come back. Even with its recent rally real estate still trades below its early 2020 all-time high .
5) With many of China’s leading firms currently out of the good graces of the ruling government, emerging markets funds have struggled a bit since February. The best EM performance recently has come from the smaller capitalization funds and ETFs. Until the cloud lifts from companies like Tencent and Alibaba, smaller cap ETFs like FEMS and EWX and funds like WAEMX are probably going to continue to perform better.
6) My final point would be this: Seasonally the stock market tends to do less well from May through September. That doesn’t mean it will happen this year, but as I write this the S&P 500 is up about 12% and small caps have done even better. Having already exceeded the usual yearly return, it wouldn’t be surprising to see stocks consolidate a bit over the next few months. If you consider that continued year-over-year gains in inflation are probably going to put more pressure on the Fed, you can see where the liquidity environment for stocks might get a little less favorable. I don’t think this is the time to increase one’s risk exposure.
Disclosure
Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio. No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them. Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.
From April 1 through midday, April 29th, per Y Charts
Source: Y Charts as of midday, April 29th
Follow-ups and New Thoughts: 1) Emerging Markets are still exciting for the long run, but surging interest rates are not helpful for this asset class. Higher yields in the U.S. hurt EM in two ways – they raise the relative attractiveness of U.S. bonds and they raise the cost of financing U.S. dollar denominated debt. So if you are Malaysia, for example, to the extent that you have issued a bond in dollars, you now have to set aside more ringgits for conversion to dollars to pay interest and eventually principal to bondholders, thus your money supply constricts and your economy suffers. The U.S. has a lot of structural problems, but the dollar remains where money flows in a crisis.
2) The 10-year yield going from 92 basis points on December 31 to 109 basis points at the end of January was not upsetting to the market, nor should it have been. On the other hand, the spike to over 150 basis points by February 25th was not expected and not welcome. Moves that sharp – 109bp to 150bp is a 37% increase – are multiple sigma events, so they are outside of the risk tolerance bands of most trading firms. In other words, they may not have been properly hedged. Markets may trade with unusual volatility if one or more funds finds itself with a liquidity problem.
As it stands now, long term bonds are oversold so a little consolidation should be expected. The 10-year is in a range from 1.40% to 1.50%. A sustained move back below 1.40% is bullish for growth stocks and emerging markets. Conversely, a retest and break of the recent 1.53% is bearish for all but commodity and financial services related value stocks if it occurs in the next week or two. If, however, interest rates move up through recent levels on a gradual basis over several months tied to a strengthening global economy, I believe it will not be bearish for 90%+ of the stock market. Markets tend to be able to digest gentle interest rate increases but not rate spikes.
That said, I am more worried about how high bond yields can go in this recover phase, and for how long, than I was a month ago.
3) Blackrock put out an excellent piece recently called “The Queen’s Gambit Declined”. The piece makes reference to the actual Chess strategy that the recent Netflix series was taken from. The strategy known as the Queen’s Gambit involves sacrificing a pawn to gain initiative and control of the center of the chessboard. Blackrock’s analogy involves underweighting bonds for cash. You forego the yield of bonds (not that much anyway) but you retain the optionality of cash – in other words the ability to deploy it easily wherever opportunities might arise. We are very willing at this point to hold lower than usual bond positions and higher than normal cash in portfolios.
4) In the technology space, the biggest winners over the past 11 months tended to be the biggest losers last week. Growth stocks in general have struggled over the last three months RELATIVE to value stocks because the former are more interest rate sensitive. Growth seems to do well only on those days where interest rates fall. This raises an interesting portfolio management conundrum. Bonds are often held as “ballast”, or that which helps a portfolio to not decline as much if equities have a rough time. Yet over the past several months growth stocks have had a high correlation with bond prices. I would argue that the ballast argument has become almost completely unsupportable for growth stocks. Value stocks, which are more economically sensitive, still often gain on modestly weak bond days. I believe this is (another) good argument for lightening up on interest sensitivity in bond portfolios, either by shortening bond duration or marginally reducing exposure to bonds in favor of other asset classes. Today, what protects your portfolio from momentum stock losses is not Treasury bonds but deep value stocks.
5) The recent SPAC (special purpose acquisition company) boom is interesting. Not for the obvious reason that many of these are blank check companies with high fees and no operations to analyze, but because they are helping to reverse a two-decade trend of share shrinkage which many believe has helped fuel the bull market. In other words, mergers and buybacks reduced both the number of companies and number of shares outstanding, which pushed stocks upward from a supply-and-demand standpoint (those monthly dollar cost averaging payments have to go somewhere). Now, however, buybacks have slowed post-Covid while new entrants to the market (SPAC or traditional IPOs) have been very strong over the past year.
All of this is in a way can be read as: God help us all when the Federal Reserve stops (or is forced to stop) pumping liquidity into the economy. I don’t expect this to happen soon and in fact 2021 could very easily see a melt-up as overly accommodative monetary policy and a strong post-Covid economic recovery converge. I’m just saying that valuations are in the 100% percentile historically NOW1, so that if we lose our minds 1999 style and the Fed is forced by inflation to try to deflate the liquidity balloon with the S&P at 5000 or more (as they had to in early 2000 with the NASDAQ over 5000) a similar debacle could ensue.
Meaning that the offering merely lists who is going to operate the entity and what they hope to do with your money, as opposed to those offerings that fund a specific company and give you financial information on that company.
Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio. No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them. Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.
