Election on the Horizon

Historically, stock markets have not reacted well to periods of great uncertainty that create a higher degree of question regarding the trends of future earnings.  2020 has certainly been a year of high uncertainty as a result of Coronavirus and the subsequent effects on the global economy.   While investors are still dealing with the potential ramifications of Coronavirus and companies’ ability to adapt to “the new normal”, the elections in November are an upcoming secondary source of uncertainty. 

Whether we have continuity from the current administration, or a change in leadership, it is our opinion that markets tend to adapt and move higher regardless of who wins the election.  Investors that mix politics with portfolios tend to perceive an unfavored political outcome as negative for their portfolio. Historically, however, the stock market performs well under Republican and Democratic administrations. In the chart below, the performance of the S&P (blue line) rises over time regardless what party is in charge. The light blue shaded area represents periods when a Democrat was President and the red shaded area represents time periods when a Republican was President.  As you can see, the constant among both Democratic and Republican administrations is the ability for the market to grind higher. 

As we move closer to November, a lot of attention will be paid to election polls and predictions. The early election polling reflects a potential for a policy administration change. The initial consensus is that a Democratic sweep may be less business friendly than the current administration.  While prediction of both the election and the resulting reaction of the market is extremely difficult, an examination of historical precedent can reflect how markets have performed during various scenarios.

As an example, history has shown if the Democrats sweep the presidency as well as congress, the returns for the S&P 500 on average are positive. In the graph below when a Democrat is President and Congress is also controlled by Democrats the average annual return for the S&P 500 going back to 1928 is 14.1% (red circle).  While history is a good guidepost, it is never a certainty.  Markets, and the companies within them, have shown a high degree of ability to adapt to various political environments and continue to provide value to their shareholders.

The upcoming election in November is yet another uncertain event with an unknown outcome.  Uncertainty, however, is simply a part of investing and, over time, markets have proven adaptable and able to prosper regardless of which party controls the White House.  It is Gradient’s opinion that politicians tend to have less influence on markets than most realize, and a well-defined investment plan tends to outlive political actions.

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

Posted on July 21, 2020 Read More

Quarterly Market Review

The financial markets have worked overtime to discount an inordinate amount of new information in real time to assess the future global economic picture.  When this quarter began, the stock market was just beginning to pick itself up from one of the worst and quickest declines in history.  The 34% decline from February 19 to March 23 this year was an indication of just how weak the economy would be in the second quarter.

The economic numbers released over the past three months confirmed the story the stock market predicted.  The unemployment rate peaked at 14.7% as over 20 million jobs were lost in the economic lockdown.  The housing market saw large declines in both starts and permits for new homes.  The consumer, who had been the engine for economic growth, was essentially shutdown causing consumer spending and consumer confidence to plunge in the second quarter.  First quarter GDP fell 4.8% and second quarter GDP is expected to decline by an astounding 50.0%.  Two consecutive quarters of negative GDP growth officially qualifies as an economic recession. This will mark the first recession since 2008/2009.

The headlines reminded us how bad things were, but the market began to shed light on how good things could become. The volatility experienced in the last week of the quarter also suggested we are not out of the woods just yet.  There is still a wall of worry the market needs to climb.  Signs of a second spike in coronavirus cases seem imminent as some states are slowing or partially reversing their economic reopening plans.  A therapeutic and eventually a coronavirus vaccine are still a few quarters away.  The 2020 election combined with social unrest and China tension creates a recipe for continued volatility in the second half of the year.

Despite all the current news and anxiety, the stock market had an excellent quarter as it looked toward a better future.   This was actually the best quarter since 1987.  The technology-heavy NASDAQ led the way with returns just over 30% and surpassed the 10,000 mark for the first time.  The S&P 500 and the Dow Jones Industrial Average posted gains of nearly 20% in the second quarter.  International stocks participated in the comeback quarter with international developed stock markets rising 14.9% and emerging markets adding 18.1% in the past three months.               

The bond market entered the quarter on the heels of the Federal Reserve’s rapid move to zero on key short-term interest rates.  With the interest rate floor firmly in place, rates experienced a quarter of relative quiet.  The yield curve remains positively sloped and interest rates ended the quarter basically where they began.  The 2-year U.S. Treasury note declined seven basis points to yield just 0.16% at quarter end.  At the longer end of the yield curve, the10-year note fell four basis points to yield 0.66% and the 30-year U.S. Treasury bond rose six basis points to yield 1.41% on June 30, 2020.  The real action in the bond market was found in the credit markets.  Both high yield and investment grade corporate debt saw a significant tightening in credit spreads.  Investment grade corporate bond spreads were basically halved from 3.15% at the start of the quarter to 1.61% at quarter end.  Spreads on high yield bonds collapsed 2.00% sending their bond prices significantly higher.      

When this year began, no one could have predicted the economic path traveled in just six short months.  Now that we are here, it is a perfect time to reflect on your financial plan, investment goals and objectives and to decide on your plan moving forward.  Risk tolerance is a widely used term in the investment profession.  There are numerous ways the industry tries to quantify this and help investors establish a personal financial risk assessment.  While this is an important exercise, the best risk tolerance questionnaire cannot capture how you tolerated the volatility in the markets during the past six months. Take a moment to reflect on 2020 to date.  How did you handle the emotional aspect of these wild swings in valuations?   How did your portfolio perform relative to your expectations?   Did your current income and liquidity support your current lifestyle?

The first quarter was the test.  The second quarter provided an opportunity to change your answer.  The next two quarters will have new surprises and the heightened volatility will likely persist.  Keep yourself healthy, safe and invested at a risk level that supports your emotional and financial well-being.                

Posted on July 7, 2020 Read More

Growth Versus Value Stocks

2020 has been a year of dramatic swings in the US stock market, with a decline from all time highs on Feb 19, 2020 to down over 30% in just over a month and a 30% rally off the March bottom.  Within this timeframe, there has been a large divergence in performance between stocks that have recovered and even exceeded prior highs while others are languishing and have not experienced the level of recovery seen in the broad market index (S&P 500).  The segments of the market that reflect this is the divergence of growth versus value stocks. 

Loosely defined, growth stocks tend to have higher revenue and sales growth and historically have had higher valuations and greater volatility.  On the contrary, value stocks tend to have lower revenue and sales growth (more mature companies) but have historically held lower valuations (cheaper) and lower volatility.  The S&P 500 is an index that has both growth and value stocks, and the index provider of the S&P (S&P Global) uses various metrics to dissect the 500 companies into value or growth segments.  While not perfectly segmented, the S&P 500 is approximately 50% value and 50% growth.    

Using ETFs that represent the S&P 500 (IVV – black line), growth stocks (IVW – red line) and value stocks (IVE – blue line), the performance differential in 2020 (through 5/19/20) is quite dramatic. 

  • The S&P 500 is down 8.79%
  • Growth stocks are now actually up on the year (up 0.16%)
  • Value stocks are languishing (down 19.10%) 

A significant factor for the level of outperformance in growth stocks over value has been sector composition.  The data below shows the segmentation of IVW (growth stocks) on the left versus the IVE (value stocks) on the right.

  • Technology stocks represent nearly 40% of growth compared to less than 10% of value
  • Financials represent nearly 18% of value compared to less than 5% of growth
  • Technology stocks (Apple, Microsoft, and Visa) have significantly outperformed Financials stocks (JP Morgan, Bank of America, and Wells Fargo)
  • In Consumer Discretionary, Amazon (which has outperformed significantly) is a large percentage of the growth ETF (over 7%) while the value ETF has no position

Why is this important?

Within Gradient stock portfolios, the investable universe is dependent upon the stated objective.  For example:

  • The G50 is a blue-chip, US, dividend paying stock portfolio designed for growth and income.
  • The investable universe for the G50 tends to be much more heavily weighted in value stocks, as those stocks have historically been the companies that pay higher dividends.
  • On the contrary, the G33 portfolio is a diversified growth portfolio designed for long term price appreciation.
  • It isn’t concerned with dividends and is going to invest in growth companies (like Amazon and Google) and will not be invested in value stocks.

The performance between the two portfolios reflects this difference in objective, as the G33 portfolio has had much greater performance in 2020 compared to the G50. 

As these differentials of performance tend to normalize over time, but are difficult to predict, our preferred approach for investors is to have a blend of both and to periodically rebalance based on opportunity and risk.  There are several ways to accomplish this, which include:

  • A mix of the G50 for value and the G33 for growth (rebalanced periodically)
  • An allocation to our Core Select portfolio – which invests in both growth and value segments
  • An allocation to our Tilt Series – which is actively managed and includes G50, G33, and Core Select allocations in a mix determined by the Gradient Investment Committee

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

Posted on May 22, 2020 Read More
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