Portfolio Management Archives | Page 17 of 22

Positive momentum, economic expansion and rising business confidence

The markets continue to climb, lifted by positive economic data, such as manufacturing, homebuilding and increased employment. As vaccines become more widespread and the public begins to venture out, businesses will continue to reopen, and their capacity will expand. All signs point toward a strong GDP in 2021 as fiscal and monetary stimuli pump an unprecedented amount of liquidity into the economy.

The improving business confidence may translate into strong capital goods shipments as well, and hiring is picking up, as seen by the March job numbers. Restaurants will continue to add capacity, as will the airline and hospitality industries. Positive momentum for the global economy widens the range of outcomes for how strong our GDP may be in 2021.

Earnings, interest rates and inflation are three ingredients that will help determine the trajectory of stock prices over the next several years. Earnings expectations continue to remain a bright spot for the stock market. The expectations for 2021 earnings on the S&P 500 are 26% higher than in 2020; these estimates continue to rise, and projections may move even higher. The Fed has made it clear that interest rates will remain low through 2022, even though the 10-year and 30-year Treasury rates may continue to move higher. Stocks have been relatively unfazed with the rise in the 10-year Treasury bond.

The first quarter in the stock market did see sector rotation taking place, as seen in the chart below. Large-cap growth stocks finished the quarter basically flat, while value stocks outperformed. The sectors that have been leading the last few years, such as information technology and consumer discretionary, lagged in the first quarter, while energy and financials were strong performers. One could argue that these sectors were due for a break after the tremendous run the last two years, but rising rates also were a factor.

It is natural to be apprehensive about the market, given the current levels. Skepticism and caution can lead to focusing on near-term issues, instead of concentrating on the endgame. Economic expansions since World War II have lasted 26 quarters on average, with the shortest expansion being 11 quarters and the longest 48 quarters. The current cycle is only five quarters old. During expansions, markets may take a breather and have a correction, but keeping an eye on the long term remains the best approach.

Given the difficulty of timing the market, the most realistic strategy for a majority of investors is to invest and stay invested over time. Procrastination, or not investing, is worse than bad timing. We continue to view more risk being out of the market than in the market. Riding out future market volatility, in addition to having a diversified portfolio, means staying the course. From an investment perspective, we use trends to help with the strategic and tactical asset allocation and where we see the portfolio heading over the next 5-7 years with short-term adjustments along the way.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. With regards to investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Factset, Smith Asset Management

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with CD Wealth Management. Investor Disclosures: https://bit.ly/KF-Disclosures

What’s the cost of missing the market’s best days?

Timing the market is extremely difficult – even during the best of times and for the top traders on Wall Street. A recent study by Bank of America shows that if an investor missed the S&P 500’s 10 best days each decade going back to 1930, the total return for the entire 80+ years would be 28%. On the other hand, if that same person had stayed invested, the total return would have been 17,715%!

A chart showing investment returns since 1930 and the impact of missing the market's best and worst days each decade.

When stock markets have a sell-off, the natural impulse for many investors is to hit the sell button. However, the best market days, in regard to performance, often follow the biggest drops. If you follow your impulse to sell, your returns could end up closer to 28% over 80 years versus the much larger return from staying invested through both good and bad days.

As the chart below shows, April has historically been one of the best months for the stock market since 1964. The average monthly return has been 1.7%, and the market has been positive almost 75% of the time. More importantly, every month except for September has had positive return more than 50% of the time over the last 56 years.

Chart showing average monthly returns for the S&P 500 from 1964 to 2020.

So, what can we learn from all this? Markets go up and down over time. The key is to stay invested and stick with the financial plan. Market downturns present opportunities to purchase stocks that were previously viewed as overvalued. In a down market, you are “buying low,” one of the fundamental tenets of investing.

Given the difficulty of timing the market, the most realistic strategy for a majority of investors is to invest and stay invested over time. Procrastination, or not investing, is worse than bad timing. We continue to view more risk being out of the market than in the market. Riding out future market volatility, in addition to having a diversified portfolio, means staying the course. From an investment perspective, we use trends to help with the strategic and tactical asset allocation and where we see the portfolio heading over the next 5-7 years with short-term adjustments along the way.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. With regards to investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: CNBC, Topdowncharts

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

4 takeaways for investors as the bull market turns 1

It has been a year since a historic health crisis swept the world, and we remain truly thankful for the healthcare professionals who have continually risked their lives to care for the rest of us. We also mourn the more than 500,000 lives lost in the U.S. — and the 2.75 million deaths worldwide.

While we are glad to be on the path toward reopening venues and working toward a sense of normalcy, we also are aware that this week marks the anniversary of the S&P 500 reaching its bottom. On March 23, 2020, it had experienced a 30% decline in only 22 days, the biggest decline on record in such a short period of time.

Among our investment takeaways:

1. Stay invested and diversified. The market sell-off in February and March saw investments in both stocks and bonds tumble by double digits. However, as we discuss in every weekly letter, staying the course proved to be the prudent course of action. Since its low point in March 2020, the S&P 500 has risen more than 65%. Investors who sold their holdings in the midst of the decline and stayed on the sidelines missed the recovery and the upside gains, potentially altering their long-term financial plans in a negative way. Historically, strong bull markets usually follow big bear market declines, with gains carrying into a second year.

2. Look for opportunities along the way. Not only is it critical to stay the course, but it also is important to be both strategic and tactical with investment allocations. Last year, the world experienced a technological advancement due to the pandemic, and a group of stay-at-home stocks in the technology and healthcare sector performed very well. Technological and macro-economic trends accelerated due to COVID-19, presenting long-term investment opportunities. When the vaccines were announced in November and the world anticipated the reopening of the economy, small-cap stocks became more attractive, along with service and hospitality stocks. This doesn’t mean that technology and healthcare stocks are less favorable, but we continue to invest where we believe the market is moving, not where it currently sits.

3. There is a movement toward sustainable investing, such as worker health and safety, climate change and fossil fuel reductions — and not just with younger investors. More and more companies will focus on ESG (environmental, social and governance) as part of their corporate operations.

4. Tax Loss Harvesting. When markets experience large declines, selling current holdings and capturing realized losses will help offset future taxable gains. This does not mean investors should sell and get out of the market. Instead, swap one holding for a similar holding to maintain market exposure, and create a taxable loss. Then, in the future, when you sell the holding for a hopeful gain, you have a realized loss that may reduce the amount of tax that you owe on the gain. This is prudent investment strategy.

We are not trying to time the market. We continue to view more risk being out of the market than in the market. Riding out future market volatility in addition to having a diversified portfolio means staying the course. From an investment perspective, we use trends to help with the strategic and tactical asset allocation and where we see the portfolio heading over the next 5-7 years with short-term adjustments along the way.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. With regards to investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals – regardless of market volatility. Long-term fundamentals are what matter.

Sources: CNBC, LPL

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

What portfolio changes are we making as the first quarter ends?

As we near the end of the first quarter of 2021, we’d like to review where we’ve been and let you know where we are headed with the portfolio. The year started the same way 2020 ended: with the stock market continuing its upward momentum, led by large-cap stocks — specifically, technology companies. Then Bitcoin caught the public’s attention, as did GameStop mania. The 10-year Treasury has increased from 0.9% to 1.6%, and the NASDAQ experienced a correction, albeit a very brief one.

We are in the process of reallocating and rebalancing the portfolios to account for the economic recovery and the economic lifecycle of the U.S. and the world. We are making the following changes:

1. After increasing our technology position in 2020 to align the portfolio with the technological boom that resulted from the pandemic, we are reducing our exposure in technology to a market-weight level. Looking at the long term, we continue to believe strongly in the technology sector and will continue to have a strong weighting. As more people have access to the vaccine, however, the economy continues to reopen and broaden. Travel is increasing, people are eating out more, and stocks that were out of favor last year are becoming more relevant this year.

2. International equities remain less expensive on a price-to-earnings multiple basis, compared to the U.S. stock market, and we are adding to our current position. We believe that small- and mid-cap stocks will benefit from the economic reopening, and we are increasing our current allocation. At the same time, we are increasing our allocation to higher dividend-yielding companies that have a broad exposure to the overall economy in sectors like financials, energy and industrials.

3. From a fixed-income perspective, we are reducing our current weighting in high-quality corporate bonds and adding a strategic income fund that provides diversification to different asset classes within fixed income. As interest rates rise, certain fixed-income segments invest in bonds that rise with higher rates and provide increased flexibility within the portfolio.

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought-out, looking at where the economy is heading. We are not guessing or timing the market. We are anticipating and moving to those areas of strength in the economy and in the stock market.

We strategically have new cash on the sidelines and buy in for those clients on down days or dips in the market – like one does in a 401K every other week. We speak with our clients regularly about staying the course and not listening to the economic noise.

In the short term, the outlook for the global economy continues to improve – specifically, with the recent passage of a $1.9 trillion stimulus package and millions receiving their vaccinations. The Federal Reserve has stated on many occasions that it plans to allow mild inflation to increase and reach above 2% for the foreseeable future — and it is unlikely to raise short-term interest rates in the near future.

So, what can we learn from all this? From an investment perspective, we use these trends to help with the strategic and tactical asset allocation and where we see the portfolio heading over the next 5-7 years, with short-term adjustments along the way. We are not trying to time the market. We continue to view more risk being out of the market than in the market. Riding out future market volatility in addition to having a diversified portfolio means staying the course.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. With regards to investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals – regardless of market volatility. Long-term fundamentals are what matter.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

A closer look at the NASDAQ market correction

The stock market is worried that longer-term interest rates will continue their upward trend and that the Federal Reserve may not be able to control it. Technology stocks are in a correction. The NASDAQ is more than 10% down from its recent historic high three weeks ago. Many large-cap technology names, like the fabled FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) are down even more. These same technology stocks led us out of the depths of the pandemic, so some pullback is to be expected.

Why do growth stocks tend to sell off with rising interest rates? The method Wall Street uses to value stocks is to discount future cash flows to what they may be worth in today’s dollars. Stocks are valued based on how much cash they can generate in the future. We then must figure out the present value of the expected future stream of cash flows. No one knows how much cash a company will generate next year or years from now; many factors are involved, such as the economy, company management, competition and the nature of the business. The farther one looks into the future, the harder it is to estimate future cash flows.

After you estimate future cash flows, you need to make a guess on what interest rate should be used to discount those cash flows to today’s dollars. A dollar today won’t be worth a dollar five years from now; it will be worth less. The higher the interest rate you use to discount cash flows, the less a dollar five years from now will be worth today. From a market perspective, as rates rise and a higher interest rate is used to discount future cash flows, the less a company may be worth. This is why the same growth stocks that have performed so well for the last year are now in correction mode: the fear of higher rates and what they may do to future valuations.

The current bull market for the S&P 500, which started in April 2020, is only 11 months old. As the chart below shows, the average S&P 500 bull market lasts almost six years, with an average gain of 179%. Within every bull market, multiple corrections may occur. According to data from Yardeni Research, there have been 38 declines of at least 10% in the S&P 500 since 1950 — that’s a double-digit decline almost every two years. In the past 11 years, there have been seven double-digit declines and at least eight others ranging from 5.8% to 9.9%. Corrections are a healthy and normal occurrence and not a reason to change direction.

There remains a strong case for continuing to buy the dips and stay the course with equity allocations:

* Washington is moving forward with passing a $1.9 trillion fiscal relief package in March, with stimulus checks being mailed out at the end of the month.

* The Federal Reserve has been strong in its policy stance and will remain patient with regard to short-term interest rates.

* The U.S. economy is reopening, and momentum is very strong.

* Millennials are investing in equities, and the surge in retail brokerage account openings is further evidence of this trend.

* Short-term bond rates will remain close to zero, making stocks more attractive than cash in the bank.

* The chart below looks at the fastest corrections in the NASDAQ and what has historically followed for index returns.

So, what can we learn from all this? Market corrections are a normal occurrence. The key, as we mention on a regular basis, is to stay the course. Selling into a correction may have long-term negative financial consequences for your financial plan.

We use the above insights to help with the strategic and tactical asset allocation based on where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way. We are not trying to time the market, but we will try to take advantage when we see where the stock and bond market heading. Having a well-balanced, diversified, liquid portfolio and a financial plan are keys to successful investing. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals – regardless of market volatility. Long-term fundamentals are what matter.

Sources: Marketwatch, Yardeni, Truist, LPL

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The MSCI Europe Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI AC (All Country) Asia ex Japan Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of Asia, excluding Japan. The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy.

S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. It is not possible to invest directly in an index.

Click Here for Additional Investor Disclosures

What does the recent surge in Treasury bonds mean?

The spike in U.S. Treasury bonds last week sent a small sell-off through the global markets. The 10-year Treasury yields surged to their highest level in more than a year, as seen in the chart below. The bond market is forecasting that higher economic growth is likely to occur this year with the rollout of vaccines and additional fiscal stimulus, and the Federal Reserve has stated on many occasions that it plans to let inflation run above 2% for an extended period of time.

With the likelihood of another stimulus package coming in March, we will be watching the money supply, which historically has been a leading indicator for the economy. The M2 money supply — the amount of currency, deposits and money in checking accounts, plus retail money market fund balances and savings deposits — has grown at a rate of 25% over the past year and is at its highest rate since 1960. COVID relief acts in 2020 explain this rapid growth; as stimulus checks have been mailed to households, checking and savings account balances increased over the last year. Some of the money has been spent and has flowed through the economy, but most has been saved. The unspent money will eventually find its way into the economy and the markets.

In recent weeks, the primary driver of the 10-year Treasury’s surge has been the rising expectation of inflation from this excess money supply. However, it is not a foregone conclusion that long-term rates are on a higher trajectory. As seen in the chart below, recessions like we had in 2020 have typically been followed by low interest rates several quarters later. For example, in 2008, the 10-year Treasury bond was at 2%, and in 2012, as the economy recovered, the rate rose to 4%, only to hit 1.4%.

The Federal Reserve has many tools at its disposal to fight the rise in long-term rates, including the ability to ease investors’ worries about higher rates through communication. The Fed can continue to purchase bonds in the open market or even increase the amount of bonds it is buying to push rates or drive yields lower. It is important to remember that over the long run, higher yields driven by strong economic growth are a positive for the markets.

So, what can we learn from all this? Markets are concerned that the Fed might rush to raise short-term interest rates in the face of stronger inflation data. The recent rise in the 10-year Treasury yields was driven more by prospects for stronger economic growth than inflation. With the real yield still in negative territory (taking inflation into account), there is plenty of room for the 10-year Treasury to return to normal if the economy’s prospects continue to improve as expected.

We use the above insights to help with the strategic and tactical asset allocation based on where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way. We are not trying to time the market, but we will try to take advantage when we see where the stock and bond market heading. Having a well-balanced, diversified, liquid portfolio and a financial plan are keys to successful investing. The best option is to stick with a broadly diversified portfolio that can help you achieve your own specific financial goals – regardless of market volatility. Long-term fundamentals are what matter.

Sources: Guggenheim, Bloomberg, Charles Schwab

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Click Here for Additional Investor Disclosures

What is a SPAC? A popular investment trend explained

Investors often get excited when they learn that a private company they’re following is planning an initial public offering, and last year’s IPO momentum carried over into 2021. Nasdaq saw 91 IPOs in January alone, and more than two-thirds were special-purpose acquisition companies (SPACs), one of Wall Street’s hottest trends.

What exactly is a SPAC — and how does it work? A SPAC is set up with no commercial operations of its own; it is formed only to raise capital for the purpose of acquiring an existing private company. SPACs have been around for decades, as seen in the chart below, but they have recently gained popularity as a medium for smaller, private companies to go public. Examples of companies recently going through a SPAC merger are DraftKings, Virgin Galactic, Opendoor and Nikola, to name a few.

SPACs make no products and do not sell anything. The only asset a SPAC has is the money it raises through an IPO. Institutional investors (or very wealthy investors) typically create SPACs, which often are referred to as “blank check companies” because when they raise money, investors do not know what the eventual acquisition target will be. By design, SPACs have a specific period of time — normally two years — to identify a suitable company to acquire.

SPACs are not allowed to prescreen investments or sign letters of intent prior to going public or raising monies. The money raised in the IPO is placed in an interest-bearing trust account, and funds cannot be dispersed except to complete an acquisition or to be returned to investors if the SPAC is liquidated because it could not close a deal quickly enough.

If a company agrees to be acquired by a SPAC, it will forgo the IPO process during the two-year open period. Investors, therefore, receive immediate liquidity and equity exposure via the SPAC. Assuming SPAC shareholders approve the merger, the SPAC’s name changes to the name of the acquired company when the purchase is complete.

What can go wrong with investing in a SPAC? Not every SPAC completes all the phases in the chart above within the two-year window. Target companies run the risk of having their acquisition rejected by SPAC shareholders. SPAC investors are putting money blindly into an investment vehicle, not knowing what company may be acquired with their investment. The due diligence process of the SPAC is not as thorough as that of the IPO process, and therefore, can be riskier.

There are no guarantees that SPAC returns will not fall short of the average post-market return. Most SPAC investors are not buying at the SPAC’s IPO price, usually $10 per share. Instead, they often buy shares on the open market, with a considerable premium added. If the SPAC is unable to close a merger, it returns $10 per share to the investor, possibly far less than what the investor paid.

So, what can we learn from all this? SPACs can be a good investment vehicle. However, investors need to understand the risks involved and the hidden danger of paying a premium price while not knowing what company they may end up acquiring. Investors should invest only as much as they are willing to lose, and if one does invest, it should be part of a well-diversified portfolio.

From an investment perspective, we use the above insights to help with the strategic and tactical asset allocation based on where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way. We are not trying to time the market, but we will try to take advantage when we see where the market is heading. Having a well-balanced, diversified, liquid portfolio and a financial plan are keys to successful investing. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals – regardless of market volatility. Long-term fundamentals are what matter.

Sources: CNBC, Wealthmanagement.com, Credit Suisse

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Click Here for Additional Investor Disclosures

A beginner’s guide to bitcoin

You may have seen recent headlines about bitcoin and other cryptocurrencies getting a boost. Just last week, Tesla said it had purchased $1.5 billion worth of bitcoin and would accept it as payment, and Mastercard said it would open up its network to support certain cryptocurrencies. On Tuesday, the price of bitcoin — the original and best-known cryptocurrency — rose above $50,000 for the first time.

Cryptocurrencies are digital assets that work as a medium of exchange. Ownership records for an individual token (or coin) are stored on an exchange, known as blockchain; this ledger is a shared computer database that reflects who owns these tokens — and in what amounts. There is no single person or organization in charge of the record, so any two people, anywhere in the world, can send bitcoin to each other without the involvement of a bank, government or other institution. Every transaction involving bitcoin is tracked on the blockchain (ledger), which is distributed across the entire network.

Cryptocurrency provides a global method of payment through a computer network, available any time of day or night, anywhere in the world. Fractions of bitcoins may be used as payment, and each transaction is tracked on the blockchain ledger, which is open for all bitcoin holders to see.

One of the allures of cryptocurrencies such as bitcoin is that these digital monies are said to be safe from manipulation or inflation. Bitcoins are produced through “mining,” a process in which very powerful computers solve complex math problems on the bitcoin network, verifying transaction information to ensure the payment network is trustworthy. About 18 million bitcoins have been mined so far, and the supply will be capped at 21 million. As the remaining 3 million bitcoins are mined, the process will move more slowly, and the last blocks may not be mined until 2140.

Of the approximately 18 million bitcoins in existence, an estimated 4 million may have already been lost forever and another 2 million may have been stolen — meaning one-third of the existing supply could be gone already. Some bitcoins have been lost when people lose or forget the encrypted passcode that accompanies the currency as part of the blockchain, which can prove to be a very painful mistake. In fact, one man in England accidentally threw out his hard drive that was loaded with bitcoin and offered to donate more than $70 million to his home city if the council would let him scour the landfill to find it.

There are several ways to invest in cryptocurrency, such as bitcoin. Two more common mediums are through either the Grayscale Bitcoin Trust exchange traded fund (GBTC) or an online exchange, such as Coinbase. Coinbase allows individuals to buy, sell, send and receive bitcoin. The publicly traded option, GBTC, trades at a premium to the actual price of bitcoin and has higher costs than using Coinbase. The price of bitcoin varies substantially on a daily basis and remains unpredictable as an asset class.

Bitcoin is a new kind of money because of its global nature and its constant availability — even on weekends, when banks are closed. Bitcoin transactions are private and secure, as the network has yet to be hacked. Bitcoin remains a relatively immature, volatile asset whose price fluctuates wildly from day to day.

So, what can we learn from all this? Cryptocurrencies like bitcoin are still in their infant stages, as they have only been around for a little more than 10 years. They are still a risky investment that may or not pay off. Investors should invest only as much as they are willing to lose, and if one does invest, it should be part of a well-diversified portfolio.

Sources: Blockgeeks.com, Coinbase, Motley Fool

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Click Here for Additional Investor Disclosures

Unemployment down, markets up: What happens next?

The GameStop mania appears to be fading as quickly as it appeared, with shares down roughly 70% last week. As the chart below shows, the stocks that are the most heavily shorted (or bet against) have the worst performance over time — and stocks that are shorted the least have much better results. The reason this is true? Company fundamentals. The recent spike in the most heavily shorted stocks is an aberration, not a common occurrence.

*Quintile 1 represents the most heavily shorted stocks; Quintile 5 represents the least.*

The markets now are able to focus again on the positive macro-economic backdrop: liquidity in the economy, vaccines in arms and low interest rates. The S&P 500 and NASDAQ both hit record highs last week, as investors are focusing on what the future holds rather than where the economy is today. Speaking of the economy, the U.S. unemployment rate fell from 6.7% in December to a lower-than-expected 6.3% in January, the lowest level since the pandemic started. Some people found new jobs, while others left the workforce entirely. Gains were seen in professional and business services, as well as in government employment, while retail, leisure and hospitality jobs continue to suffer.

Treasury bond yields also rose last week, reaching levels not seen since March. If inflation remains in check, the Fed can keep monetary policy easy, which helps bonds and provides diversification from stocks. The services sector, the largest piece of the Consumer Price Index, continues to fall, contributing to the lower level of inflation — whereas commodity prices (especially oil) are seeing a resurgence in price as supplies are starting to decrease. This also affects the Manufacturing Prices Paid Index, which also is trading at nearly a 10-year high, as higher commodity prices flow through to the cost of producing goods.

We do expect to see some inflation volatility in the near to medium term as economic activity resumes and price comparisons with weaker numbers from last year push inflation higher. We do not expect these effects to result in sustained inflationary pressure, and we anticipate that the trend will reverse in the second half of the year, after the economy reopens further.

So, what can we learn from all this? The vaccination rollout, U.S. monetary policy with regard to inflation and an additional stimulus all play an important role in direction of the market in 2021, with potential for further upside growth. We will continue to stay the course, and while we know there will be bumps in the road in 2021, the public markets will continue to look forward, anticipating what is ahead.

From an investment perspective, we use the above insights to help with the strategic and tactical asset allocation based on where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way. We are not trying to time the market, but we will try to take advantage when we see where the market is heading. Having a well-balanced, diversified, liquid portfolio and a financial plan are keys to successful investing. The best option is to stick with a broadly diversified portfolio that can help you achieve your own specific financial goals – regardless of market volatility. Long-term fundamentals are what matter.

^{Sources: Horizon Investments, Bureau of Labor Statistics, Charles Schwab}

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Click Here for Additional Investor Disclosures

What caused the GameStop bubble?

Following a three-month rally that coincided with the election and the vaccine rollout, stocks took a rest last week, and the end of January brought a slightly negative start to the year. Some market pundits believe the performance of the S&P 500 in January predicts the performance for the rest of the year, but this theory hasn’t played out often over the last two decades, as the chart shows below. Since 2003, the average return was over 11% during the 11 months following a negative January — and that number is skewed by the financial crisis of 2008.

Last week, the news consuming the markets was all about GameStop. The video game retailer started the year trading around $17 per share, and on Thursday of last week, the stock hit a high of $483, for a gain of more than 1,625%. This story is not about a retailer undergoing a fundamental shift in business philosophy and changing its outlook; it’s about a group of people on Reddit, called WallStreetBets, who are buying the most heavily shorted stocks on Wall Street en masse.

Shorting occurs when investors attempt to make money on a stock that falls in price. Instead of buying low and selling high, investors who short stocks borrow shares and sell them immediately. If the stock drops in price, they buy the shares back at the lower price before delivering them back to the lender — effectively making money by selling high and buying low. But if the stock price goes up instead of down, the investor may have to buy the stock at the higher price to deliver the shares that they borrowed, taking a potentially sizable loss.

If the price of the stock moves up very quickly, as GameStop did, then the lender can ask for additional collateral to cover the loan. This becomes a cycle: The investor then has to sell other holdings, raise cash and buy back the stock they are shorting, forcing the price up even higher and creating a “short squeeze.” Part of the phenomenon we are seeing with Reddit is a desire to cause institutions such as hedge funds, which are betting against this group of stocks, to lose as much money as possible. The traders following the advice on Reddit do not fully understand the market fundamentals and are attempting to make a quick dollar.

These bubbles do not end well historically — markets always return to fundamentals — and this fad, too, shall pass.

So, what can we learn from all this? Markets do not move up in a straight line. Bubbles like GameStop come and go, leaving volatile markets in their wake. We view these movements as opportunities, never as a time to panic or gamble unnecessarily. We will continue to stay the course, and while we know this will not be the only bump in the road in 2021, the public markets will continue to look forward, anticipating what’s ahead. From an investment perspective, we use the above insights to help with the strategic and tactical asset allocation based on where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way.

We are not trying to time the market, but we will try to take advantage when we see where the market is heading. Having a well-balanced, diversified, liquid portfolio and a financial plan is the key to successful investing. The best option is to stick with a broadly diversified portfolio that can help you achieve your own specific financial goals – regardless of market volatility. Long-term fundamentals are what matter.

^{Sources: FactSet, CNBC, LPL}

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

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