Market Commentary 5/10/2021

Market Commentary 5/10/2021

How Are Your Investments Doing Lately?  Receive A Free, No-Obligation 2nd Opinion On Your Investment Portfolio >

Weekly Financial Market Commentary

May 10, 2021

Our Mission Is To Create And Preserve Client Wealth

Like a gender reveal gone wrong, last week’s employment report delivered an unexpected surprise.

Economists estimated 975,000 new jobs would be created in April. The United States Bureau of Labor Statistics (BLS) reported there were just 266,000. That’s a big miss.

Economists, analysts, and the media offered a wealth of theories to explain the shortfall. These included:

·         Pandemic fear. A March U.S. Census survey found 4.2 million people aren’t working because they fear getting or spreading the coronavirus, reported Gwynn Guilford of The Wall Street Journal. That’s more than half of the 8.2 million non-farm jobs that need to be recovered to reach pre-pandemic employment levels.

·         Too-generous unemployment benefits. Another theory is federal unemployment benefits ($300 a week) have created a labor shortage. The theory is being tested. Last week, Montana announced it will no longer participate in federal unemployment programs. Instead, it will offer a $1,200 return-to-work bonus, reported Greg Iacurci of CNBC.

 ·         Low pay. Some say Americans are less willing to work for low pay than they were before the pandemic. Christopher Rugaber of the AP interviewed a Texas staffing office manager who reported job seekers are turning down jobs that pay less than unemployment benefits. 

A former retail worker told Heather Long of The Washington Post, “The problem is we are not making enough money to make it worth it to go back to these jobs that are difficult and dirty and usually thankless. You’re getting yelled at and disrespected all day.”

·         Lack of childcare. Many women who want to work left jobs during the pandemic to care for children. The April employment report showed a slight decrease in the rate of unemployment for adult women; however, it resulted from women giving up on job searches rather than finding work. The Institute for Women’s Policy Research reported, “…more women continued to exit rather than enter the workforce: 165,000 fewer women had jobs or were actively looking for work in April than in March.”

·         Quirky data. Statistical distortions or seasonal factors could be responsible. “The more time the market has to digest [the] report, the more the report seems a bit of an anomaly relative to other data,” said a deputy chief investment officer cited by Mamta Badkar and Naomi Rovnick of Financial Times.

 Other data include the ADP® National Employment Report which showed 742,000 new jobs in April. The report reflects real-time data on one-fifth of U.S. private payroll employment. 

·         Rethinking work. “There is also growing evidence – both anecdotal and in surveys – that a lot of people want to do something different with their lives than they did before the pandemic. The coronavirus outbreak has had a dramatic psychological effect on workers, and people are reassessing what they want to do and how they want to work, whether in an office, at home, or some hybrid combination,” reported The Washington Post.

U.S. financial markets shrugged off the news. The Standard & Poor’s 500 Index finished the week at a record high, and 10-year Treasury rates finished Friday where they started.

Check out the big brain on Brett! There is a long-standing scientific theory about the size of a mammal’s body relative to its brain offers an indication of intelligence. The findings of a recent study seem to debunk that idea, reported Science Daily.

 An international team of scientists investigated how the brain and body sizes of 1,400 living and extinct mammals evolved over time. They made several discoveries. One was significant changes in brain size happened after two cataclysmic events in Earth’s history: a mass extinction and a climatic transition.

Not every mammal changed in the same ways. Elephants increased body and brain size. Dolphins and humans decreased body size and increased brain size. California sea lions increased body size without comparable increases in brain size. All have high intelligence.

“We’ve overturned a long-standing dogma that relative brain size can be equivocated with intelligence…Sometimes, relatively big brains can be the end result of a gradual decrease in body size to suit a new habitat or way of moving – in other words, nothing to do with intelligence at all. Using relative brain size as a proxy for cognitive capacity must be set against an animal’s evolutionary history,” stated Kamran Safi, a research scientist at the Max Planck Institute of Animal Behavior and one of the study’s authors.

Of course, intelligence doesn’t always translate into wise behavior.

Studies of behavioral finance have found the human brain is more interested in survival than saving. “It turns out that, when it comes to money matters, we are wired to do it all wrong. Our brains have evolved over thousands of years to focus on short-term survival in a dangerous world with limited resources. They were not designed for today’s optimal financial behaviors,” wrote financial psychologist Dr. Brad Klontz, a CNBC contributor.

No one knows how the COVID-19 pandemic will be remembered over time, but it appears to have influenced the way people think about money in some significant ways. An April 2021 Bank of America survey reported:

·         81 percent of participants saved money, that would normally be spent on entertainment, dining, and travel, and set it aside in emergency, savings, and other types of accounts.

·         46 percent used pandemic downtime to put their finances in order.

·         44 percent said their risk tolerance changed: 23 percent became more aggressive and 21 percent more cautious.

If the pandemic has changed your thinking, let’s review your financial plan and align it with your current circumstances and thinking.

Weekly Focus – Think About It 
“It doesn’t matter how beautiful your theory is, it doesn’t matter how smart you are. If it doesn’t agree with experiment, it’s wrong.”
–Richard P. Feynman, Theoretical physicist

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Investment advice offered through Research Financial Strategies, a registered investment advisor.
* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

 

Investment advice offered through Research Financial Strategies, a registered investment advisor.

 

Sources:
https://www.bls.gov/news.release/empsit.nr0.htm
https://www.wsj.com/articles/the-other-reason-the-labor-force-is-shrunken-fear-of-covid-19-11618163017 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/05-10-21_WSJ-The_Other_Reason_the_Labor_Force_is_Shrunken-Fear_of_COVID-19-Footnote_2.pdf)
https://www.cnbc.com/2021/05/05/montana-opts-to-end-300-unemployment-boost-other-states-may-too.html
https://apnews.com/article/lifestyle-coronavirus-pandemic-health-business-82aa4f9fddcea22918d010c55b5e55b3
https://www.washingtonpost.com/business/2021/05/07/jobs-report-labor-shortage-analysis/ (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/05-10-21_TheWashingPost-Its_Not_a_Labor_Shortage-Its_a_Great_Reassessment_of_Work_in_America-Footnote_5.pdf)
https://iwpr.org/media/press-releases/mothers-day-surprise-women-lose-jobs-and-continue-to-leave-the-labor-force-while-unemployment-among-black-and-latina-women-remains-high/
https://www.ft.com/content/9ef97745-c4d7-4273-b1f1-07d5d55efbc8 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/05-10-21_FinancialTimes-S_and_P_500_Ends_at_Record_Despite_Disappointing_Jobs_Report-Footnote_7.pdf)
https://adpemploymentreport.com/2021/April/NER/NER-April-2021.aspx
https://www.barrons.com/articles/why-the-stock-market-rose-this-past-week-what-to-know-51620430506?mod=hp_LEAD_3 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/05-10-21_Barrons-The_Dow_Surged_to_a_Record_High_Because_the_Bad_News_Wasnt_So_Bad-Footnote_9.pdf)
https://www.sciencedaily.com/releases/2021/04/210429090227.htm
https://www.mpg.de/16785076/disaster-brain-size?c=2249
https://www.cnbc.com/2019/12/09/when-it-comes-to-money-our-brains-are-wired-to-do-it-all-wrong.html
https://newsroom.bankofamerica.com/content/newsroom/press-releases/2021/04/bank-of-america-study-finds-nearly-half-of-affluent-americans-ge.html
https://www.brainyquote.com/quotes/richard_p_feynman_160383

Significant Shrinkage

Significant Shrinkage

Significant Shrinkage

Buffeted by Inflation

Is it time to double check your household budget?

Chances are the budgeted expenditures of the vast majority of Americans are about to get buffeted. Or so says the Oracle of Omaha.

In the latest shareholder meeting of Berkshire Hathaway, Mr. Buffet sounded an alarm:

We are seeing substantial inflation. We are raising prices. People are raising prices to us, and it’s being accepted.[1]

​Specifically, Mr. Buffett pointed to the rising cost of steel affecting Berkshire’s businesses in housing and furniture.

People have money in their pocket, and they pay higher prices.  It’s almost a buying frenzy. [The economy is] red hot.[2]

​Mr. Buffett isn’t the only town crier sounding the alarm. Consider what happened at Bank of America. BofA has been tracking the “mentions” of the word “inflation” in corporate earnings calls since 2004. In late April, their analysts said, “Buckle up! Inflation in here.”[3] The analysts showed a chart depicting a tripling of inflation “mentions.”

But after another week of earnings calls, the BofA analysts had to revise their findings. They then found that “mentions” of “inflation” had quadrupled.

When Money Chases Assets

We don’t have to look far to see evidence of inflation. And we don’t have to wonder why prices are rising. When the Federal Reserve increases the U.S. money supply at an annual rate of 37%,[4] those dollars have to go somewhere. They go into the stock market, into real estate, into art works, and … into the groceries you buy every week.

Stock Market Is Up

So far this year, the S&P 500 Index is in positive territory.

Housing Prices Are Up

In northern Virginia, the median price of a house rose by 9% in 2020. According to WTOP News:

​The median price of a home that sold in Northern Virginia last year was $590,000, up 9%, and $90,000 more than the median price throughout the D.C. metro.[5]

“Art” Prices Are Way Up

Surely you’ve heard by now that a piece of crypto art sold at Christie’s for $69 million. An artist known as Beeple (a young man in Charleston, South Carolina) had created a piece of digital art for 5,000 consecutive days. He then cleverly combined all 5,000 pieces into a single piece of digital art and made it an NFT (a nonfungible crypto token). Strangely enough, a buyer then plopped down a whopping $69 million for the ownership of this single NFT, which resides somewhere on a blockchain. But we don’t have to pay to see it. It’s all over the Internet. It appears in a CNN article.[6] Take a look:

Shrinkage – Your Grocery Bill

The prices of many grocery items are not going up. But inflation is rampant. How is that possible? One word: shrinkflation.

Instead of raising prices, producers of consumer goods are shrinking the amount in a package. Seemingly, the package size remains the same. But in fact, a smaller quantity is offered at the same price.

Consider this picture of paper towels offered at Costco.[7] The roll on the right has 160 sheets; the one on the left, just 140.

Or check out these pictures of Nathan’s Pretzel Dogs, which appear in an article on Mouseprint.org.[8] The first box contains five; the second, just four.

Shrinkflation Is Everywhere

Scads of manufacturers are now playing the shrinkflation game. Len Penzo, in his blog, reports more than two dozen items where product size has shrunk.[9] Here’s his list of changes in product size since 2020:

Powerade (Was: 32 oz.; Now: 28 oz.)
Lay’s Potato Chips, party bag (Was: 15.25 oz.; Now: 13 oz.)
Nutella (Was: 14.1 oz.; Now: 12.3 oz.)
Puffs tissue (Was: 56 count; Now: 48 count)
Dawn dish soap, small (Was: 8 oz.; Now: 7 oz.)
Hillshire Farms Polska Kielbasa (Was: 16 oz.; Now: 14 oz.)
Nathan’s Hot Dogs, skinless: (Was: 16 count; Now: 14 count)
Keebler Club Crackers (Was: 13.7 oz.; Now: 12.5 oz.)
Charmin Ultra Strong toilet paper (Was 286 sheets; Now: 264 sheets)
Hershey’s kisses, family size (Was: 18 oz.; Now: 16 oz.)

Inflation Primarily Hurts Those on Fixed Incomes

If a family’s income stays the same and prices go up (or shrinked products reduce the amounts purchased), then slowly, over time, that family become poorer.

The solution? Buy assets that are also inflating. If a portion of a family’s savings can be allocated to assets that also inflate, then they have a chance to see their lives remain pretty much the same, or, if they pick the right assets, improve over time.

Which assets?

That’s Our Job at Research Financial Advisors

We have a long track record of protecting a family’s assets and making sure they battle the ravages of inflation. If you’d like us to review the current account we manage for you … or if you have accounts that either you manage or others manage for you … we’re happy to provide a review of your holdings.

Market Commentary 5/10/2021

Weekly Market Commentary 5.3.2021

How Are Your Investments Doing Lately?  Receive A Free, No-Obligation 2nd Opinion On Your Investment Portfolio >

Weekly Financial Market Commentary

May 4, 2021

Our Mission Is To Create And Preserve Client Wealth

It’s Spring and economic recovery is in the air.

Last week, the Bureau of Economic Analysis reported the U.S. economy grew at a 6.4 percent annualized rate for the first three months of 2021. While that’s good news for companies and workers, asset managers are checking their expectations.

The stock market reflects what investors think may happen in the future. During the past year, major U.S. stock indices moved higher as investors anticipated vaccines and economic recovery, reported Patti Domm of CNBC. Since its March 2020 low, the Standard & Poor’s 500 Index has gained 88 percent.

Amidst strong signs of recovery in the United States, some asset managers are positioning for “inflation and tapering,” according to a source cited by Naomi Rovnick of Financial Times. “Investors have topped up their cash holdings at the fastest rate since March 2020 as debate intensifies over whether stock markets will continue rallying now the U.S. economic recovery from the pandemic is firmly under way.”

Investors were feeling cautious last week, but there were no signs of tapering, which occurs when the Federal Reserve begins to buy fewer bonds. On Wednesday, the Fed left its supportive policies in place.

When the Fed begins to change course and rates move higher, equity market valuations may adjust. “The main worry for stocks is that higher bond yields translate into lower equity valuations. Higher yields reduce the current value of future profits and therefore can reduce earnings multiples,” reported Jacob Sonenshine of Barron’s.

Profits were strong during the first quarter of 2021. U.S. companies continued to report exceptional earnings last week. With 60 percent of firms in the Standard & Poor’s 500 Index reporting, the blended earnings growth rate was 45.8 percent. More than 8 of 10 companies have reported better than expected earnings, reported John Butters of FactSet.

Major U.S. stock indices finished the week flat to down. Rates on 10-year Treasuries edged higher.

Estimates suggest there will be 25 million by 2100. Take a guess: electric vehicles, household robots, wild elephants, centenarians, or streaming services per household?

 ·         Electric vehicles. There may be far more than 25 million – estimates suggest 145 million – on the road by 2030.

·         Household robots. Domestic robots that offer companionship or help with tasks like lawn mowing, vacuuming, and mopping are becoming popular. Estimates suggest about 55 million domestic bots will be sold next year.

·         Wild elephants. From 1989 to 2018, the number of elephants in the wild doubled to 34,000, reported Earth.org.

·         Streaming services per household. Currently, the average number of streaming services per household is four. There’s room for growth, but probably not that much.

·         Centenarians. The world is in the midst of a longevity revolution and, by 2100, there may be as many as 25 million centenarians – people age 100 or older – around the globe, according to a source cited by Science Direct.

The world’s 65 and older population is growing rapidly.

According to the most recent population estimates from the United Nations, “…1 in 6 people in the world will be over the age 65 by 2050, up from 1 in 11 in 2019. The latest projections also show the number of people aged 80 or over will triple in the next 30 years. In many regions, the population aged 65 will double by 2050, while global life expectancy beyond 65 will increase by 19 years.”

Longevity deserves more thought than it often receives. It is an essential part of every financial and retirement plan, influencing savings goals, investment choices, and retirement income levels. Yet, people often underestimate their potential longevity.

In the United States, the average life expectancy at age 65 is 19 years, according to the Centers for Disease Control (CDC). Consequently, many people assume they should plan to live to age 84. However, the CDC estimate is an average. Half of 65-year-olds will live beyond age 84.

When it comes to planning for the future, having above average expectations for longevity may be a good idea.

Weekly Focus – Think About It
“I am not more gifted than the average human being. If you know anything about history, you would know that is so – what hard times I had in studying and the fact that I do not have a memory like some other people do…I am just more curious than the average person and I will not give up on a problem until I have found the proper solution. This is one of my greatest satisfactions in life – solving problems – and the harder they are, the more satisfaction do I get out of them. Maybe you could consider me a bit more patient in continuing with my problem than is the average human being. Now, if you understand what I have just told you, you see that it is not a matter of being more gifted but a matter of being more curious and maybe more patient until you solve a problem.”
–Albert Einstein, Theoretical physicist

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Investment advice offered through Research Financial Strategies, a registered investment advisor.
* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

 

Investment advice offered through Research Financial Strategies, a registered investment advisor.

 

Sources:
https://www.bea.gov/sites/default/files/2021-04/gdp1q21_adv.pdf
https://www.cnbc.com/2020/12/30/how-the-pandemic-drove-massive-stock-market-gains-and-what-happens-next.html
https://www.ft.com/content/dc17fddb-3e09-419d-aabe-90ee89511bc5 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/05-03-21_FinancialTimes-Investors_Move_into_Cash_at_Fastest_Rate_Since_March_Last_Year-Footnote_3.pdf)
https://www.barrons.com/articles/the-stock-market-ignored-the-fed-meeting-why-that-could-be-a-mistake-51619715102 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/05-03-21_Barrons-The_Stock_Market_Ignored_the_Fed_Meeting-Why_that_Could_be_a_Mistake_Footnote_4.pdf)
https://insight.factset.com/sp-500-earnings-season-update-april-30-2021
https://www.barrons.com/market-data (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/05-03-21_Barrons-Market_Data-Footnote_6.pdf)
https://www.cnbc.com/2021/04/29/global-electric-vehicle-numbers-set-to-hit-145-million-by-2030-iea-.html
https://www.mordorintelligence.com/industry-reports/household-robots-market
https://earth.org/kenya-is-seeing-a-boom-in-elephants/
https://discover.jdpa.com/hubfs/Files/Industry%20Campaigns/TMT/New%20Streaming%20Services%20Cut%20into%20Netflixs%20Market%20Share%20While%20The%20Mandalor.._.pdf
https://www.sciencedirect.com/science/article/abs/pii/S0047637416302548?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosam&stream=top
https://www.un.org/development/desa/en/news/population/our-world-is-growing-older.html
https://www.cdc.gov/nchs/data/vsrr/VSRR10-508.pdf
https://www.goodreads.com/quotes/tag/average

John Dough’s Investment Strategy

John Dough’s Investment Strategy

John Dough’s Investment Strategy

Buy and Hold

Back in the late 1990s, John Dough had it all figured out.

He had worked for the same government agency for more than 30 years, he made a nice salary, he would get a solid pension upon retirement, he was careful with his money, and he followed the tried-and-true investment strategy of none other than Warren Buffet:

“Buy a few good stocks and hold them forever.”

John Dough stayed away from the Dot Com stocks of the late 1990s. Instead, he had invested his portfolio in the ETF called SPY. This Exchange Traded Fund basically owns the stocks in the S&P 500 Index. And John knew that the S&P had yielded about an 8% annual return since 1957.[1]

His buy-and-hold strategy would enable him to sell 6% of his portfolio each year. With the historical record of the S&P, the amount of his estate would at least stay the same and perhaps even grow a few percent.

John hoped to sell his house in Arlington, VA, move to a smaller house in the country, and then buy a condo at the beach.

Oops … The Dot Com Crash of 2000

In the spring of 2000, everything fell apart.

Over the next two years, the NASDAQ tumbled 76.81%.[2] But John felt safe: his tried-and-true, buy-and-hold position in the S&P would surely protect him over time.

The S&P stood at 1494.50 on September 8, 2000.[3] But it then dropped to the 800s in February 2003.[4] John’s SPY investment got back to even briefly in 2007. Then it crashed again.

Finally, in the year 2013, John’s SPY buy-and-hold strategy got back to even.[5]

John had to work another 10 years. His wife had to get a job as well.

Beach condo? Not.

Buy and Hold If You Plan to Live Another 100 Years

John—and millions like him—fail to realize a key truth: yes, buy and hold if you plan to live to be 100 and you’re now 25. If you’re a pension fund that’ll be around forever, then perhaps a buy-and-hold strategy is right for you, too.

And if you’re Warren Buffet? Well, if you’ve got 50 billion stashed away for retirement, a 50% haircut won’t hurt. You’ve got 25 billion left over. You can afford to wait for the market to recover and for Mr. Bull to continue his journey.

But if you’ve got $400,000 stashed away, a 50% haircut can destroy your life.

Instead, Manage Risk Through Active Portfolio Management

If John had followed a different route in 2000, his life would be different. And a whole lot better. Instead of buying and holding the S&P, John should have sought to manage risk. He should have been in a position where he could get out in the spring of 2000 and take on some defensive positions.

What Is Risk Management?

Risk management analyzes the ebb and flow of the market. Using a variety of skills known as “technical analysis,” our financial advisors at Research Financial Advisors carefully monitor various moving averages to spot upcoming trouble in the market. If we get certain signals, we might decrease the holdings in a portfolio. If a serious signal waves the red flag, we might very well take on a “leveraged” position that goes up as the market goes down.

A COVID Example

When the virus struck in the spring of 2020, we started to play defense. We knew that a buy-and-hold strategy could wreck the retirement accounts of many of our clients. Instead, in February we started to exit our long positions, at one point going to 100% cash. We then began to purchase some leveraged “market short” positions—these are ETFs that go up in price when the market goes down. As the crash accelerated, these defensive positions prevented catastrophic losses.

As we watched our technical indicators (we watch a host of them every single day … all day), we began to see a slight shift in market temperament. Perhaps a bottom was approaching. So we began to take on some long positions that we thought might even thrive in this new, COVID economy. We bought some ETFs in the aerospace and defense sectors, in the home-gaming sector, and in the robotics sector, and we bought a significant position in SPY when we thought the bottom was either in or very close.

Using technical analysis to manage our clients’ accounts, our 100% equity model ended 2020 with a 32% gain (net of fees). Meanwhile, the S&P advanced 15.76% in 2020. Even our 100% fixed income model clocked a gain of 8.5% (net of fees).

2020 Was Strange

Think about it. Millions of people out of work. Small businesses destroyed. Streets and sidewalks empty. No airplanes in the sky.

And the stock market goes up.

It could have crashed and turned into a 1930s nightmare.

Here Comes the Fed

In 2020, the Federal Reserve went on a bond-buying binge. Here’s what ordinarily happens when a bond is bought and sold. Suppose you have a $1,000 bond and you sell it to Susan. You give the bond to Susan, and she writes you a check for $1,000. Your account goes up $1,000. Susan’s goes down $1,000. The net effect on the money supply? Zero.

Now suppose the Federal Reserve buys your $1,000 bond. What happens then? Your account goes up $1,000. But nobody’s account goes down $1,000. The net effect on the money supply?

The money supply goes up $1,000 (with that increase in your account and no decrease in anyone else’s account).

Multiply that one thousand by one million and you get one billion. Multiply that one billion  by one thousand and you get one trillion.

The Fed has increased the supply of dollars circulating throughout the globe by trillions. In fact, … are you sitting down …. as of last September nearly 25% of all dollars in existence were created in the past year.[6]

That Money Has to Do Something

That extra money needs a home. So it goes into housing. It goes into art work (a piece of crypto art recently sold for $69 million[7]). It goes into the stock market. That injection of cash saved us from a 1930s depression.

But what will the ultimate effect be? Inflation. Not just in homes and stocks and art. But also in bacon and eggs.

Risk Management Is the Best Approach

Buy and hold? Sure, if you’ve got a very long time horizon. But the buy-and-hold strategy of John Dough spelled trouble. Big trouble. The S&P began a long decline in the fall of 2000. John’s SPY holdings began to decline. Ultimately, his account took a 50% haircut. John had to wait 13 years before he was back to even.

Risk management would have saved his retirement.

Risk management. That’s what we do here with your account.

Give Us a Call

I invite you to call me 301-294-7500. I’m always happy to answer your questions about our approach.

We hope you’ll forward this email to your family, friends, and colleagues.

Sincerely,

Jack

Market Commentary 5/10/2021

Weekly Market Commentary 4.26.2021

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Weekly Financial Market Commentary

April 26, 2021

Our Mission Is To Create And Preserve Client Wealth

It wasn’t just the price of pork chops.

Last week, as investors weighed the news, strong corporate earnings were offset by higher grocery prices and rising numbers of global coronavirus cases.

Solid corporate earnings weighed favorably.
So far, 25 percent of the companies in the Standard & Poor’s (S&P) 500 Index have reported first quarter earnings, and 84 percent said profits grew faster than expected, reported John Butters of FactSet. The blended earnings growth rate for the S&P 500 (which includes estimated earnings for companies that have not yet reported and actual earnings for companies that have) was 33.8 percent last week. For context, the 5-year average earnings growth rate (actual earnings) for the S&P 500 was 6.9 percent as of last week.

It’s important to remember the impact of earnings is often muted as earnings expectations – good or bad – tend to be priced into the market long before they are reported.

Inflation expectations weighed unfavorably.
Investors were concerned about inflation – and so were consumers. While the Federal Reserve and many economists believe we’ll see a fleeting uptick in inflation, others think the increase will persist. “…A consistent drumbeat of price hikes from major companies, consumer reports, and market data suggest the world may not be going along with their conclusion,” reported Dion Rabouin of Axios.

It is likely markets may pay particularly close attention to Federal Reserve statements about inflation and interest rates this week.

Rising numbers of Covid-19 cases around the world tipped the scales.
Concerns about India’s coronavirus surge, Japan’s state of emergency, and rising numbers of cases around the world caused investors to reassess expectations and some sold shares of companies that were expected to benefit from the re-opening of world economies. Yun Li and Maggie Fitzgerald of CNBC reported:

“The sell-off in shares that are tied to a successful reopening came as the World Health Organization warned that global coronavirus infections were edging toward their highest level in the pandemic. In the United States, while the country is maintaining a pace of 3 million reported vaccinations per day, about 67,100 daily new infections are still being recorded.”

Despite uncertainties, most (67 percent) professional investors who participated in Barron’s Big Money Poll said they were bullish on the outlook for stocks in the next 12 months. Just 7 percent were bearish.

Major U.S. stock indices finished the week flat or slightly lower. U.S. Treasuries rallied briefly before finishing the week flat.

A capital gains tax hike has been proposed.
Another factor that influenced last week’s stock market decline was the proposed capital gains tax hike. Investors’ response was a bit surprising since the tax increase wasn’t really news. Ben Levisohn of Barron’s reported:

“President Joe Biden made no secret of his plan to raise capital-gains taxes on the very wealthy. It was a campaign pledge, one that got enough attention for Goldman Sachs to release a note looking at the historical impact of previous increases on the stock market. (The answer: not very much.)”

According to Steve Goldstein of MarketWatch, the Goldman note reported the wealthiest U.S. households sold 1 percent of their equity assets prior to the 2013 capital gains tax increase. As a result, the S&P 500 Index experienced a short-lived loss six months prior to the tax hike and, six months after the tax hike, the Index was back in positive territory.

While the long-term impact on stock markets may be relatively small, the effect on high income investors could be significant.

The administration proposal, as written, would nearly double the capital gains tax rate for people with adjustable gross income of $1 million or more. (That’s about 0.3 percent of American taxpayers.) The current top long-term capital gains tax rate would increase from 20 percent to 39.6 percent, reported Laura Davison and Allyson Versprille of Bloomberg.

The capital gains tax increase is a proposed change. It has not been finalized, and there are indications the final tax may be lower if the bill is passed.

If you’re concerned about the potential tax increase and would like to learn more, please get in touch.

Weekly Focus – Think About It
“Share prices fluctuate more than share values.”
–Sir John Templeton, Investor, banker, and asset manager

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Investment advice offered through Research Financial Strategies, a registered investment advisor.
* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

 

Investment advice offered through Research Financial Strategies, a registered investment advisor.

 

Sources:
https://www.barrons.com/articles/the-feds-inflation-blind-spot-already-surging-grocery-and-housing-prices-51619209825 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/04-26-21_Barrons-The_Feds_Inflation_Blind_Spot-Already-Surging_Grocery_and_Housing_Prices-Footnote_1.pdf)
https://insight.factset.com/sp-500-earnings-season-update-april-23-2021
https://www.cnbc.com/2021/04/19/stock-market-futures-open-to-close-news.html
https://www.axios.com/inflation-federal-reserve-price-hikes-63588a9a-92cd-4764-8cd0-28778cf57c57.html
https://www.barrons.com/articles/india-and-japan-are-seeing-covid-surges-why-that-wont-derail-the-global-recovery-51619208829 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/04-26-21_Barrons-India_and_Japan_are_Seeing_COVID_Surges-Why_That_Wont_Derail_the_Global_Recovery-Footnote_5.pdf)
https://www.barrons.com/articles/stocks-have-more-room-to-rise-says-barrons-big-money-poll-51619222301?mod=hp_HERO (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/04-26-21_Barrons-This_Bull_Market_is_Far_from_Over_Pros_Say-Where_Theyre_Investing_Now-Footnote_6.pdf)
https://www.barrons.com/articles/why-did-the-dow-drop-this-week-it-got-spooked-by-old-news-51619221366?mod=hp_LEAD_2_B_1 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/04-26-21_Barrons-The_Stock_Market_got_Spooked_by_What_It_Already_Knew-Heres_Next_Weeks_Surprise-Footnote_7.pdf)
https://www.marketwatch.com/story/get-ready-for-178-billion-of-selling-ahead-of-the-capital-gains-tax-hike-these-are-the-stocks-most-at-risk-11619174251
https://www.bloomberg.com/news/articles/2021-04-23/biden-aims-at-top-0-3-with-bid-to-tax-capital-gains-like-wages (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2021/04-26-21_Bloomberg-Biden_Aims_at_Top_0.3_Percent_with_Bid_to_Tax_Capital_Like_Wages-Footnote_9.pdf)
https://www.azquotes.com/author/14517-John_Templeton

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