2019 Elite Advisor Forum Recap

Last week, Gradient Investments held its annual Elite Advisor Forum.  In this forum, we gather advisors and experts from across the country to discuss hot button topics in markets and trends in the asset management business.  Here are some of the topics discussed.

The Search for Yield

The search for income in a negative rate world was a significant point of discussion.  This is a topic we have also covered in prior market reflections.  Thomas Wood, Director for Blackrock, shared that nearly 25% of global government bond yields are now in negative yield territory.  Paul Blomgren, Portfolio Manager with Nuveen, suggested that slower global growth, controlled inflation, and geopolitical risks are likely to keep a “lid” on interest rates. 

An alternative to bond income is dividend paying stocks, like the holdings in our G50 portfolio, given the negative interest rate environment.  The below chart presented by Sam Stovall, Chief Investment Strategist from CFRA research, reflected that market performance has often been positive when the S&P 500 dividend yield exceeds the 10-year US Treasury rate.

Politics and Portfolios

Another widely discussed topic was the upcoming presidential election and the impact on the markets.  Stu Sweet, President of the Washington DC advisor Capitol Analysts Network, provided some insight into the current situation.  He suggested the “battleground” states to watch in 2020 remain Florida, Wisconsin, Michigan, and Pennsylvania.

Overall, however, recommendations were consistent with Gradient’s position regarding investing based on politics: portfolio decisions and politics are best left separate.  There are always issues and concerns in the markets, including elections, but that doesn’t require a need to deviate from your customized investment plan.  Below is a chart from Yardeni Research that shows stock market performance during Democrat (blue) and Republican (red) presidencies.  As you can see, markets tend to work for either and allocating based upon who may or may not occupy the White House is not a recommended strategy. 

Investment Outlooks

Regarding the stock market, most were positive on the US market but with expectations of continued volatility in the short term.  Brian Belski, Chief Investment Strategist from BMO, believes we are in the middle stages of a long-term secular bull market that has significant future upside even with increased short-term volatility.  Mr. Stovall echoed similar sentiments by stating his case as a “bull with a small b”.  His thought was that while there is an increased threat of recession on the horizon, his base case is US GDP growth above 2% next year and a stock market with upside potential from current levels. 

At Gradient, we remain constructive on stocks but caution investors to temper future expectations given a very strong market in 2019.  We are cautious on bond markets overall and would not be chasing significantly higher bond risk for a very small amount of incremental income.  For clients who are willing to tolerate more risk, we believe dividend stocks like our G50 or our income focused Absolute Yield portfolio are attractive alternatives.  Lastly, for investors looking for some protection from near term volatility, the Gradient Buffered Index Portfolio is designed to participate in market upside but also provides some downside protection. 

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 October 15, 2019 Read More

Third Quarter Review

The third quarter seemingly packed a year’s worth of market action into three fast moving months.  Regardless of your stock market, interest rate or economic viewpoint, there was something for everyone in this fluid and volatile quarter. 

Quarter three began in bullish fashion as most of the major stock benchmarks jumped by 1.5% or more in the first week of July.  A key catalyst for this quick start was the Department of Labor’s June jobs report that said the U.S. economy added 224,000 net new jobs – which was 60,000 more jobs than most forecasters predicted.  The momentum to new all-time highs ended in the final trading hours of July as the Federal Reserve announced their first interest rate cut in over ten years.  Normally a 25 basis point rate cut would be positive news, but post decision comments by Chairman Powell disappointed investors and ignited what would eventually become a 6.5% correction in stock prices. From the August lows, the stock market climbed back within reach of new all-time highs the end of September.  A second 25 basis point rate cut in mid-September and a verbal agreement to reopen trade negotiations by representatives from the U.S and China gave the markets renewed hope heading into quarter end.

The quarter produced modest gains in global stock markets with major price fluctuations on a month to month basis.  Fast growing companies have provided much of the leadership in this long running bull market.  Once a year in each of the last four years, cheaper value stocks have unsuccessfully tried to lead the way, but any strength in those cheaper value companies has proven temporary.  This scenario played out again in the third quarter as value stocks outperformed growth stocks.  It appears growth companies will once again reassume their market leadership.  Housing was the strongest sector and the energy sector was once again the laggard.  This is the first quarter since 2009 when dividend yields on the S&P 500 exceeded the yield on the 30-year U.S. Treasury Bond.  This fact, along with bearish investor sentiment gives stocks a potential positive setup for the fourth quarter.

Our stock market thoughts are:

  • Corporate earnings grow 5% year over year.
  • PE ratios represent fair value at 17x.
  • U.S. economy continues to expand while international economies are slowing.
  • Focus on U.S. stocks relative to international stocks.

Overall, this was a remarkable quarter in the fixed income market.  The quarter began with interest rates low and thoughts of rates moving significantly lower seemed improbable.  Fear of an inverted yield curve signaling the next recession motivated investors to sell stocks and buy bonds. The rapid move to lower yields caught most investors by surprise. The quarter began with key U.S. Treasury yields for the 2, 10 and 30-year maturities at 1.75%, 2.00%, and 2.52% respectively.  By early September these same benchmark yields resided at 1.47%, 1.47% and 1.95%, marking the first time the 30-year U.S. Treasury bond yielded less than 2.00%.  By quarter end, stocks moved to within 2% of their all-time highs and Treasury yields moved higher. 

Our bond market thoughts are:

  • Interest rates will likely remain low for an extended period of time.
  • Softness in the global economies combined with low inflation will support bond prices.
  • Central banks around the world have accommodative monetary policies.
  • The impact of trillions of dollars of negative global interest rates has created a rate ceiling.

The U.S. economy is growing at a moderate pace.  The one-time tailwind from last year’s tax cuts and reduced regulations turned 1% GDP growth into 3% GDP growth.  Now the economy is settling into 2% growth as manufacturing and consumer confidence data are beginning to show signs of slowing.  The growth is still impressive in the face of economic weakness from Europe, China and Japan.  On the positive side:  the U.S. remains at full employment, productivity growth continues to impress and low mortgage rates are supporting the housing market.  Future corporate earnings estimates have been systematically reduced by Wall Street analysts this year, possibly paving the way for positive earnings surprises down the road.  Two percent GDP growth coupled with low inflation can keep long-term expansion fires burning well into 2020.  

Eyes now turn to another round of quarterly corporate earnings and an all-important holiday sales season. These factors, along with the ever evolving headlines, will determine the short-term price action.  The noise from the markets will intensify as we move into year-end and another election year in 2020.  Ignore the noise and remain patiently committed to your long-term personal financial plan.         


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 8, 2019 Read More

Market Volatility Perspective

The stock market has had an increase in the level of volatility over the past several months.  Generally, more volatile markets can have a negative impact on the psyche of investors because of the perceived possibility of greater loss. The reality is there are always fluctuations in the stock market and bursts of volatility are quite common.  Our stance is that, while volatility and uncertainty can create higher concern in the short term, investment opportunities are created by volatility that can pay off handsomely in the future.

A common measurement of stock market volatility is the CBOE Volatility index (VIX). The VIX is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days. It provides a measure of market risk and investors sentiment; some refer to it as a fear index.  As seen in the chart below, the VIX has had several spikes in volatility over the last few years.

Even though the stock market has had periodic bouts of volatility over the last three years, the S&P 500 was still up over 44% during this period1, despite the volatility.                                                                                                                              

Another measure of volatility is the number of days of a plus/minus 1% change in the S&P 500.   In 2019, there have been 32 days of plus or minus 1% moves, with 13 coming in the last month alone. Putting that in perspective, the average move of more than 1% has been 66 days per year for the last 19 years (see the chart below).

Further, the chart reflects only one year in the last seven that has been above the 19-year average. This shows that while volatility has picked up recently, this isn’t out of the historical norm and, in fact, has been less volatile compared to other periods. 

There are several reasons why market volatility has picked up in the recent months, including

  • Global economic data been slowing
  • Global interest rates have been compressing
  • Increased trade tension between the US and China

The reasons for volatility are real, but the one constant of the market is there are always issues to worry about whether it is the economy, Federal Reserve policies, elections, oil prices or the health of the consumer.

While volatility certainly brings anxiety, it is not necessarily always a negative occurrence. Volatility can be positive and refer to times when stocks are moving up quickly. Most investors are more concerned with downside volatility but even that can create long term opportunity for investors who are prepared to take advantage of these situations through dollar cost averaging.

 As we stated prior, volatility is common in the markets, and timing these instances is extremely difficult.  For investors interested in reducing overall volatility for their investments, we have recently launched the “Gradient Buffered Index Portfolio”.  This portfolio offers a pre-determined level of downside protection, allows investors to participate in market upside (to a cap level) and has a short-term maturity. If you have interest in this type of strategy, please feel free to reach out to Gradient Investments for more information. 

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 September 11, 2019 Read More
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