New Concerns in the Markets

November was a down month for stock markets as new worries on a COVID variant along with the actions of the Federal Reserve were front and center on investor’s minds.  Both bond and stock markets were significantly more volatile as concerns about future actions and repercussions of potential government actions caused investors to re-examine risks. 

The S&P 500 was down 0.69% for November, with the negative movements concentrated in the back half of the month.  On November 26, news of a new COVID variant, now titled Omicron, caused the worst daily market performance since October 2020.  Governments rushed to adjust flight restrictions and examine populations for evidence of the variant while scientists and drug providers began the process of assessing the impact.  The bond market also displayed characteristics of a “risk-off” trade as well – with US treasury rates falling (leading to rising US Treasury bond prices) and some selling of higher risk bond assets like investment grade and high yield corporate bonds. 

As of now, we know very little about the impact of Omicron on long term business fundamentals.  The digestion of news forthcoming will likely create a more volatile market than we’ve seen in recent months, but this added volatility may go in both directions.  If Omicron has a more severe impact on individuals and causes a re-establishment of restrictions, then the market is likely to experience a decline.  If Omicron is determined to be controllable, and does not alter the prior trajectory of re-opening, then the markets could experience a snapback rally that continues into 2022. 

In other news, comments made from Chairman Fed Jerome Powell on November 30 also suggested that elevated inflation may be with us longer than anticipated.  Noting continued supply constraints along with potential Omicron effects, Chair Powell laid out a stance that could include an accelerated pace of reduction in bond purchases by the Fed.  This commentary led investors to believe that rate hikes may be coming earlier, and at a faster pace, than suggested prior. 

While the concerns of Omicron and Fed action are relatively new, concerns about issues and the effect on market trends are as old as the markets themselves.  There is ALWAYS something to be concerned about.  When markets are rising, it feels like they can’t go up forever and are “due” for a decline.  When markets are falling, it feels like there is no bottom.

Our stance remains that, over the long term, markets follow business fundamentals.  This includes the health of the economy, the health of businesses within these economies, and the valuation (or what we pay) for these businesses.  It is our opinion that nothing we have seen thus far necessitates a change in our outlook.  Reducing the level of support by the Fed does not change how a company generates more business to increase revenues and earnings.  Omicron could have an effect, but it is too early to make the call that this variant will have a significant impact on the healthy US consumer to go out and spend money.

The important part is not to get caught up in the noise and instead focus on the investment plan.  The plan should include taking enough risk to meet your long-term investment objectives but is also prudent and has some level of protection from decline.  Allow yourself to be nimble to market changes and take advantage of opportunity, but not so aggressive that it shifts you dramatically away from your risk tolerance or risk ability.   

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on December 2, 2021 Read More

The Big Get Bigger

October was a positive month for the market, with some of the largest companies in the world driving positive performance back to all-time highs. The worries that came in September were swept away in October; even as economic data is starting to show some signs of softness.  It’s clear that the current market trend is upward.  Investors are not searching for as many reasons to sell but instead looking for opportunities to buy. 

Stock markets in the US were strong in October.  The S&P 500 was up 7.01% during the month and the Russell 2000 (small cap stocks) were up 4.25%.  International stocks weren’t quite as strong but were still up as developed market stocks were up 2.46% and emerging markets were up 0.99%. 

US large cap stocks were led by some of the largest companies in the world.  Microsoft (MSFT) is up over 50% in 2021 and the market capitalization of the company ended the month at a staggering $2.49 Trillion.  This market cap has now superseded the second largest company, Apple (AAPL), with a market cap of $2.48 Trillion.  The most recent entrant to the Trillion Dollar Market Cap club, Tesla, is now up over 57% this year after a rapid rise in October. 

Bond performance continues the stagnation seen since the massive outperformance during the COVID driven correction of 2020.  Interest rates are higher than the levels of last year, creating a headwind to performance for both treasury and investment grade bonds.  Despite the stagnation, flows into bond funds and ETFs remain steady as investors continue to use bonds for low levels of income but also to protect portfolios from potential future stock market declines. 

Despite the market trending positively, economic and fundamental business data hasn’t been as overwhelmingly positive.  GDP estimates, which reflect US economic growth, are still positive but have been trending down as supply chain issues have caused product delays and higher prices on goods and services.  Companies have also been reporting earnings in October, and while year over year growth remains strong, the levels of positivity have been watered down somewhat by supply chain constraints and the rising cost of labor. 

While these trends are worth monitoring, Gradient Investments still views the level of demand from a healthy US consumer as the predominant reason to remain positive.  Supply problems and higher prices may persist in the short term, but fixing these issues is usually an easier task compared to trying to stimulate demand from an uneasy consumer.  Supply chains will adjust to meet demand, and a healthy consumer with a desire to spend usually is a good recipe for US businesses.       

As the last 2 months have shown, fears residing in markets in one month can transition to high levels of exuberance in the next month.  It is important to not react to a roller coaster of news and information that can create an emotional short-term response that will derail long term efforts.  The best way to do this is by building a fully tailored, well designed investment plan that can protect assets but also participate in market upside and keeping the risk aligned with your personal objectives. 

Posted on November 3, 2021 Read More

A Few Bumps in the Road

September saw the first real signs of weakness in the stock markets this year.  While the S&P 500 did not experience a 5% correction, many of the companies within the US market did experience corrections of 5% to 10% or more.  During times of correction, investors often search for reasons as to why markets are selling off.  While we never know with full accuracy why markets sell off (nor exactly when), the recent concerns include: a Chinese property company and contagion concerns, fears around the proliferation of COVID, inflation, a rapid increase in interest rates, an uncertain path regarding a US infrastructure bill package, and a potential government shutdown.    

Stock markets across the globe declined in September.  The S&P 500 broke a seven-month streak of gains after falling by 4.65% in the month.  US small cap stocks fared slightly better than their large cap counterparts but were also down 2.95% in September.  Lastly, international stocks declined during the month as fears around Chinese property development company Evergrande spurred a sell off in global stocks.     

Bond performance also declined as long-term US interest rates rose during the month.  The US Federal Reserve elected to keep the Fed Funds rate unchanged, but commentary regarding tapering (reducing their level of bond purchases) combined with economic inflation data sent long-term rates from 1.31% to 1.52% by month end.  Despite the current rise in rates, real yields (treasury yields minus the inflation rate) remain near 20-year lows.     

As we think about trends in the market, one thing remains consistent: investors always have something to fear.  Political influences, contagion effects of a business gone awry, or simply that markets have worked “too well” are fears that will always be part of investing.  Further, markets rarely move up in a straight line.  The environment we experienced earlier in the year, with seven months of positive performance, is the exception rather than the rule.  Market growth is rarely linear and trying to time the ebbs and flows perfectly usually leads to performance erosion rather than performance improvement.

At Gradient, we focus our decision making on longer term trends in economic and business fundamentals.  We concentrate on trends in global economies, trends in the companies within those economies, and the valuation (what we pay) for those companies.  Using this information as guideposts, over time, is what adds value to an investment process. 

In that regard, the fundamentals keep us positive on the overall condition of our economy and the potential for continued stock performance.  Both US and global economies are growing, and while inflation is a concern, we aren’t in red flag territory as of yet.  The best measures of company performance are revenue and earnings growth.  These metrics have been consistently exceeding expectations and S&P 500 earnings growth is expected to grow at an average of 25% this and next year.  On the other side, valuations are not cheap.  What we pay for stocks in the S&P 500 are at a premium to their long-term averages.  While this is worth monitoring, we feel that higher valuations are justified based on continued low interest rates combined with an economy and businesses that should continue to grow at a higher than average rate. 

These same fundamentals are what keep us cautious on the bond market.  Historically, what investors receive for interest income at the beginning has been a good indicator of bond performance over the subsequent years.  Currently, 10-year US Treasury rates are below the current inflation rate.  Further, default spreads (the premium received for taking on default risk) are near record lows, which means both investment grade and high yield bonds are paying very low yield compared to long term history.  While bonds can still have a place in client portfolios, the environment would suggest very low rates of return for bond allocations until rates rise to levels that make income more attractive.   

Lastly, the investment philosophy of Gradient has always been to do the homework upfront.  We understand the unique circumstances of each of our investors and build investment plans around personal investment objectives and tolerance for risk.  Adherence to the plan, in both good times and bad, are the bedrock of growing assets over time but also protecting assets when markets suffer an inevitable, but temporary, decline.  The world will always give us something to worry about, and those concerns are valid and worth monitoring.  These concerns, however, often lead to greater value for investors who have a plan and can be opportunistic when others are fearful. 

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on October 5, 2021 Read More
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