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. 
  1. https://fred.stlouisfed.org/series/AUINSA, https://fred.stlouisfed.org/series/AISRSA
  2. https://www.reuters.com/business/autos-transportation/us-auto-sales-pace-weaken-further-july-jd-power-lmc-automotive-2021-07-28/
  3. https://www.coxautoinc.com/news/wholesale-used-vehicle-prices-peak-according-to-latest-manheim-data/
  4. https://conference-board.org/data/consumerconfidence.cfm
  5. https://wallethub.com/edu/cc/credit-card-debt-study/24400
  6. https://www.nasdaq.com/articles/u.s.-household-net-worth-hits-record-high-in-q1%3A-5-picks-2021-06-14
  7. https://fred.stlouisfed.org/series/AISRSA

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

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.

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.

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.

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

———————————-

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.

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.

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 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.

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. 
  1. https://fred.stlouisfed.org/series/AUINSA, https://fred.stlouisfed.org/series/AISRSA
  2. https://www.reuters.com/business/autos-transportation/us-auto-sales-pace-weaken-further-july-jd-power-lmc-automotive-2021-07-28/
  3. https://www.coxautoinc.com/news/wholesale-used-vehicle-prices-peak-according-to-latest-manheim-data/
  4. https://conference-board.org/data/consumerconfidence.cfm
  5. https://wallethub.com/edu/cc/credit-card-debt-study/24400
  6. https://www.nasdaq.com/articles/u.s.-household-net-worth-hits-record-high-in-q1%3A-5-picks-2021-06-14
  7. https://fred.stlouisfed.org/series/AISRSA

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

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.

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.

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.

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. 
  1. https://www.bls.gov/news.release/ppi.nr0.htm
  2. https://www.bls.gov/news.release/pdf/cpi.pdf
  3. https://www.bea.gov/news/2021/gross-domestic-product-state-1st-quarter-2021
  4. https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20210616.htm

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

 

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.

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.

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.

Tax-loss Harvesting

More Investors Should Have Access To “Tax Alpha”

Sell low. It’s the opposite of conventional wisdom that tells us to always “buy low, sell high.” But for some investors, selling low — even at a loss — can be a powerful tool to generate what investment professionals call “tax alpha.”

Done strategically, selling a portfolio’s losers enables the investor to book a capital loss, which can be used to balance out capital gains elsewhere. And those gains don’t necessarily have to be gains on securities. You can use capital losses from stocks to reduce your liability for capital gains in your business, for example, or on hard assets like property.

This process, called tax-loss harvesting, has many uses and potential benefits. But investors planning to take advantage of this strategy should be aware of a few key issues.

The first is that many advisors and financial planners, even some of the biggest advisory firms in the business, don’t offer this service. They don’t because they can’t.

Why? Because harvesting capital losses requires that you own individual stocks. But many RIAs, both large and small, rely solely on mutual funds, ETFs, and other fund vehicles to build client portfolios. They don’t use individual stocks in client portfolios, for reasons of internal costs, efficiency, and scale. Technology and automation make it easier for money management firms to lower their costs and increase their capacity, building out cookie-cutter, commoditized products that may have a veneer of something custom, when they really aren’t.

That observation is certainly true in the area of customized tax-loss harvesting. Think about how fund vehicles work in practice, particularly actively managed mutual funds. Inside the fund, the manager may be selling losers and harvesting losses. But those sales/losses are balanced against the winners inside the fund. As an investor, you only get to see the total performance that comes out at the end. If it’s a decent-performing fund, there will be more winners than losers in that basket of stocks, and the fund’s share price will go up.

That’s good news, as long as you’re not trying to employ a tax harvesting strategy. With fund investing, selling individual stocks to harvest capital losses is done at the sole discretion of the fund manager. And all the tax loss benefits accrue to the fund, not to you personally.

So, if your adviser only uses mutual fund and ETF vehicles in client portfolios—rather than individual stocks—then you’re out of luck when it comes to implementing a “tax alpha” strategy.

Second, it requires hard work, expertise, and advanced systems to create and implement a tax-loss harvesting strategy. At Concord Asset Management, the first thing we do is work with the financial planner to determine how much of the portfolio should be dedicated to this strategy — generally 40% to 60% of a client’s total portfolio assets.  In our program, we have created sleeves that directly invest in two distinct asset classes, U.S. value, and U.S. growth stocks. Thus, we also assess the client’s existing holdings to determine if any current positions fit into one of these two sleeves to avoid unnecessary turnover when implementing the tax-loss harvesting strategy.

Then we use state-of-the-art technology, and a process called optimization, to a create portfolio of individual stocks that are expected to mirror the performance our internal U.S. value or U.S. growth benchmarks.

And here’s the exciting part: now that the client owns individual stocks, we can decide how, when, and why we want to harvest any losses that show up in the portfolio. We can embed tax-loss harvesting into the portfolio’s regular rebalancing approach, when appropriate. Or maybe there is a need to reduce a concentrated position, which we can do systematically over a period of time. We can also optimize the portfolio according to any criteria the client has in mind such as socially responsible investing. In fact, we have the capabilities of including individual values that a client feels are important enough for us to include in our proprietary screening process for their individualized portfolio. Eliminating fund holdings problematically reduces the impact of year-end fund distributions, which can be significant.

Finally, we believe that there is a no more important element in tax-loss harvesting than the strategic planning that goes into it. To be truly effective, tax-loss harvesting needs to be a collaborative effort, including the client, financial planner, tax advisor, and investment manager.

Some examples of this are, how do we best time the losses to be most useful from a tax perspective? Is the capital loss part of a business planning exercise? Is the loss being used to offset gains in the value of a hard asset? Or, to offset gains in a highly concentrated asset that requires diversification (e.g., for corporate executives who receive large grants of stock or stock options; or investors with decades-long holding periods whose portfolio may be over-allocated to a small number of names).

The key takeaway is this: tax-loss harvesting is a powerful tool based on a simple premise. Sell low when that capital loss serves a strategic purpose. But this takes work, discipline, sophisticated systems, and a deep understanding of the individual client to do it right.

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.

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 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.

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 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.

May 2021 Insights

The Reopening Continues: Is Inflation a Concern? 

  Key Observations:

  • Consumers are fueling the economic recovery as spending and credit usage soar from pandemic lows.
  • CPI data surged 4.2% year-over-year in April, but the Federal Reserve is adamant broad price increases are transitory and not a long-term economic threat.
  • After a rough first quarter, bond markets have stabilized, and equity markets continue with the “re-opening” trade as value stocks continue to outperform.

Economic Commentary

The re-opening of the US economy is in full swing, evidenced by a surge in American’s travel plans. AAA expects 37 million people to travel over the holiday weekend, a 60% increase from last year’s historical lows.1  Of course, this is to be expected as a greater percentage of citizens are vaccinated, and people begin to satisfy pent-up demand. There is even a new buzzword for this surge in travel demand – revenge travel. People lost a year’s worth of travel for weddings, family vacations, etc. and they are ready to spend to take back this part of their lives.

Speaking of spending, recent economic data confirm what we already know. Americans are opening their wallets (and credit cards) and purchasing goods and services at an incredible clip.  Although the Commerce Department reported consumer spending for April was flat, it raised its March’s increase to 10.7%.2 This is not a surprise as most households received the additional $1,400 stimulus checks in March. An additional sign of consumer demand and confidence is credit usage. In early May, the Federal Reserve reported consumer credit increased 7.4% in March, including a 7.9% increase in revolving credit (i.e., credit cards).  It is likely spending will accelerate in the coming months as reopening expands and as we highlighted in prior Insights, Americans are flush with savings.

Of course, we have to once again discuss inflation. If you turn on any financial news network or any news for that matter, you will hear a lot of chatter about inflation. And for good reason, the April Consumer Price Index rose 4.2% compared to a year earlier. According to the Bureau of Labor Statistics, this is the largest year-over-year increase since September of 2009.3 Pent-up demand and the economic reopening, combined with supply chain bottlenecks and shortages in the labor supply have created this perfect storm. Despite the surge in prices across most goods and services, the Fed has clearly laid out its position that the current inflation data is “transitory.” And they mean it; the minutes from April 27-28 Federal Open Market Committee meeting references transitory eight times. 4

Market Commentary

After a terrible first quarter, bonds have stabilized across the board. The Bloomberg Barclays US Aggregate Bond Index is up 0.78% so far in May. This includes a return of 2.33% for long-term Treasuries after a loss of 11.50% through April.  Commodities continue to perform well, up 6.5% in May following a stellar return of 23.4% for the first four months of the year. Gold has finally started to surge. After returning a dismal 10.65% during Q1, gold rose 4.50% in April and another 7.45% so far in May.

Broadly speaking, equities continue their strong performance. The Dow Jones Industrial Average, S&P 500, and NASDAQ Composite have advanced 13.01%, 12.38%, and 6.89% year-to-date respectively. They have, however, taken a slight breather in May, increasing 1.53%, 0.48% and -1.53%. And yes, value continues to outpace growth. So far in May, value stocks have outperformed growth by 4.6% (2.44% vs. -2.16%).

Foreign equities are doing well. Developed market stocks, as measured by the MSCI EAFE Index, continue solid returns. In May the index has returned 3.01% and is up 9.80% year-to-date.  Not faring as well, but still with solid returns are emerging market stocks, up 0.35% in May and 4.92% for the year.

Final Thoughts:

How concerned should we be with inflation and its impact on our investments? Is it transitory or not? While the Fed clearly has an opinion, the markets send mixed signals. The rotation from growth to value stocks, the sharp and steady increases in commodity prices, and the recent surge in gold prices indicate inflation concerns are valid and persist. However, the recent pause and pullback in long-term Treasury yields argue inflation expectations are priced in.

Fortunately, we do not have to know the exact answer to have a well-positioned portfolio. The “re-opening trade” is real, has momentum, and is well suited for an inflationary environment. Value stocks, the beneficiaries of the reopening, are dominated by financial services and commodity-based companies. Accordingly, they are likely to continue their strong relative performance in an inflationary environment.  An overweight to value stocks as part of a well-diversified portfolio is prudent.

At CAM, we have implemented this overweight for our clients while recognizing a diversified exposure to all types of stocks and bonds is necessary to maintain a proper risk exposure. Along with your Concord Wealth Advisor, we are constantly monitoring the markets so you can relax, and take advantage of this summer’s great reopening.

Sources:
All performance data generated through Morningstar. 
  1. AAA: https://media.acg.aaa.com/memorial-day-holiday-travel-to-rebound-to-more-than-37-million.htm
  2. CNBC: https://www.cnbc.com/2021/05/14/retail-sales-april-2021.html
  3. Bureau of Labor Statistics: https://www.bls.gov/news.release/pdf/cpi.pdf
  4. Federal Open Market Committee: https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20210428.pdf
  5. Barron’s: https://www.barrons.com/articles/the-treasury-market-just-had-its-worst-quarter-since-1980-51617299808

     

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

 

 

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.

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.

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.

Growth Through Innovation – Part 1

Looking for Growth? Harness the Power, and Inevitability, of “Disruptive Innovation”

Call it the Fourth Industrial Revolution. These are unique times, unlike previous economic revolutions when multiple technologies are emerging and converging all at once. And the “disruptive innovations” bearing down on us have the power to remake the entire economy in the matter of a few decades.

So, as disruptive innovations change all our lives in meaningful ways, we believe it would be naïve not to change the way we invest.

The trends are numerous and easy to spot. They include exponential increases in computing power; breakthroughs in gene editing and DNA sequencing; major gains in robotics and artificial intelligence; and the interconnection of potentially every device in the world through an Internet of Things. It’s difficult to fully comprehend how and where these and other disruptive technologies may come into play, as they can be applied to just about every industry, and just about every sector of the economy.

Take the COVID, stay-at-home economy: it changed how we all consumer goods and services; changed how we shop, access our finances, access our healthcare, entertainment, and education. It changed where and how many of us work. It disrupted almost everything. But it also showed how adaptable we are, and how quickly behavioral and economic shifts can remake society.

So even though life is slowly getting back to “normal,” it may never go back entirely to what it was. Because COVID accelerated preexisting economic and business trends – toward disruption of the old status quo – that were already well underway.

We see these changes affecting our lives every day. It is not illogical to think, for example, that the big banks consumers know and love (kidding!) could go the way of the dinosaurs and be replaced by some of today’s breakout names in digital financial technology (“fintech”). Some of the largest names in the S&P500 – particularly names in retail – have already disappeared. Index turnover is increasing, and we believe that pace of displacement is going to accelerate. Yet, many broad market indexes remain heavily weighted toward companies that may not be around over the next 10 to 20 years.

In our view, not having a direct, robust, and purposeful exposure to the theme of disruptive innovation poses a long-term risk of underperformance for diversified portfolios. We believe that a process of rapid disruption will create winners and losers, and it’s the winners of this new economy that will drive growth. That’s why our growth allocation is heavily weighted to this theme as a part of our client’s diversified portfolios.

It’s important to note that the theme of disruptive innovation is broad. It’s not about one company or one industry. It’s not as concentrated as you may think. It includes both the creators of these technologies, as well as those companies who apply and use the technology; and it covers all market caps, from small to large.

The theme of disruptive innovation can be exploited in a diversified, risk-managed, tax-efficient manner, the same way as any other market opportunity.

What we saw over the past year was just how fast – and seamlessly – the world can shift to entirely new ways of living, working, and playing. Over the next several decades, a realist would expect more of that – a lot more. As professional investors, we believe that it’s our job to capture such trends in client portfolios: avoiding being overly weighted to the successes of the past, no matter how attractive they still may feel, and instead, delivering robust, risk-managed exposure to the growth opportunities that will power the future.

Author

Mitch York

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.

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.

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 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.

April 2021 Insights

Coinbase’s IPO Makes a Splash in the Market 

  Key Observations:

  • The IPO of Coinbase is an important milestone in securing the legitimacy of cryptocurrencies.
  • Coinbase as a stock is a means to broad exposure into cryptocurrencies.
  • The risks on Coinbase are numerous, especially given its current valuation.

What is all the Fuss About Coinbase?

A highlight of 2020 was the incredible resiliency of the market for initial public offerings (IPOs).  Firms such as Airbnb, DoorDash, Rocket Mortgage and GoodRx took advantage of the burgeoning stay-at-home economy and booming stock market as their IPOs collected tens of billions in new market capitalization.1  There is no sign of the red-hot IPO market slowing down either. According to Ernst & Young, in Q1 global IPO volumes rose 85% and proceeds rose 271% year-on-year for the strongest first quarter in 20 years.2

So it was no surprise when Coinbase, the largest cryptocurrency exchange in the U.S. and third largest globally, had an incredibly successful launch on April 14. On the close of its first day of trading, Coinbase was valued at $86 billion dollars. To put this in perspective, investors viewed it as more than three times as valuable than the NASDAQ ($26 billion).  Even more remarkable, Coinbase was valued significantly higher than Intercontinental Exchange Inc ($67 billion) which owns 12 stock exchanges globally including the NYSE and as a company it was deemed to be worth more than Citigroup and Morgan Stanley.3

Before we start to think dotcom bubble all over again, let’s consider the company’s merits. Coinbase has several lines of business but generates most of its revenue from spreads and fees it charges users when they buy or sell cryptocurrencies such as Bitcoin. And they have a lot of users; 56 million verified and 6.1 million transacting monthly representing year-over-year increases of 30% and 117% respectively. They are bringing their money as well with $223 billion of assets currently residing on the Coinbase platform. Even better, the firm is making money. During the first three months of 2021, revenue came in at $1.8 billion with profits expected to fall between $730-$800 million.  In comparison, revenue for all of 2020 was $1.3 billion.4

The obvious question, given its user base and financial performance, does Coinbase deserve an $86 billion valuation?  Maybe. As a stock, Coinbase is compelling to investors because it is likely the best pure-play, publicly traded investment providing exposure to the cryptocurrency market.  It is inherently a more acceptable investment for traditional investors than Bitcoin. Cryptocurrencies such as Bitcoin do not generate revenue and profits, they will never pay a dividend and thus, they are nearly impossible to value. As an investment, this is an advantage to companies like Coinbase will always have over cryptocurrencies. When you buy a crypto you are accepting its price based on faith and hope. In addition, many investors call Coinbase a “pick and shovel” investment, referring to the California gold rush where the true money to be made was from selling goods and services to those mining the gold, not in the gold itself.

Now for the maybe not. The risks of investing in Coinbase are numerous and the greater the risks the less attractive the lofty valuation. First, future success depends on more users which will be dependent on broader adoption of cryptocurrencies as a basic way to pay for goods and services. In addition, success also depends on a healthy market for Bitcoin and other cryptos; a sustained bear market for these assets will certainly dampen the adoption of crytpos and Coinbase as an exchange. Then there is the risk of government regulation; it has and will be looming over this market for a very long time.

Even if all those concerns are a wall of worry you are comfortable climbing, there is competition. When it comes down to it, Coinbase is an exchange and exchanges have been around for hundreds of years. Coinbase is just trading a new product and trading it an incredible spread. In 2020, Coinbase collected about 0.57% of every transaction in fees (for 87% of the firm’s 2020 revenue). That is at an incredible spread and has resulted in Coinbase’s incredible margins. High margins attract a lot of attention. Just as competition drove online stock trading fees to zero for broker-dealers, it is possible competition in this space will force another race-to-zero. The risk is in Coinbase’s ability to dramatically increase their user base and lines of business in the headwinds of increased competition and diminishing transaction fees.

A more important question than Coinbase’s valuation is “do you believe cryptocurrencies will be more significant 10 years from now?” If you answer yes, as I do, then having exposure to this industry in your investment portfolio is important. How to suitably acquire this exposure is where CAM can provide important direction.

Final Thoughts:

At CAM, we believe investing in disruptive innovation stocks is an important part of our clients’ diversified portfolios. We provide broad exposure to this theme for clients by carving out a portion of their accounts and constructing a portfolio of up to 100 individual stocks. Collectively, these stocks track our proprietary, internal disruptive innovation benchmark. Our benchmark’s universe of stocks includes “pick and shovel” companies associated with cryptocurrencies such as Coinbase, other fintech companies, blockchain firms, etc. For new clients, and as we rebalance existing client accounts, Coinbase is likely to be included in the 100-stock exposure. Disruptive innovation is dynamic and will continue to evolve at a rapid pace, especially in the cryptocurrency space. Our clients can have confidence that we will monitor these changes, adjust our internal benchmark, and rebalance client accounts as necessary.

Sources:
All performance data generated through Morningstar. 
  1. Morningstar: https://www.morningstar.com/articles/1014850/the-10-biggest-ipos-of-2020 
  2. EY: https://www.ey.com/en_gl/ipo/ipo-trends-2021-q1
  3. NY Times: https://www.nytimes.com/live/2021/04/14/business/stock-market-today
  4. Coinbase: https://investor.coinbase.com/news/news-details/2021/Coinbase-Announces-First-Quarter-2021-Estimated-Results-and-Full-Year-2021-Outlook/default.aspx
  5. MarketWatch: https://www.marketwatch.com/story/should-you-buy-coinbase-the-valuation-is-ridiculous-11618254467

     

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

 

 

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.

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 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.

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 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 a 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 information that you have provided.  Please Note: IF you are a 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.

March 2021 Insights

Rising Inflation & a Re-Opening Economy Continues to Favor Value

  Key Observations:

  • After approaching 0% during the pandemic, inflation is catching up with the economy.
  • The Federal Reserve has an upbeat view on the economy projecting falling unemployment and robust GDP growth for 2021.
  • The reopening trade continues as more state and local economies open and millions of citizens are vaccinated every week.

Market Commentary:

The reopening trade continues and a pattern has emerged – the broad market continues its ascent led by value stocks while growth stocks, particularly tech names, struggle.  Year-to-date the CRSP US Total Market Index is up 4.7%.  According to Morningstar, value stocks increased 11.6% and growth stocks lost 1.9%.  This certainly persisted over the past month as value outperformed growth by 6.7%.  The Morningstar U.S. Value Index returned 4.3% the past 30 days versus its growth counterpart declining 2.4%.

The reopening trade that favors value versus growth, combined with concerns over valuations and higher bond yields, have contributed to technology stocks’ recent poor performance.  The Morningstar Technology Index is down 0.8% in 2021 and even consistent high performers Apple, Amazon and Netflix are down 9.0%, 6.5% and 7.0% year-to-date.

Bonds have found their footing recently as inflation expectations have been priced in.  After declining 2.2% for the first two months of 2021, the Bloomberg Barclays US Aggregate Bond Index is flat in March.  Long-term Treasuries and corporate bonds, down 9.0% and 4.3% during January and February, are down a modest 0.8% each so far in March.

Finally, to no one’s surprise, international stocks are lagging US stocks as much of the world struggles rolling out vaccinations and significant lock downs continue.  The MSCI EAFE Index, which represents large and mid-cap stocks across 21 developed markets is up 2.6% year-to-date (versus 6.6% and 4.1% for the DJIA and S&P 500).

Economic Commentary:

There has been a lot of talk about inflation lately, and for good reason.  As discussed in last month’s Insights, U.S. households are sitting on a mountain of savings and the U.S. government has been providing incredible fiscal stimulus including the $1.9 trillion stimulus package recently signed into law.  Speaking of the latter, over 127 million payments of up to $1,400 have been distributed for a total of nearly $325 billion.1 The economy already had the wind at its back; the Bureau of Economic Advisors (BEA) revised Q4 GDP to 4.3% and the Federal Reserve boosted their 2021 GDP estimate from 4.2% to 6.5%, an incredible 55% increase.2 The employment picture is looking much much better.  Just this week the Department of Labor reported new jobless claims hit a pandemic low and continuing claims declined by nearly 7%.3

No wonder the financial news is filled with concerns about the economy overheating and inflation escalating.  And in case you haven’t noticed (of course you have) the price of gas is way up, housing prices are surging and the trip to the grocery store costs more.  The New York Fed’s February 2021 Survey of Consumer Expectations revealed at 3.1% consumers have the highest level of inflation expectations since 2014.4 This is considerably higher than the current 12-month run rate of 1.7% and the Fed’s 2.4% inflation estimate for 2021.

Amid all this, the Fed is committed in keeping short term rates low and maintaining its accommodating monetary policy.  This may seem shocking considering recent economic data and consumer inflation expectations.  However, The Fed has made their position clear.  Last summer Chairman Powell explained the Fed’s new stance on inflation is a 2% “average inflation target.”  So it should be no surprise Chairman Powell has reiterated multiple times recently the Fed is comfortable allowing inflation to run considerably higher than the standard 2% target given it bottomed out at 0.1% in 2020. 5  They are confident higher inflation is transitory – the result of economic reopening and not a longer-term systemic risk.

Final Thoughts:

Maintaining stable prices is one of the Federal Reserve’s two core directives.  They take inflation very seriously.  It has real life consequences as high inflation is essentially a tax on every consumer.  It is particularly damaging to lower income households as they use the vast majority of their income on consumption.  This is the same group that has been disproportionately harmed by the pandemic.  Of course the Fed knows this and that leads me to two conclusions.  First, as Chairman Powell reiterates, long-term inflation is under control and recent upticks will be short-lived.  Secondly, if circumstances change and inflation does exceed current expectations, the Fed will be swift to act, raising short-term interest rates and certainly longer-term rates will make another run higher.

What does all this mean for your portfolio?  First, we believe it is prudent to avoid long-term (10+ years) U.S. Treasury and corporate bonds as the risk/return profile is unbalanced.  Maintaining an intermediate term bond allocation provides proper diversification and sufficient downside protection if there is turmoil in the equity markets and a flight to quality transpires.  Secondly, the reopening trade is real and likely to continue for some time.  The stock market will continue to react sharply to changes in inflation expectations and rising interest rates.  This increases the probability growth stocks will experience greater volatility and under perform value stocks.

Early in March, in CAM’s investment models and client accounts, we reduced the allocation to growth and increased the allocation to deep value.  Currently, the average allocation to value stocks is approximately 11% greater than growth stocks.  Additionally, even with the recent increase in yields, we continue to avoid long-term Treasury and corporate bonds.  At Concord Asset Management we continually monitor the economy and investment markets.  We strive to offer long-term, risk balanced portfolios you and your planner can use to help meet your financial goals.  We do not make changes frequently, but when we do have confidence, they are made with only your best interests in mind.

Sources:
All performance data generated through Morningstar. 
  1. USA Today: https://www.usatoday.com/story/money/2021/03/24/stimulus-check-2021-irs-third-covid-payment/6989393002/
  2. Federal Reserve: https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20210317.htm
  3. Yahoo Finance: https://finance.yahoo.com/finance/news/record-low-jobless-claims-show-104710751.html#:~:text=Signs%20of%20Systematic%20Recovery,week%20ended%20Mar%2014%2C%202020
  4. New York Fed: https://www.newyorkfed.org/microeconomics/sce#indicators/inflation-expectations/g1
  5. Business Insider https://www.businessinsider.com/economic-recovery-priority-federal-debt-concerns-federal-reserve-jerome-powell-2021-3

     

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

     

 

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.

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 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.

All data is as of the end of February 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.