Insight Archive - Page 13 of 14 - Concord Asset Management

Goodbye and Good Riddance

By Mitch York | April 6, 2022

After a brief flight to quality following Russia’s invasion of Ukraine, U.S. interest rates jumped to three-year highs as inflation fears prevailed.
The Federal Reserve approved its first interest rate hike in more than three years and indicated many more to come.
Stocks declined sharply during the first 10 weeks of the year but rallied at the end of March to erase half the losses.

Economic Commentary

The first quarter wasn’t pretty so let’s say goodbye and good riddance. Like a Clint Eastwood film, this quarter featured the good, the bad, and the ugly.

The good is a strong economy coming back from Coronavirus constraints with very low unemployment and robust demand from households flush with money to spend. The bad is continuing supply chain constraints. And the ugly is the Russian invasion of Ukraine.

The impact of the war isn’t limited to Europe. It’s affecting wheat, fertilizer, and energy supplies, raising prices around the globe. Even before the invasion, all eyes were on inflation, which hit 7.9% for the 12 months ended in February. It’s the highest rate in 40 years and the dominant economic concern. Nearly all other metrics are being viewed through the lens of inflation.¹

We thought inflation had plateaued as supply chain constraints started to ease earlier this year. However, the Russian invasion added another layer to supply chain struggles and confirmed to investors the real risk to the U.S. economy is inflation.

Source: Bloomberg

Take fertilizer for example. Even before the Russians rolled into Ukraine the world was verging on “the worst fertilizer situation in modern history in terms of supply,” Peter Zeihan, a geopolitical analyst and author, told FOX Business. “All three source materials that go into fertilizer (phosphate, nitrogen, potash) are subject to an abject shortage. Even if the war were to stop tomorrow, it’s already too late. It’s too late for the planting season for the Northern Hemisphere this year.” It is possible, if not likely, food prices could rise even further.²

Russia also provides about 30% of the global supply of palladium. This metal used to produce catalytic converters for autos has seen its price rise by 80%. It will now lift the already rising prices of cars. Of course, there are the sanctions on Russian oil. No need to explain this impact as we are all aware of the pain at the pump.³

All of this has the Federal Reserve’s attention. It’s no surprise that soon after raising rates 25 basis points in March, Fed Chair Jerome Powell said the Fed might hike its benchmark short-term interest rate faster than expected if inflation continues to surge. All eyes are now on half percent hikes at the next few meetings.⁴

If there is a recession, it won’t be started by a banking crisis or declining home values. It will be driven by inflation and rising interest rates. In February the Bureau of Labor Statistics reported average hourly wages increased by 5.3%. However, adjusted for inflation, hourly earnings declined by 2.6%.⁵ No wonder consumers are feeling the blues. The University of Michigan Consumer Sentiment Survey hit 11-year lows on the back of surging prices.⁶

And for more ugly news, the yield curve has started to invert. That means shorter-term interest rates are higher than longer-term interest rates. That is often a precursor to recession. And this time it may be different as investors are concerned the Fed’s late start to raising rates could lead to stagflation, a word not heard since the 1970s. Stagflation is a combination of rising prices and declining economic growth.

Market Commentary

After New Year’s Day, the market indexes hit all-time highs, then began a steady decline. The shock of the Russian invasion and surging inflation expectations pushed the Dow Jones Industrial Average and the S&P 500 Index into correction territory, a more than 10% drop from their highs. The Nasdaq posted a decline of more than 20%, which is considered a bear market.

Uncertainty causes investors to pull back and lower their exposure to stocks and other risky assets. Geopolitical risk only adds to the uncertainty. We don’t like it when stocks decline dramatically, but these declines reprice risk in order to increase future expected returns. This is why investors “buy the dip.” Fortunately, dip-buying occurred in late March cutting those staggering equity losses in half.

Typically, bonds become a safe haven when stocks crash, but not this time. The yield on the 2-year Treasury note rose 155 basis points to 2.28% during the first quarter; the largest 3-month increase in 38 years. The 10-year Treasury note advanced 83 basis points to 2.36%. When yield goes up, bond prices go down. According to Bloomberg, the total U.S. bond market lost 5.9% during the first quarter. Long and intermediate-term U.S. Government bonds declined 10.6% and 5.4% respectively. Investment-grade corporate bonds also performed miserably, down an incredible 8.4%.⁷

The bond market is reacting to expectations of inflation and what the Fed will do. Meanwhile, the stock market is reacting to the bond market, interest rates, the risks of rising inflation, stagflation, geopolitical uncertainty, and the volatile commodities market.

Final Thoughts

The financial markets have started the year on a roller coaster ride. Bonds have sold off sharply and the yield curve has started to invert. Stocks entered correction and even bear market territory only to surge back at the end of Q1. The typically reliable 50/50 stock & bond portfolio declined more than 5%. The wall of worry I often refer to is looking ominous at the moment, so let’s put this in perspective and discuss a prudent course of action.

We don’t know if the Fed’s actions will lead to recession. With interest rates starting at 0%, even if the Fed hikes rates to 2.5%, that’s will still be historically low. While higher rates could slow economic growth, households have a lot of money and want to spend it. This might prevent an economic contraction, at least for now.

An inverted yield curve could indicate a recession is in the cards. Since 1900, the yield curve has inverted 28 times, and about 75% of the time a recession has followed. However, it is worth noting the average lag from inversion to recession was 22 months. The lag time over the last six recessions ranged from 6 months to 3 years. To add even more complexity, stocks tend to perform well in the months following an inverted yield curve.

Source: Truist Advisory Services

What we do know is being out of the market can be very costly. According to Dimensional Fund Advisors, from 1990 to 2020, an investment of $1,000 in U.S. stocks would have grown to $20,400. During that 30-year time period, missing out on the best 25 stock market days would have reduced that amount to $4,400.

It’s important for investors to keep a long-term perspective. There are always reasons to sell stocks, but timing the market is difficult. You have to get it right twice – getting out and getting back in. At Concord Asset Management we have that long-term perspective. Instead of bailing on stocks, we have changed stock allocations by reducing clients’ exposure to growth stocks that are more sensitive to rising interest rates for less sensitive stocks.

In addition, earlier this year we lowered interest rate risk for clients in moderate-risk and conservative portfolios by increasing the allocation to funds that invest in floating-rate securities and reducing the allocation to longer-term, traditional bond funds that perform poorly when rates rise. Some clients still have exposure to U.S. Government bonds. If the war in Ukraine spreads, or other significant unforeseen events transpire, there will be a flight to quality, and you will be thankful you own Treasuries.

Lastly, times like these remind us how important it is to consult with your Advisor to make sure your portfolio is aligned with your risk tolerance. It is this valuable partnership between the Client, Advisor, and CAM that will help guide you through these uncertain times by making prudent decisions and avoiding costly mistakes.

Author

Mitch York
CIO
Concord Asset Management

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Footnotes and Sources

¹US Inflation Calculator, March 15, 2022

²FOX Business, March 10, 2022

³Reuters, March 7, 2022

⁴PBS NewsHour, March 21, 2022

⁵U.S. Bureau of Labor Statistics, March 10, 2022

⁶Reuters, March 11, 2022

⁷MarketWatch, March 31, 2022

Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. The forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. The Dow Jones Industrial Average is an unmanaged index that is generally considered representative of large-capitalization companies on the U.S. stock market. Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of technology and growth companies. The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) serves as a benchmark of the performance of major international equity markets, as represented by 21 major MSCI indexes from Europe, Australia, and Southeast Asia. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general. U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications, and other factors. International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risks unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility. Please consult your financial professional for additional information. This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and they should not be considered a solicitation for the purchase or sale of any security.

Concord Asset Management, LLC (“CAM” or “IA Firm”) is a registered investment advisor with the Securities and Exchange Commission. CAM is affiliated, and shares advisory personnel, with Concord Wealth Partners. CAM offers advisory services, including customized sub-advisory solutions, to other registered investment advisers and/or institutional managers, including its affiliate, Concord Wealth Partners, LLC. CAM’s investment advisory services are only offered to current or prospective clients where CAM and its investment adviser representatives are properly licensed or exempt from licensure.

The information provided in this commentary is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Please Note: If you are an IA Firm client, please remember to contact IA Firm, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. IA Firm shall continue to rely on the accuracy of the information that you have provided. Please Note: If you are an IA Firm client, please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

November 2021 Insights

Key Observations:

A more hawkish Federal Reserve has emerged and no longer views inflation as transitory
The yield curve is flattening as the market is pricing in rate hikes, but strong demand persists for longer-term Treasury bonds
Economically sensitive stocks sold off in November as the Omicron variant and inflation concerns raised doubts about the sustainability of the U.S. economic recovery

Economic Commentary

Let’s start with some good news. The U.S. Bureau of Labor Statistics reported the unemployment rate dropped to a pandemic low of 4.2% in November. Other encouraging data from the nonfarm payroll includes an increase in labor force participation rate to 61.8%, also a pandemic high. Unemployment is down as more people are wanting a job and finding it. As for the bad news, nonfarm payrolls only increased by 210,000 in November, dramatically below expectations of 573,000. This deceleration is a concern and has increased uncertainty in labor market momentum. It appears this is a hiccup caused mainly by the deceleration of hiring in labor and leisure in COVID impacted geographies. (1)

A greater concern is elevated inflation and its potential impact on households, as clearly displayed in the University of Michigan’s Surveys of Consumers for November. (3) The Consumer Sentiment Index declined 6.0% in November and 12.4% from the prior year to its lowest level in 10 years. Consumer’s assessment of current economic conditions dropped a staggering 5.3% from the prior month and a staggering 15.4% year-over-year. As noted in the survey release, “the decline was due to a combination of rapidly escalating inflation combined with the absence of federal policies that would effectively redress the inflationary damage to household budgets.” The survey presents a real risk to economic growth. If fears of declining real income override the historically high level of cash on hand households are currently enjoying, consumers are likely to cut back on spending and curtail economic growth in the months to come.

The Federal Reserve has certainly taken notice and changed its tune. Just a month after the Fed stated, “inflation is elevated, largely reflecting factors that are expected to be transitory,” Federal Reserve chief Powell stated in testimony to the U.S. Banking Committee, “I think it’s probably a good time to retire that word.” (2) To amplify the Fed’s right turn on inflation, the Fed Chair indicated a more hawkish tone as he expressed it is, “appropriate in my view to consider wrapping up the taper of our asset purchases.”

Market Commentary

The bond market certainly took Powell at his word (4). Anticipating an acceleration in tapering and expedited rate hikes, short-term rates jumped, longer-term rates declined, and the spread between two-year and ten-year Treasury bonds dropped by approximately 0.25% in just a few days. At 0.75%, the spread is at a one-year low. This “flattening” of the yield curve is due to investors betting earlier rate hikes will damper future inflation. In addition, there is still a demand for longer-term Treasuries as a flight to quality trade has picked up due to the uncertainty of the Omicron variant.

Speaking of Omicron, the variant emerged as a significant concern in late November, and its impact on the market was swift and noticeable. Economically sensitive stocks sold off sharply, led primarily by financials and energy, down 6.2% and 5.3% for the month. Broadly, the Dow declined 3.5%, the S&P 500 lost nearly 1%, and the NASDAQ was flat. Foreign and emerging market equities were hit particularly hard as expectations of significant governmental restrictions weighed on their stock markets. As measured by the MSCI EAFE Index, developed foreign markets lost 4.6% in November, and emerging markets dropped 4.3%.

Final Thoughts

The Omicron variant certainly caused short-term volatility and a November sell-off in stocks. However, as more data comes to light, it appears this variant is not the threat as once feared. It is the emergence of a more hawkish Federal Reserve that has embedded a new level of uncertainty into the stock and bond markets. The Fed is walking a tightrope. Stock valuations are high, and an overly aggressive Fed risks choking economic growth to the extent that it does not support these valuations. A Federal Reserve that does not accelerate tapering and rate hikes encourages sustained high inflation. This will reduce real GDP and dampen consumer spending as households adjust to their new real incomes. Again, bad news for stocks and not good news for bonds either.

As this more hawkish Fed reveals its plan for tapering and rate hikes, a clearer picture of future interest rates will emerge.

At Concord Asset Management, we design portfolios for the long run, with the ability to navigate various market cycles. However, you can have confidence that we are monitoring these market-moving events, and we will make reasonable, tactical adjustments as necessary.

Author

Mitch York

CIO

Concord Asset Management

Sources:

All performance data is generated through Morningstar.

You cannot invest directly in an index. A description of each comparative benchmark/index is available upon request.

Disclaimer: Concord Asset Management, LLC (“CAM” or “IA Firm”) is a registered investment advisor with the Securities and Exchange Commission. CAM is affiliated, and shares advisory personnel, with Concord Wealth Partners. CAM offers advisory services, including customized sub-advisory solutions, to other registered investment advisers and/or institutional managers, including its affiliate, Concord Wealth Partners, LLC. CAM’s investment advisory services are only offered to current or prospective clients where CAM and its investment adviser representatives are properly licensed or exempt from licensure.

All data is as of the end of April 2021 unless otherwise noted. Data sources include www.morningstar.com. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by CAM or its affiliates, or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from CAM or CWP. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. IA Firm is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of IA Firm’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at https://concordassetmgmt.com/. Please Note: If you are an IA Firm client, please remember to contact IA Firm, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. IA Firm shall continue to rely on the accuracy of the information that you have provided. Please Note: IF you are an IA Firm client, Please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

Enduring a choppy stock market

Don’t be a greedy chicken

There’s no doubt that big drops in equity indexes make headlines. They are often phrased to be sensational: “Biggest weekly decline in 2 years”, or “worst day since May,” or “Stocks fall for a third straight session.” Declines in stock indexes happen because of concerns, worries, and fears over one thing or another, which cause equities to tank, plunge, slide, retreat, or even crash. You can almost hear the exclamation points, even if the headline writers don’t include them!

But a wise investor will keep his or her composure in the face of such headlines – including the headlines we have been seeing since the S&P 500 dropped more than 5% from its all-time high back in early September 2021. While volatility may be up recently, volatility is a feature of stock markets, and it has been more muted over the past few years than it has been historically.

So, anticipating more sensational headlines about choppiness in stock markets, here are a few things to keep in mind:

First, pullbacks are common, even “large” ones, and today’s market has seen fewer such pullbacks than is typical. When the S&P 500 dropped 5% from its all-time high in September, it had gone 227 days without a drop of that magnitude, the “seventh longest such streak on record,” according to Barron’s. Moreover, stock market pullbacks of 10% or more have happened in about 50% of the years since 2000. So even if the headlines make it seem like significant drops are remarkable, they are not.

Second, pullbacks that make headlines are often measured in relation to an all-time high, which means that investors have been making money all the way up. During that 227 days between the last 5% pullback and the most recent one in September 2021, the S&P 500 index had gained 29.4%.

Third, pullbacks are typically followed by a rebound. That means if you liquidate your stocks after a pullback, you lose the opportunity to benefit from any recovery. By far, the most common “large” declines in the S&P 500 are between 5% and 20%, and those are typically fully recovered in four months or less.

I have a term for investors who want all the return of stocks but don’t want any of the volatility or drawdown risk. I call them “greedy chickens.” Volatility is an embedded feature of the stock market; you cannot avoid it, and it’s the main reason you earn a return on your equity investments. Short-term sell offs happen periodically, and that’s what drives long-term return because risk and return are related. Don’t run from it. Embrace it and let it work for you.

We believe that investors should listen to their financial advisors, who should have a long-term strategic plan in place for investors’ portfolios. It may be wise at this point to have cash on the sidelines as a reserve to put more money to work when stocks are one sale. And try to maintain a long-term perspective, of 5-10 years or longer, when it comes to investing in stocks. For those with lower risk tolerance, or high-income needs, a balanced portfolio of stocks and bonds may reduce equity risk to a tolerable level.

But all investors need to remember that when stock markets get choppy, it’s easy to get angsty over potential drawdowns in the equity portion of the portfolio. We haven’t seen significant equity drawdowns for quite a while. And there are certainly difficulties on the horizon. Economic growth may falter. Politics may prove difficult. The delta variant may continue to cause problems. Corporate earnings may have topped out for the moment.

But any short-term declines in equities may very well present excellent long-term buying opportunities if you’re not a greedy chicken.

Author

Mitch York, CFA®

CIO

Concord Asset Management

———————————-

Disclaimer: Concord Asset Management (“CAM”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where CAM and its representatives are properly licensed or exempt from licensure.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Concord Wealth Partners, LLC (“IA Firm”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from IA Firm. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. IA Firm is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of IA Firm’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at https://concordassetmgmt.com/. Please Note: If you are an IA Firm client, please remember to contact IA Firm, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. IA Firm shall continue to rely on the accuracy of the information that you have provided. Please Note: IF you are an IA Firm client, Please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. You cannot invest directly in an index. Stock markets, and many individual equities, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.

The price of bitcoin and other digital currencies has fluctuated unpredictably and drastically. You could experience significant and rapid losses. Profits or losses from investing in bitcoin are virtually impossible to predict. Platforms that buy and sell bitcoins may be unregulated, can be hacked, may stop operating, and some have failed. Unlike banking institutions that can provide FDIC insurance, there are no such safeguards provided to digital wallets. Bitcoin payments are irreversible. Once you complete a transaction, it cannot be reversed. Reversing a transaction depends solely on the willingness of the recipient to do so.

October 2021 Insights

Key Observations:

The Delta variant, supply chain constraints, and consumer sentiment bit into Q3 economic growth
The Federal Reserve announced plans to reduce its monthly purchases of Treasury and mortgage-backed bonds
Interest rates are still range-bound, offering low yields across the spectrum of traditional fixed income

Economic Commentary

It has been a mixed bag of economic news recently. The Labor Department reported the unemployment rate hit a new pandemic low of 4.8% at the end of Q3. That’s good news. The bad news is much of the decline in unemployment was due to workers dropping out of the labor force. (1) With the holidays fast approaching, this presents other economic challenges. The Labor Department noted that employers face their own issues persuading employees to come back in preparation for a busy holiday season. Employers are dealing with the lowest rate of American adults, 62%, that are either working or looking to work while experiencing a rising Q3 employment-cost index of 1.3% from the prior quarter, the fastest pace since 2001.

We are all very aware of the supply chain issues contributing to product shortages and significant inflation. This has consumers worried. The University of Michigan’s October survey declined 1.5% as consumers feel the most uncertainty about the year-ahead inflation rate than any time in nearly 40 years. (2) This, combined with the spread of the Delta variant, resulted in consumers slowing down. According to the U.S. Department of Commerce, consumer spending grew by only 0.6% in September and was the significant factor in third-quarter GDP coming in at 2.0%, far below the 2.6% estimate. (3)

Back to good news. The Fed doesn’t seem overly concerned about these economic headwinds. In the most recent FOMC statement, the Fed stated, “with progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen.” (4). They continue to believe inflation is “elevated, largely reflecting factors that are expected to be transitory.” Their optimism has been put into action. As expected, the Fed will immediately begin to slow down its pace of monthly purchases of Treasury and mortgage-backed securities, a.k.a. “tapering,” by $10 and $5 billion, respectively. This pace of reduction into the foreseeable future as market conditions warrant.

What makes tapering so important? By incrementally decreasing the monthly purchase of bonds until the program is ended altogether, the Fed methodically reduces the growth in money supply (i.e., monetary stimulus). It not only signals an economy that is moving towards the Fed’s goals of full employment and stable prices, but it provides a potential timeline for future rate hikes (following the end of tapering).

Market Commentary

Let’s focus on bonds for a change. The Fed is now tapering, and real-life inflation is all around us. You would expect the bond market to be in a free fall and interest rates skyrocketing. Not so. The 10-year Treasury bond is yielding 1.55%, well below the recent April peak of 1.75% and far below pre-pandemic levels. Two years ago, the 10-year yielded about 1.90%, and the year before that, it hovered near or above 3% for several months. That’s remarkable considering inflation expectations are now historically high, the Fed has commenced tapering, and a series of small rate hikes are likely to begin late in 2022.

It’s not just U.S. Treasury yields that are low. Government mortgage-backed bonds are paying about 2.5% and investment-grade corporates 2.4%. One could take significantly more risk and buy junk bonds. They yield about 4.4%. That’s not exciting as they averaged an 8% yield over the past 20 years, and they have drawdowns that rival stocks. During the financial crisis of 2008, junk bonds, as measured by the Bloomberg High Yield Very Liquid Index, declined as much as 38%. During last year’s Covid crash, junk bonds declined by nearly 22%.

Final Thoughts

Don’t fight the Fed is an old investment mantra that advises investors to align their decisions with the actions of the Federal Reserve. That’s good advice, but the challenge has always been timing. When do you align your investment decisions knowing there is a lag between signaling, implementing, and finally real market consequences?

At CAM, we suggest now is the time to begin adjusting fixed-income allocations to the reality of the Federal Reserve’s intentions. We expect that interest rates, short and long-term, will methodically increase over the next year or two, and credit spreads will remain in a narrow range. Therefore, capital gains that prevail from falling rates and tightening credit spreads are less likely to lift fixed income returns.

In this environment, looking beyond traditional fixed-income allocations is warranted. For our portfolios, the addition of a multi-asset class income approach including higher-yielding, adjustable-rate debt, and risk-managed, income-generating alternative securities is on the horizon.

Author

Mitch York

CIO

Concord Asset Management

Sources:

All performance data is generated through Morningstar.

You cannot invest directly in an index. A description of each comparative benchmark/index is available upon request.

September 2021 Insights

Key Observations:

Equities experienced their first monthly losses since January with broad, deep declines.
New supply chain challenges come front and center as a major headwind.
Market pullbacks of 5% and greater are more common than you think.

A September to Forget

September has historically been the worst month of the year for equities, and it certainly lived up that reputation this year. Stocks finally sold off after seven consecutive months of positive returns. The Dow Jones, S&P 500, and NASDAQ 100 indices declined 4.2%, 4.7%, and 5.7%, respectively. The selloff was broad with few bright spots. According to Morningstar, 10 of the 11 economic sectors declined for the month. The lone bright spot was energy, up 9.8%. From large growth to small value, every asset class declined in September. How about foreign stocks? After trailing the performance of U.S. stock for eight straight months, developed market equities outperformed U.S. stocks by 1.75% as they declined “only” 2.9% in September. Emerging market stocks were less impressive, losing approximately 4.0%.

Losses were not isolated to the stock market. Bonds fared better but were still down as the Bloomberg US Aggregate Bond Index lost 0.9% in September. On the heels of a modest increase in longer-term yields, long-term Treasury bonds declined 2.9% while short-term bonds were flat. Oddly enough, junk bonds eked out a 0.02% return in what otherwise was a risk off-market. Lastly, precious metals failed to shine as gold dropped 4.0% and silver an incredible 10.5%.

Cause and Effect

What led U.S. stocks to experience their worst month since March of 2020? Most likely, it’s a confluence of several factors. Supply chain issues have come front and center once again. According to Business Insider, Southern California ports are experiencing their greatest ship-backlog on record. (1) As of the end of September, more than 65 enormous container boats were anchored off the Southern California coast while 95 massive cargo ships and another 147 vessels were in port, all records. The consequences include the average wait time for these vessels to unload has increased 40% from 6.2 to 8.7 days, the average time for an ocean freight to go door-to-door has increased 43% (50 days to 72 days), and the costs of shipping containers have risen by some estimates as much as 500%. Why does this matter? Stocks have performed consistently well this year with muted downside volatility because corporate earnings have smashed all expectations. These Southern California ports facilitate nearly 50% of all U.S. imports. Delays in delivering products to market and associated rising costs (and at the worst possible time as inventories need to ramp up for the Christmas season) have tamped down expectations earnings surprises will continue.

There’s more. Inflation pressures are not limited to supply chain issues. Labor remains in high demand and tight supply. We are all feeling the pain at the pump as oil has hit a seven-year high. (2) Inflation expectations are running hot even if bond yields are stubbornly range-bound. As many investors expect a significant increase in bond yields on the horizon, the appetite for high P/E technology stocks has disappeared.

Lastly, there is an even heightened risk to the seemingly endless stimulus from monetary and fiscal policy. Following September’s Federal Open Market Committee meeting, Fed Chairman Powell stated, “While no decisions were made, participants generally viewed that so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate,” (3) Translation, the Fed is going pump the brakes on bond-buying to slow the growth in money supply.

As for fiscal policy, we have all witnessed the calamity in Washington as a once certain infrastructure bill, and its long-term economic impact is in peril. As these additional uncertainties were piled onto a near perfectly priced market, investors took profits and demanded greater expected returns from equities which required a decline in stock prices.

Final Thoughts – A Silver Lining

Yes, there are multiple reasons stocks slid sharply in September. However, it is worth noting profit-taking and the two most impactful headwinds, supply chain backlogs and inflation, are the result of a robust economic recovery led by strong aggregate demand. Recession is not in the cards, so a sustained bear market is highly unlikely. These 5% to 10% selloffs are however common in sustained bull markets. In fact, during the past ten years, the S&P 500 has experienced 18 selloffs of 5% or more during an eight-week period. (4) Taking profits and repricing risks are a normal part of a healthy stock market.

At CAM, we are constantly watching and assessing market conditions. If our long-term outlook changes, we will prudently adjust client portfolios to address our view of these opportunities and risks. Therefore, months like September are a good reminder to review your portfolio with your Advisor to ensure you have a well-diversified portfolio of stocks and bonds that will serve your financial planning needs.

Author

Mitch York

CIO

Concord Asset Management

Sources:

All performance data is generated through Morningstar.

You cannot invest directly in an index. A description of each comparative benchmark/index is available upon request.

Growth Through Innovation – Part 2

Old Dogs, New Tricks: A Deeper Look at Disruptive Innovation.

A few months back, we wrote a piece about today’s age of “disruptive innovation,” which is in the process of reshaping many parts of the global economy. We called it a Fourth Industrial Revolution and outlined how emerging technologies may create new models for success and a whole new crop of winners and losers across various industries.

Here, we take a deeper dive into the topic and outline why some of the leaders of the old economy (old dogs) are leveraging innovation (new tricks) to secure their leadership positions even as their markets see rapid, large-scale change.

TECH REINVENTION: Some of today’s most prominent tech giants are proving that they can be winners at disruptive innovation. Take Hewlett Packard as an example, which has endured several steep selloffs over the years (e.g., 2012) as it struggled to re-define itself and move away from stagnant legacy businesses like ink-jet printing. However, the company’s stock has been a solid outperformer recently, with advancements in 3D printing solutions, open-source artificial intelligence (AI) and machine learning, and virtual reality. One of the granddaddies of the tech world, Microsoft, is another example. The company is rapidly building its cloud computing business, especially its cloud-based gaming platform. It’s also making acquisitions in AI and ambient intelligence tools (e.g., for use in healthcare settings). It acquired a leader in industrial technology innovation and rapid prototyping. And its augmented-reality capabilities recently won Microsoft a bidding war for a $21.9B, 10-year contract with U.S. Army.

INDUSTRIAL REMODEL: Is there any company that more screams “old-school” industrial than a company like John Deere? Well, this company is truly advanced in applying AI, robotics, and connectivity to improve its manufacturing processes (e.g., a neural network technology that can diagnose and fix weld defects in real-time). It’s also using satellite-link technology to improve harvesting and deploying drone technology to provide autonomous crop-dusting.

RETAIL REFASHION: Not to be left behind, retail and service businesses are leading their charge into disruptive innovation. Sports apparel leader Nike uses a range of innovations — like advanced RFID technology, web-based loyalty apps, and predictive analytics — to help optimize inventory, speed up product cycles, and better match consumer demand. Supposedly, stodgy Walmart has been investing for years in supply chain management and automation technology, which powers upgrades to services like rapid in-store pick-up, personal shopping, and even drone delivery. The company is even expanding into consumer finance and money management, as well as autonomous vehicles.

SERVICE OVERHAUL: JP Morgan is in an all-out battle to fend off competition from fintech and Big Tech competitors: for example, it’s partnering with OpenInvest to facilitate ESG-based (environmental-social-governance) and values-based investing; and it’s rapidly automating the consumer investing market with the use of Robo-advisors. Once just the investment bank of the uber-wealthy, Elite institution Goldman Sachs is building out digital apps, new trading capabilities, new credit building solutions, cryptocurrency management, and a range of related personal financial management tools.

It can be easy to get seduced by the tech angle within the theme of “disruptive innovation,” but technology is merely a means to an end. As these examples show, it’s not just upstarts and start-ups that are changing the game. Today’s old-line industry leaders can also be game-changers, sometimes by strategic partnership or acquisition, but also through old-school R&D investment.

As investors, given just how fast the world is changing, we believe that it’s important to avoid being overly weighted to past successes. Thankfully, there are a lot of big, ostensibly “conventional” benchmark companies that agree.

So, when looking at growth themes for the future, it’s critical that investors not automatically count them out.

Author

Mitch York, CFA®

CIO

Concord Asset Management

———————————-

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Concord Wealth Partners, LLC (“IA Firm”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from IA Firm. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. IA Firm is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of IA Firm’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at https://concordassetmgmt.com/. Please Note: If you are an IA Firm client, please remember to contact IA Firm, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. IA Firm shall continue to rely on the accuracy of the information that you have provided. Please Note: IF you are an IA Firm client, Please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

August 2021 Insights

Key Observations:

• The Covid Delta variant has emerged as a headwind for economic growth.
• Growth stocks continue to lead the market forward.
• Corporate earnings have crushed estimates, and expectations remain high.

Economic Commentary

It’s two steps forward and one step back for the economy. After firing on all cylinders through the first two quarters, consumer-oriented economic data has softened recently. Consumer sentiment has hit a near-decade low. According to the University of Michigan, its consumer sentiment index fell to 70.3 in August. This marks a sharp decline from the July reading of 81.2. (1) Retails sales have cooled. According to the U.S. Census Bureau, advance estimates of U.S. retail and food services sales declined 1.1% from the prior month. (2) A stunning surprise was the most recent jobs report, which revealed 235,000 jobs were added to the economy in August, far below the consensus estimate of 750,000 After driving employment gains for most of the year, leisure and hospitality payrolls were unchanged, and restaurants and bars lost 42,000 jobs. (3)

There is certainly more evidence. According to data from Adobe’s Digital Economy Index, Americans have curtailed travel plans significantly over the past several weeks. (4) In July, online bookings for domestic flights declined 16% to $5.3 billion compared to the previous month. Through the first three weeks in August, online bookings totaled only $2.9 billion. Hotels haven’t fared much better, with occupancy rates declining every week in August in most major cities. Also, have you noticed the movie studios are once again pushing back major releases? These include a pair of Tom Cruise movies, Top Gun and Mission Impossible, and Clifford the Big Red Dog (featuring an even bigger star).

Of course, we know the culprit. The Delta variant of Covid has caused spikes in infections and hospitalizations across the country, altering consumer behavior and leading to local governments imposing new rounds of restrictions. The economy is likely to continue to show strength, but we must expect more road bumps as we work through the enduring pandemic.

Market Observations

The economy has hit a speed bump, but you would never know it based on the stock market. As measured by the CRSP U.S. Total Market Index, stocks were up 2.9% in August. Growth stocks, led by the technology and communication services sectors, jumped 4.6% and 3.8%, respectively. The biggest laggard was the energy sector, declining 1.8% for the month. The S&P 500 has returned 21.6% year-to-date and has generated a positive return for seven consecutive months.

Foreign stocks also gained in August. Emerging markets outpaced developed markets returning 3.1% vs. 1.8%. Year-to-date, foreign developed market stocks have gained 11.6% outpacing the 5.8% return on emerging markets equities. The return on emerging markets is quite remarkable when you consider that China represents 39% of the S&P Emerging Broad Market Index and that Chinese stocks are down 12.7% this year. Not to be forgotten, bonds were flat as measure by the Bloomberg U.S. Aggregate Bond Index, as was gold.

Final Thoughts:

Pick a headline – the Delta variant, a troubling departure from Afghanistan, a contentious political environment, or the devastation caused by Hurricane Ida. Throw in the S&P’s lofty forward price-to-earnings ratio of 22.1, and there are many reasons investors could use to bail out of stocks. However, that exodus hasn’t occurred, and we do not expect it to any time soon for three compelling reasons.

Corporate earnings are strong and growing. According to FactSet, 87% of S&P 500 companies beat estimates in the latest quarter. (5) That’s the largest percentage in the 23 years FactSet has been collected. In addition, as data rolls in during the first two months of a quarter, it is typically for analysts to lower earnings expectations. Over the past 20 years, the average reduction in earnings estimates was 2.4%. For Q3 this year, earnings estimates were increased by 3.8%.
There is a lack of compelling alternatives. The yield 10-year Treasury bond remains low at 1.32% as the Federal Reserve’s argument that inflation is transitory has been widely adopted. It should not be a surprise the appetite for stocks hasn’t waned, given the dividend yield on the S&P 500 is currently 1.28% and earnings growth is robust. Stocks are simply much more compelling than bonds.
Cash and liquidity are abundant. As we have highlighted in prior Insights, households are flush with savings, and the U.S. Government’s massive spending will continue to pump up the economy for at least a few more years.

The foundation for a continued bull market is solid, but caution is advised. The S&P 500 has not experienced a 5% correction in 10 months. Since 1950, the average number of days between 5% corrections is 97. The headline risks are real and with a historically high valuation, expect more volatility and more frequent 5% pullbacks. Lastly, do not lose sight of the importance of portfolio diversification. Although yields are low, U.S. Government bonds are important for downside protection. Think of them like airbags—they allow you to drive fast but are not appreciated until you need them.

At Concord Asset Management, we believe a well-positioned portfolio is diversified, owning all types of stocks and bonds, so part of your portfolio will always hold the best performing asset classes despite which risks come to fruition or not. Although currently tilted to value stocks, our typical client’s portfolio provides exposure to thousands of stocks and bonds in multiple asset classes and economic sectors. As always, the best way to ensure your portfolio is well-positioned is to reach out to your Financial Advisor for a portfolio review.

Author

Mitch York

CIO

Concord Asset Management

Sources:

All performance data is generated through Morningstar.

Note: All performance data in the following two charts were drawn from Morningstar.

Foreign Investing

International Equity: An Important Portfolio Component

During the first half of the year, one of the key themes we have been covering in our monthly market commentary is the “re-opening trade.” As the economy re-opened after months of lockdown, value stocks tended to perform better than growth. At the same time, U.S. markets outperformed overseas markets, as the rest of the world has had a tougher time than the U.S. in getting the pandemic under control.

But this would be an opportune time to remind ourselves that all market trends end at some point and shift toward a new regime. We saw that as growth stocks reasserted themselves and delivered outperformance in June, after months of underperformance.

In the same vein, it’s important not to count out non-U.S. stocks for many reasons. Here’s how we think about the importance of global equity allocations at CAM:

Why allocate?

The U.S. equity market is the biggest in the world by capitalization. But typically, it is only about 50% of the global equity opportunity set. So if you’re only looking at half the world, it’s impossible to say that you’re selecting from the best investment opportunities in the world.

Of course, there are sustained periods when U.S. equities outperform. For example, since 2010, only twice have foreign stocks outperformed U.S. stocks. But there are also periods when non-U.S. markets outperform, such as the 1980s, when foreign stocks outperformed in all but two years. In fact, over the past 50 years, its nearly evenly split, with foreign equities outperforming in only 26 of the 50 calendar years.

The disparity in performance across global markets is the foundation of a basic investing principle of diversification. And while correlations among global market are creeping higher — i.e., American companies derive large chunks of revenue abroad, and non-U.S. multinationals are often leaders in U.S. markets (e.g., Samsung, Nestle) — there’s still enough performance diversification to deliver an overall benefit to the portfolio.

How do we do it?

How much should I allocate overseas is an obvious question. Academic research is mixed concerning the optimal allocation, but 30% falls into the most accepted ranges. We are comfortable with that level of exposure. However, there are other important considerations as well. Should I hedge currency risk? What about foreign bonds?

We don’t hedge currency risk for two simple reasons. It is expensive and currency volatility is an important driver in lowering the correlation between U.S. and foreign markets. As for bonds, we believe the combination of tight correlations between U.S. and foreign bonds and extremely low (and even negative yields) in foreign markets simply make it an unattractive addition to a diversified portfolio.

Lastly, we believe that the most important issue here is capturing the asset class exposure, rather than trying to pick winners at a given point in time, with respect to country, company, or even investment theme. Therefore, we focus on passive ETFs as the optimal investment vehicle, given their tax efficiency, liquidity, and ease of trading in these foreign markets.

Diversify your home bias:

Finally, what most U.S. investors forget is that, for most of us, nearly all our wealth is tied to the U.S. economy — investors called this a “home bias.” The value of your business is tied to the U.S. economy, as is the value of your house, as is your salary. A certain amount of home bias is appropriate, given that it’s the economy you’re living (and spending) in. But diversifying a material portion of your invested assets may play an important role in mitigating any risks embedded in that home bias.

As the world slowly emerges from various forms and degrees of lockdown, the re-opening trade continues, even if a bit unsteadily. Equities have been very volatile at mid-year, as COVID variants spread, vaccination programs stall, and infection rates tick upward, even in large swaths of America. Once again, it’s a reminder that regimes never last forever, and sometimes the shifts can be sudden and surprising.

That’s why, as investors, we rely on the principle of diversification to mitigate risk, as well as provide a greater universe of opportunity. Non-U.S. stocks have been underdogs for a while now, but if history is any guide, they will have their day once again. And investors don’t want to be caught flat-footed chasing a rally on the way up, better to take a long-term view and keep those allocations in place in both bad times and good.

Author

Mitch York, CFA®

CIO

Concord Asset Management

———————————-

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Concord Wealth Partners, LLC (“IA Firm”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from IA Firm. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. IA Firm is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of IA Firm’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at https://concordassetmgmt.com/. Please Note: If you are an IA Firm client, please remember to contact IA Firm, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. IA Firm shall continue to rely on the accuracy of the information that you have provided. Please Note: IF you are an IA Firm client, Please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

July 2021 Insights

Fast and Furious…

Key Observations:

The automobile industry, with a supply and demand imbalance, reflects the broader U.S. economy.
Strong demand for goods and services is likely to continue as the financial condition of most Americans has improved considerably over the past year.
The two primary economic risks, inflation, and COVID variants, hang over the market and provide considerable uncertainty for investors.

Fast and Furious – The Auto Industry is Clicking on All Cylinders

We have all seen it – near empty lots as we drive by our local auto dealerships. Just how bad is it? According to the U.S. Bureau of Economic Analysis, supply is at all-time lows. In May, domestic auto inventories fell to 187,000 units, a decline of 71% from 2 years prior, when inventories stood at 641,000. (1). The inventory-to-sales ratio, a measure of the ability to meet consumer demand, also plummeted. A reading of 1.0 means the dealership has enough supply to meet one months’ demand. In May, the ratio hit 0.8, a decline of 63% from two years prior when inventories stood at 2.2 months sales and 68% lower than the pre-pandemic historical average of 2.5 months. (2) Of course, we know the backstory. Supply chain issues, namely a chip shortage, lingers over the industry.

Sticker shock is certainly hitting consumers who are fortunate enough to find the vehicle they want. According to J.D. Power, in July, the average new car sales price is expected to jump 17% to $41,044, the highest on record. Don’t expect the typical incentives either; the average incentive spending per sale is expected to fall to $2,065 from $4,235 in the prior year. There is no relief in buying a used car either. According to Cox Automotive, used vehicle prices have appreciated more at an incredible 30% clip over last year. (3)

You would think basic economics would kick in, and the demand for cars would wane given the incredible price increases. Not so. Mike Jackson, CEO of AutoNation, recently stated, “Consumers are buying vehicles before they even arrive at our stores. We expect the current environment of demand exceeding supply to continue into 2022.” During last week’s earnings report, Ford’s CEO Jim Farley said he expects sales volume to increase 30% in the second half of 2021. He stated, “We are now spring-loaded for growth in the second half and beyond because of those red-hot products, pent-up demand, and improving chip supply.” So, the reopening trade is alive and well for automakers.

The auto industry has a reason to be optimistic. Americans are eager to buy new cars, and they have the resources to do so. According to the Conference Board, consumer confidence increased for a six-straight month in July to a new pandemic high. (4) The details of the survey are telling. The share of consumers who said jobs were “plentiful” increased to a 21-year high, and 20.6% of respondents said they expect their incomes to grow in the next six months, the highest since February of 2020.

Things just don’t feel better; for most Americans, they are better, as shown by household balance sheets and income statements. In 2020, Americans paid off a record $82.1 billion in credit card debt and another $56.5 billion in the first quarter of 2021. (5) On Jun 10, Federal Reserve reported that during the first quarter of 2021, household net worth reached a record $137 trillion, a 23.6% year-over-year increase. (6) Even as housing prices are hitting all-time highs, mortgage debt service is hitting all-time lows thanks to low mortgage rates and larger average down payments. Household debt service payments have dropped to a record low of 8.2% of disposable income, 35% lower than the historical average of 11.1%. (7)

So why all the commentary on autos? The market for new and used cars is an excellent illustration of the state of the U.S. economy. As noted in prior Insights, in 2020, Americans saved more and spent less. Now they are saving less and spending more. Their bank accounts are larger, and their debt service payments are lower. Just like in the auto industry, high prices are unlikely to curb future demand for most goods and services any time soon. This is bullish for the economy, and that is bullish for the stock market.

Final Thoughts:

Given this bullish outlook, how should one position their investment portfolio? One should start by considering the risks. What is on your “wall of worry.” Obviously, inflation fears sit at the top for many. Supply chain challenges are everywhere, broadly putting pressure on prices. Strong demand that is ignoring higher prices threatens to add more fuel to the inflation fire. For others, an even more worrisome brick on that wall is the potential for renewed lockdowns due to new, highly contagious Covid variants. No need to go into the economic damage a new round of lockdowns would cause.

When inflation fears were front and center earlier this year, high-priced growth stocks were harshly punished as assets rotated to value-oriented equities. Conversely, renewed lockdowns would undoubtedly result in a harsh rotation out of reopening trade along with other value-oriented stocks. It is logical to believe this would bode well for growth stocks, especially technology stocks, as they flourished through the lockdowns. Lastly, for those sitting on the sidelines, there is a third risk. What if inflation is truly transitory and the impact of Covid continues to wane? By avoiding all stock market risks, you potentially miss out on strong equity returns and harm your ability to meet your financial goals.

At Concord Asset Management, we believe a well-positioned portfolio is diversified, owning all types of stocks and bonds, so part of your portfolio will always hold the best performing asset classes despite which risks come to fruition or not. Although currently tilted to value stocks, our typical client’s portfolio provides exposure to thousands of stocks and bonds in multiple asset classes and economic sectors. As always, the best way to ensure your portfolio is well positioned is to reach out to your Financial Advisor for a portfolio review.

Author

Mitch York

CIO

Concord Asset Management

Sources:

All performance data is generated through Morningstar.

Note: All performance data in the following two charts were drawn from Morningstar.

June 2021 Insights

Growth is Dead, Long Live Growth!

Key Observations:

Growth stocks have rebounded with a record return in June.
The financial markets are pricing in “transitory” inflation.
The Federal Reserve has calmed inflation fears with a more hawkish tone.

Market Commentary

Growth is dead! Long live growth! Just when most had settled in with expectations that growth stocks would be the laggards of the stock market for the foreseeable future, they staged a historic rebound in June. According to data from Morningstar, after declining 2.0% through May, growth stocks have returned a stellar 7.7% thus far in June. Conversely, value stocks are down 2.0% in June after returning a remarkable 19.1% through May. That is an incredible 9.4% spread in the return of growth versus value. As you might expect, the technology and communication services sectors are leading the way, up 7.4% and 3.7% respectively during the past 30 days. Meanwhile, the value-heavy sectors of basic materials and industrials have declined 5.2% and 1.9% during the same period.

Foreign stocks continue to perform well although lagging U.S. equities. Year-to-date, foreign developed stocks, as measured by the MSCI EAFE Index, are up 7.3% versus 14.4% for the S&P 500 Index Not to be forgotten, emerging market stocks have gained 7.1% so far in 2021.

Following modest positive returns in May, the bond market shows signs of stabilization as interest rates are flat to slightly lower. For June, the Bloomberg Barclays US Aggregate Bond Index rose 0.7% so far in June. Long-term Treasuries lead the way, up 3.6% followed by a strong performance for investment-grade corporate bonds at 2.0%. Short and intermediate-term Treasuries are basically unchanged.

Commodities have certainly cooled. The S&P North American Natural Resources Sector Index is flat in June after returning 7.0% in May and 19.3% during the first five months of 2021. It is far worse for gold. Following a robust 7.5% rally in May, the precious metal has given it all back, declining 7.2% in June.

Economic Commentary

Growth stocks are killing it as the market is shrugging off lofty valuations, the bleeding has stopped in the bond market, and gold is getting crushed. It must be that inflation has waned and the economy is back to slow growth. Right? Not even close. Consumer and producer prices continue to hit historic highs, and the economy continues to grow at an impressive rate. According to the U.S. Bureau of Labor Statistics (BLS), the Producer Price Index (PPI) for final demand increased 6.6% for the 12 months ended in May, the largest increase since that data was first calculated in 2010. Fewer foods and energy, the index jumped 5.3%, the largest increase since this measure was first calculated in 2014. (1)

When the cost of doing business increases (i.e., PPI), businesses tend to pass this cost onto their consumers. We have all become very aware of this reality in 2021, and the data validates it. According to the BLS, the Consumer Price Index soared 5.0% year-over-year, the fastest pace since the summer of 2008. The core inflation rates, a measure that excludes food and energy, rose 3.8%, the sharpest increase in nearly 30 years. (2)

Of course, none of the elevated inflation data would exist if it were not for strong consumer demand. We know the story – in 2020, consumers saved more and spent less and borrowed less. Pent-up demand and the ability to satisfy it appear to be fueling this early-stage economic expansion. According to the U.S. Bureau of Economic Analysis, in Q1 national GDP rose at an annualized rate of 6.4% as GDP rose in all 50 states and the District of Columbia. (3) The consensus is for GDP to remain at elevated levels for the remainder of the year. The Conference Board Economic Forecast for the US Economy projects Q2 GDP will increase to 9.0% and 2021 year-over-year growth to come in at 6.6%.

So what is going on with the stock and bond market given economic data that points to strong growth and high inflation? As highlighted in May’s Insights, the Fed is adamant that current and near-term inflation is transitory. While more market participants may be moving in that direction, the Fed’s most recent two-day policy meeting likely had a greater impact. The Federal Open Market Committee startled investors when it reported that 13 of 18 officials saw a likely need for higher rates by the end of 2023, with seven of them seeing a need to begin raising rates as soon as next year. This was music to the market’s ears as the Fed signaled it is prepared to raise rates if necessary to slow an overheated economy that would give rise to persistent inflation. (4)

Final Thoughts:

Just how impressive is the rebound in growth stocks? You must go way back to October 2001, nearly 20 years, to find a month where growth stocks had better relative performance over value stocks. Don’t forget, this occurred with significant headwinds for growth stocks. Expectations of higher interest rates and an early-stage economic expansion that favors value stocks were the headline risks. Now that growth stocks seem to have climbed that wall of worry and are back in vogue, does it mean investors should pile on once again? Of course not, but that isn’t the lesson we should carry forward from June’s market performance.

June highlights the most important fundamental of portfolio management – diversification. Consider the opportunity to invest in 10 distinct asset classes. While it is a fact that the person who invests all their money in only one asset class only has a 10% chance of picking the worst performer, it is also a fact that they have a 90% chance of eliminating the biggest winner.

Yes, diversification is a tool for avoiding significant losses by not putting all your eggs in one basket. More importantly, extensive diversification means your portfolio will always include exposure to better-performing securities, and this is the key to long-term success.

At Concord Asset Management, we believe in extensive portfolio diversification that seeks to provide clients a rate of return consistent with their risk tolerance. Sure, we will adjust the exposure to various equity asset classes at times depending on where we are in the economic cycle, valuation levels, and other factors. However, clients’ diversified portfolios will always include exposure to growth and value stocks, small and large-cap stocks, and domestic and foreign stocks. They will also own stocks in every major economic sector from technology to healthcare. At the end of a month like June, our clients can be confident that their diversified portfolio has served them well.

Author

Mitch York

CIO

Concord Asset Management

Sources:

All performance data is generated through Morningstar.

Note: All performance data in the following two charts were drawn from Morningstar.