Topic: Portfolio Management

U.S. stock markets rallied to record highs last week, and bond yields rose after the Democrats won two Senate runoff elections in Georgia, providing a narrow majority in Congress. Even in the face of what we witnessed in Washington last week, the equity markets pushed higher. 

As we have written in previous articles, the stock market looks forward, not backward. The market’s climb is based in part on the expectation of additional fiscal stimulus being passed in the first quarter of 2021 to help those most hurt by the pandemic, spending on green initiatives and limited tax increases. 

The vaccine rollout has been slower than hoped, and a new, more infectious coronavirus strain is spreading. The pace of the rollout will be a major factor in how quickly the economy can return to pre-pandemic levels. Once the vaccine becomes more widespread, we believe we will see a restart to the economy — and the pent-up demand for goods and services and for travel will bring a return to normalcy. 

The prospects of more fiscal spending under a Democrat-led government could further fuel stocks. Many fear that this could push inflation higher over time. We do expect additional spending to drive deficits higher; as we wrote recently, with interest rates close to zero, additional debt can be more easily digested by the economy than when interest rates are higher. The Federal Reserve’s resolve to keep rates low will help fight inflation and make additional debt payments more modest. Corporate and personal tax increases are possible, but large-scale changes appear unlikely in our view. 

Regardless of who is president or which party controls Congress, the best course of action is to stay invested. The charts below confirm this strategy in different ways. The first chart shows how a hypothetical investment has increased since 1933, through a series of presidents from both parties. The second chart below shows the average annual returns under six different sets of election results, each reflecting positive returns.

The final chart below shows the average net flows into equities during each presidential election year and each following year. The amount of money on average flowing into equities after an election is significantly greater than the prior year, another positive for equities.

So, what can we learn from all this?  No matter what the election outcome was, whether you agree with the political views of the president or the majority of Congress, it is important to stay invested for the long term. We will experience volatility, and the first half of 2021 may be a choppy ride. If you do not stay invested, you will miss the ride — and the long-term growth.

From an investment perspective, we use the above insights to help with 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 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: Morningstar, RBC Capital

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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 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.

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.

Click Here for Additional Investor Disclosures

We are excited for 2021, and we think the same positive momentum that helped us finish the year strong will continue in the weeks and months ahead. Among our reasons for optimism:

1. The improved health of the global economy and the successful worldwide rollout of the COVID-19 vaccine.

2. Rapid technological adoption and the ascension of the digital economy, caused by the pandemic.

3. The Federal Reserve’s commitment to an inflation target of 2% and the outlook of low interest rates for several years.

4. The amount of cash on the sidelines that is waiting to be deployed on sizable market retractions.

5. Consumer savings that are significantly elevated, compared to pre-pandemic levels.

6. The swift market recovery, thanks to the government’s quick actions, compared with previous financial crises (see chart below).

The markets — and the global economy — are not without risks, however. History tells us that the biggest risks in a typical year aren’t usually from out of left field, 2020 notwithstanding. Or as Mark Twain famously said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” 

If we look to identify the unexpected, we see the following as risks to the global markets in 2021:

1. Problems with the vaccine rollout potentially delaying the economic recovery.

2. Trade tensions with China and other countries as a new administration takes over in the White House.

3. A faster tightening of fiscal or monetary policy than is anticipated.

4. Shock to the interest rate caused by inflation or a surge in bond yields.

5. Overbuying in the stock market and valuations being stretched.

Some have begun to compare 2020 to the tech bubble of 1999-2000, but we believe the two environments are not similar for a number of reasons. The current environment has a more favorable outlook for risk assets, as the 10-year Treasury rate today is less than 1%; in January 2000 it was more than 6.5%. Inflation is low today, and that favors longer-duration assets, such as technology and other innovative companies. Also, the increase in sales of the technology companies is keeping pace with share price increases, while in 2000, share price increases soared well ahead of actual increases in sales. 

Most importantly, equity valuations are modestly higher than that of the S&P 500 today, whereas in 2000, technology multiples were more than 2 times the multiple of the S&P 500. The harmonic averages shown in the chart below remove significant outliers — giving a better sense of the value of a company — and the disparity between weighted average and harmonic average points to numerous stocks in 2000 with extreme valuations, compared to today.

The rally in technology stocks today is being driven by stronger earnings and better profitability. Innovation continues to drive the technological revolution, accelerated by the pandemic. There will continue to be winners and losers from this race, as in all races, but we think that pace of technological change will only continue to increase in the future.

So, what can we learn from all this?  Whether or not these particular risks occur, a new year almost always brings surprises. From an investment perspective, we use these trends to help with the strategic and tactical asset allocation and to define 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 portfolio and a financial plan are the 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:  Bloomberg and Capstone Research, Factset}

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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.

S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general.  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. NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The Russell 2000 Index (RTY) measures the performance of the small-cap segment of the U.S. equity universe. The MSCI EAFE Index (MXEA) is an equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the US and Canada. The S&P 500® Value Index (SVX), represents the value companies, as determined by the index sponsor, of the S&P 500 Index. The Index measures the performance of large-capitalization value companies in the United States. The MSCI Emerging Markets Index (MXEF) captures large and mid cap representation across 26 Emerging Markets countries. The NASDAQ-100 Index (NDX) is made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock market. It is a modified capitalization-weighted index. The S&P 500® Growth Index (SGX), represents the growth companies, as determined by the index sponsor, of the S&P 500 Index. The Index measures the performance of large-capitalization growth companies in the United States. It is not possible to invest directly in an index.

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.

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.

Click Here for Additional Investor Disclosures

Ever since stocks began to rebound from the March bottom, there has been a glaring disconnect between the impact of the coronavirus on the economy and the good mood of the stock market. Eight months later, that disconnect is as wide as ever. If one only looked at the markets, it would be difficult to tell that anything was amiss.

Investors remain in a bullish mood while the economy continues to deal with the surging spread of the coronavirus, new lockdowns in California, increased unemployment claims and a lack of stimulus from Congress for those who remain out of work. While economic numbers tell the story of the past, the stock market’s focus is on the future. The markets are not ignoring the news of the day, they simply are looking beyond it —focusing on a low interest rate environment for the next several years, a vaccine rollout that will allow the economy to reopen in 2021, a new political administration and an additional stimulus package.

It is generally understood that day-to-day market swings do not reflect what is going on in the true economy, although it may feel like they should. There are some fundamental differences between the two which can be exacerbated in short time periods, but over the long run, the stock market and the economy do tend to have a stronger correlation.

At the most basic level, the economy is the production and consumption of goods and services. It encompasses all individuals and companies, as well as the government. The stock market, however, is an exchange where the buying and selling of shares of publicly traded companies occur. Stocks trade based on future earnings; they are forward-looking in nature. The earnings expectations for the top large-cap companies are high, and we should expect these companies to face volatility in the near future with growing regulatory pressure, ad-spending boycotts, the upcoming runoff election and potential corporate tax changes.

Small businesses are known to be the lifeblood of the U.S. economy, but they do not represent the stock market. According to the U.S. Small Business Administration, small businesses make up about half of private sector employment and 44% of U.S. economic activity. They represent over 99% of U.S. employer firms and create two-thirds of new jobs.

Less than one third of Americans work for publicly traded companies. That means the U.S. stock market represents only a portion of U.S. employment and does not entirely reflect how economic gains are distributed throughout the economy. The composition of the stock market also is different from the real economy. We see this in the weighting of major indexes, like the S&P 500, in that the largest stocks have the biggest influence. Right now, the largest five companies, all of them growth technology companies, make up 25% of the S&P 500. 

So, what can we learn from all this?  

Basing investment decisions on the current economy instead of where it is headed can often lead to incorrect assumptions about the direction of the stock market. Trying to time the market is extremely difficult and can cause poor investment performance. As we near the end of 2020, we 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.

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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.

S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general.  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. NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The Russell 2000 Index (RTY) measures the performance of the small-cap segment of the U.S. equity universe. The MSCI EAFE Index (MXEA) is an equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the US and Canada. The S&P 500® Value Index (SVX), represents the value companies, as determined by the index sponsor, of the S&P 500 Index. The Index measures the performance of large-capitalization value companies in the United States. The MSCI Emerging Markets Index (MXEF) captures large and mid cap representation across 26 Emerging Markets countries. The NASDAQ-100 Index (NDX) is made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock market. It is a modified capitalization-weighted index. The S&P 500® Growth Index (SGX), represents the growth companies, as determined by the index sponsor, of the S&P 500 Index. The Index measures the performance of large-capitalization growth companies in the United States. It is not possible to invest directly in an index.

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.

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.

Click Here for Additional Investor Disclosures

In this week’s update, we want to share with you our thoughts on the broader market and what we see on the horizon as we approach 2021.

1. Vaccine: Three drug companies have signaled that their vaccines show greater than 90% efficacy, which is extremely strong; a typical flu vaccine is roughly 40% to 50% effective in a given year. Around the world, 12 vaccines are in phase III trials, and as vaccines begin to roll out soon, delivery and distribution will become the focal point. The markets have responded in anticipation of a “return to normal” in 2021 as speculators sell the work-from-home stocks, looking for value in beat-up sectors such as energy and financials. 

We think that this is premature, as interest rates are likely to remain low for several years and energy companies must work through their excess supply while demand remains well below normal levels. Also, the virus is spreading rapidly throughout the country, and several cities and states are imposing a modified version of a lockdown to prevent their hospitals from becoming overrun.

2. Staying the course: Just as they did four years ago, the pollsters on TV misread the election. The lesson: Not only is politics unpredictable, but our certainties about investing might be wrong as well. We tend to overestimate the prevalence of negative information, which can lead to bad decisions. As we write in our weekly updates, it’s important to stay the course, follow the financial plan and to avoid trying to time the market based on what we think are certain outcomes. A recent Wall Street Journal article sums it well: “The trick is to embrace uncertainty without fooling yourself into thinking that impetuous decisions can give you control over it.”¹ 

3. Technology (and talk of a bubble): Led by the so-called FAANG stocks – Facebook, Amazon, Apple, Netflix and Google — the technology sector has performed very well in 2020 compared to the overall market. Several factors have helped technology stocks outperform this year:

* Ease of buying and selling through new trading apps that allow fractional share ownership.

* Cheap money through low interest rates.

* Speculation of stay-at-home companies like Zoom — and how they will permanently change how business will be performed.

If you equally weight all the stocks in the S&P 500 instead of looking at it from a market-weighted perspective, the overall market is roughly 10% above its long-term average. Or, as the Wall Street Journal put it: “A Stock Market Bubble? It’s More Like a Fire.”

4. The evolution of industry: Over the last four decades, waves of innovation have transformed the power of technology, creating a new batch of winners across sectors and industries. As technology evolves, the sector lines continue to blur. For example, companies are now classified as FinTech, a combination of a financial and technology company. Healthcare companies’ use of artificial intelligence enables more efficient drug discovery. As we look ahead, we think that the disruptive power of technology will continue to spur shifts within industries and pave the way for new market leadership.

So, what can we continue to learn from all this?  

Accurately predicting the next market move and timing the market is extremely difficult and can adversely affect the long-term performance of your portfolio. Riding out future market volatility in addition to having a diversified portfolio means staying the course and not trying to time the market. 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. The economy, and therefore, the market, is bigger than the direction the political winds are blowing. Ultimately, it’s the long-term fundamentals that matter.

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All investments involve risk, including loss of principal. Past performance does not guarantee future results. There is no assurance that the investment process will consistently lead to successful investing. Asset allocation and diversification do not eliminate the risk of experiencing investment losses. Mutual funds are subject to market, exchange rate, political, credit, interest rate and prepayment risks, which vary depending on the type of mutual fund. Information provided is provided solely for informational purposes and therefore are not an offer to buy or sell a security, and are not warranted to be correct, complete or accurate by Kestra IS or Kestra AS.

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.

S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general.  You cannot directly invest in the index.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.

Click here for additional investor disclosures.