History Or Mystery?

The mystery of man has no beginning and no end. His intuition and feeling unfold and blend. The Mystery of Man – William Hermanns

 

For investors, the experience of March may have felt a bit like a walk in the park, but readers of the financial press perhaps wondered if it was a book best placed back on the shelf. “Strong Finish Can’t Salvage Tough Quarter for Stocks” opined The Wall Street Journal on the month’s final day with that publication adding, in another article, “Bond Market Suffers Worst Quarter in Decades.” Bank of America cautioned “Stock Surge Is a Bear Market Trap with Curve Inverted.”

Investors may have felt themselves in the need of seeking the ministrations of a chiropractor as the S&P 500 offered an experience realized only for the twelfth time in the more than three-hundred quarters since the conclusion of the Second World War; returns of both plus and minus “double digits”. From January 3rd to the quarter’s lows on March 7th the S&P declined 13% followed by an 11% rise by March 28th. Let us hope that history will repeat itself this next quarter and year as the S&P was positive the following quarter ten of those eleven prior times with average returns of 11% and positive returns in all instances the following year with returns averaging 30%!

And what of that inverted yield curve “B of A” cautioned us about? The Federal Reserve, confronted with inflation numbers three times greater than its cited 2% target, grew the talons of a hawk and shredded the script from which it had only recently invited others to read. On March 16th, the Fed raised interest rates ¼%, its first increase since December 2018 and set expectations for similar increases at each of its remaining six meetings this year cautioning that it would be willing to consider increases of ½% should inflation remain “elevated and persistent”. Interestingly, the fixed income markets responded most dramatically in widening the “spread” between the rates on 90-day treasury bills and 2-year treasury notes to their widest levels since 1994. And so why should we care? Because it is the markets way of communicating its view that inflation is indeed transitory with future inflation expectations rising less than that of longer dated interest rates. Though media pundits are chirping about inverted yield curves, the reality is that inflation adjusted future interest rate levels on 10-year treasury bonds are actually rising. And that, my friends, may also be predicting higher rates of economic growth later this year and may also explain a rising stock market.

Putting together the puzzle pieces of various market returns is certainly an exercise in the interesting. Utility stocks are considered by many to be “bond surrogates” as they are valued more as sources of income rather than growth. With 20-year US treasuries declining 5 ½% for the month one might not have expected utility stocks to rally 10 1/3% for the month. With natural gas prices rising 27 ½% and oil 10% for the month, gold prices rose, a beat of the drum here, 1 ¼%. And with rising geopolitical tensions leading to, one might think, an increasingly risk averse investor population, the world’s best performing stock market for the month and quarter was…Brazil, delivering returns of 15% and 35% respectively.

The S&P 500 returned 3.76% for the month and -4.62% for the quarter with the growth portion 4.45%/-8.56% and the value 3.02%/-0.13%. Small Cap stocks hit the snooze button returning 1.16% for March and -7.54% for the quarter. The stock market party was for US attendees only as foreign developed markets were 0.52% for the month and with those markets underperforming the S&P with a -6.46% for Q1. For 60% equity/40% fixed income investors the quarter delivered a -4.0% return (0.66% in March) as the negative returns on equities -4.75% (+2.4% in March) were, unhappily for investors, married to fixed income’s -3.0% returns in Q1 (-2.0% in March).

 

Mark H. Tekamp, April 6, 2022

You-Pain?

“The secret of change is to focus all of your energy, not on fighting the old, but on building the new.” – Socrates

 

The war in Europe feels like footsteps not quite reaching the pavement. The March 1st Financial Times headlined “Nike Suspends Online Purchases in Russia” and “Carmaker Ford Suspends Operations in Russia”. The same day’s Wall Street Journal joined in with “The West’s Sanctions Barrage Severs Russia’s Economy from Much of the West”. Interestingly though, the sanctions – at least those imposed to date – appear to be focused primarily upon the financial rather than economic part of Russia’s relationship with those seeking to punish it. The United States now imports more oil from Russia than any other country and that country, with its adversary Ukraine, accounts for 29% of global wheat exports. The loss of life and destruction in Ukraine is both real and tragic but with Russia’s relatively unimpeded access to the global marketplace and the United States and its European allies disclaiming the possibility of intervening directly, the conflict seems likely to remain localized and so its impact upon the US economy may be significantly less than markets are currently discounting, creating the possibility of a positive surprise.

Yahoo Finance was left to wonder in a story on March 2nd that “All in all, the stock market is hanging tough in what has been a turbulent two weeks for humanity.” There certainly is volatility aplenty in virtually all financial markets with gold’s 6% rise for the month acting as a sort of thermometer for the emotional state of global markets. CNN’s Fear & Greed Index has fallen to 17, a measure representing Extreme Fear and a level not seen since March and April of 2020, the onset of the global pandemic. The 10 Year US Treasury rate, which started out the year at 1.52% and reached a peak yield of 2.05% on February 15th, ended the month at 1.83%. Confounding most investors focusing upon news headlines, US mid cap and small cap stocks actually rose in February and the S&P 500 ended the month higher than its closing level on January 27th.

While much of the world has been focused upon war in Europe and the likelihood of the Fed’s raising interest rates, there is something much larger at work impacting our economy and that may be what will most influence financial markets this year. Since the Global Financial Crisis of 2008 central banks have targeted an inflation rate of 2% which would have allowed them to seek to manage the inflation adjusted rate of interest to below zero, but stubbornly persistent low levels of inflation confounded their attempt to achieve that objective. Now, with inflation levels likely to remain at 4% to 5% levels through the remainder of the year and with 10 Year Treasury Rates at less than 2%, money has rarely been less expensive. With economic demand outstripping supply creating the ability to achieve attractive rates of return through investments in the real economy, it may be time to toss out the old play book because this sure looks like a new world!

Equity markets in February contributed negatively to returns on investor’s portfolios of approximately -2.25% with technology’s -5% return a source of negativity offset by the aforementioned positive returns of small cap and mid cap stocks and Energy’s +6% and +26 ½ % returns year to date. Foreign stocks, which had avoided most of the negative returns of those US markets in January, matched the S&P’s -3% return for the month. Interest rates rose modestly in February resulting in -1% returns for the fixed income portion of portfolios leaving 60/40 portfolios -1.7% for the month and – 5% year to date.

 

Mark H. Tekamp; March 6, 2022

Eyes On the Size

The reflection on the surface of the water is often mistaken for the mysteries that lie beneath. Likewise, the reflection of the moon is mistaken for its own light.” – Thomas Lloyd Qualls, Painted Oxen

 

The 14.4 % decline in the S&P 500 from the market close at year’s end to its low for the month on January 24th is what captured the headlines. Forbes Magazine mused “Will Inflation Cause a Stock Market Crash?” Kiplinger’s queried “Could the Stock Market Crash for Real?” Fortunately for investors, the market rallied from its nearly three week swoon, closing down for the month -5.2%. It may though be in the real world that we inhabit as workers and consumers that the most interesting story of all is beginning to emerge.

It’s been nearly forty years since Americans last viewed inflation as a possible threat to their economic wellbeing and it is now cited as item number one on our “worry list,” exceeding even those concerns related to the pandemic. But perhaps we should not view it as necessarily evil in all of its manifestations. Those who pay particular attention to economic statistics may be able to recall approximate rates of economic growth of 6.90% annualized in last year’s 4th quarter. That number is cited as “real” so one might think that is the number that matters most, but at least in this instance, it isn’t the “real” world that we inhabit but rather that of the “nominal”. The real GDP growth number is adjusted for inflation, the nominal rate which we hear about much less frequently was 14.30%, the highest number this century to date. Think about it. Do we adjust the value of our paycheck for inflation? The value of our investment portfolios? The rate of change of revenues in the business in which we have an interest? Suddenly, those rates of growth for the companies owned by shareholders are experiencing very significant increases in their revenues and profits. What might this mean for the stock market?

The US and global economies which, since the Global Financial Crisis of 2007-2008 have been mired in the world of small numbers, are starting to emerge into a world in which those numbers are no longer so small and that may be preparing to change a great deal that we’ve grown used to this past now almost fifteen years. For years, the rate at which money circulates through our economy has been in a state of steady decline, but that too is beginning to change as the rate of change in bank lending that was described with numbers starting with 3s and 4s, increased in December by 14.80%. Simply stated, an extended period of time in which it was difficult to create a real rate of return by investing in the real economy, due to an excess of capacity, may be ending. It may be that fact that will increasingly come to influence the financial markets.

Often forgotten in the obsession in recent years over what central banks are doing, may be preparing to do, or are not doing, is that interest rates are the arbitrators between the demand and supply for money. If the demand is falling due to declining economic growth rates, then interest rates would also be expected to decline. Ten Year US Treasury rates fell to a low of ½% in July 2020. One year ago, they were at 1% and in the past two month have risen from 1 1/3% to now almost 2%. Inflation expectations are falling back rather than rising so that increase is the market’s way of anticipating accelerating economic growth rates. That is good news.

Investors may recall that profits were difficult to come by in the 3rd quarter of last year as the S&P’s 4.65% decline in September offset its gains the prior two months. The market subsequently rose 10% the following three months which made 2021’s 4th quarter the positive experience that it was. It was that same 10% that was consumed in January’s market decline though the markets monumental reversal of 4.4% on the 24th set forth a recovery in the market’s fortunes scissoring that decline by half. The outstanding quality of the market pull back was its variability as the S&P growth stocks fell 9.4% but value 2.2%. Energy stocks, inhabiting seemingly their own universe, rose 17.4%. US small companies declined 8.4% and foreign stocks, which for what has seemingly felt like forever, reversed their irritating propensity to go up less than US stocks in a rising market but to go down more in a declining market, fell a modest 3.6%. 60% equity 40% fixed income portfolios saw declines for the month of approximately 3.25%.

 

Mark H. Tekamp| February 5, 2022

Prometheus Unbound

“Time in its aging course teaches all things.”- Aeschylus, Prometheus Unbound

 

There is a narrative that, while not held universally, is being offered with increasing frequency by the mavens of economic and financial market wisdom. The Federal Reserve, widely castigated only several months ago for having allowed the inflation genie to escape, is viewed by some as about to embark upon a serious policy error. In their view, the economy is slowing and too weak to endure the pain of higher interest rates. The stock market, that measure of all things good and true, may riot and force another round of Quantitative Easing next year. Inflation, while currently high, is likely to be transitory and since it’s not being supported by a notable increase in the quantity of money globally is anyway not really inflation in terms of too much money chasing too few goods. This all may prove to be true but being sympathetic to the belief that the markets, like the Greek gods of yore, delight in tormenting humanity through their proffering of the unexpected, perhaps there is another reality unfolding before us and if not yet widely seen is an apparition that will become increasingly apparent to and expressed by the financial markets in the next several months.

Since the Global Financial Crisis of 2007-2008 the world’s central bankers have been faced with the quandary of the zero bound, their inability to create levels of interest rates of less than 0%. With very low levels of inflation in the years since then the inflation adjusted interest rate, while negative, has been only modestly so, as central bankers have persistently fallen short of achieving their targeted levels of inflation of 2%. What if the upward pressure on prices continues to persist through next year resulting in price increases of 4%? Voila! The world has been given the gift of an effective interest rate reduction of 2%. The positive effects of interest rates now materially below inflation rates, married to a level of economic demand that will not allow the demand for money to deliver a material increase in interest rates for at least the next several quarters, could deliver a magical elixir that the world needs but is not yet aware of its being offered.

480.5%, 362.6%, 248.1%, 246.5% and 126.8%. Those are the ten year returns for the S&P 500 Growth stocks, the S&P 500, the S&P 500 Value stocks, the Russell 2000 (US small cap stocks) and the MSCI EAFE (foreign developed markets). So large cap US stocks (the S&P 500) have outperformed their small cap brethren by 50% and foreign markets by nearly 300%. Believers that every dog, even the mangy beasts inhabiting the space outside of the S&P 500, must have its day, were hearted by the performance of the equity markets at the start of the year. On March16th the Russell 2000 was +17.66%, S&P 500 Value stocks +10.50% and S&P 500 Growth stocks +1.76%. Disappointing proclaimers of portfolio diversification though growth stocks outperformed value by two to one through the remainder of the year with small cap stocks actually declining 2.4%.

December’s market was an interesting close to an interesting year. The S&P 500’s 4.48% return for the month contributed neatly to its 11.03% return for the 4th quarter but where those returns came from was the best part of the story. Utility stocks returned 9.69%, more than half of their 17.69% return for the year. Consumer Staple stocks returned 10.45%, more than 3/5th of their 17.20% 2021 return and Health Care stocks 9.02%, more than a third of their 26.04% 2021 return. The winner of the prize for 2021’s best sector? Energy stocks 53.31% followed by Real Estate’s 46.08%. Perhaps December’s market might best be remembered as a month in which money did not want to exit the market, hence its closing within a whisker of its December 28th all- time high, but lacking a high level of conviction as to where in the market it wanted to be.

So, we close the curtains on 2021. For investors it was a year offering returns very similar to those of 2020’s and those were more than passing fair so many are looking at portfolio returns of 25% to 30% for those two years. 60/40 equity/fixed income investors were looking at 10% returns at the end of the 2nd quarter but the 3rd quarter was modestly negative, so the 4th quarters 3.7% return is what allowed client’s to experience a 12.35% return for the year. Happy New Year!

 

Mark H. Tekamp/January 3, 2021

Mirage Barrage

“I see you standing in the alleys and the hallways. Wait a second, you’re gone now. I run to touch you but you vanish through the doorway.” -lyrics from ‘Mirage’, Tommy James & the Shondells

 

“The economy is very strong and inflationary pressures are high, and it is therefore appropriate in my view, to consider wrapping up the taper of our asset purchases…” so quoth US Federal Reserve Chairman Jay Powell in his testimony before the US Senate on November 30th. Taking umbrage at the prospects of its punch bowl being taken away investors sold stocks with the Dow Jones Industrial Average closing down 652 points on the day.

Mr. Powell’s opinions can be easily understood if he is relying upon the financial press as a source of his information, but a careful perusal of the economic and financial market data would seem to be painting a significantly different picture. Interest rates on 30 Year US Treasury bond have declined for seven consecutive months and are back to their level of January 5th. The spread between the yields of 5- and 30-year treasuries, which have historically been an excellent predictor of future rates of economic activity, are now at their most narrow level since the onset of the pandemic in March of last year. Oil prices have declined 24% from their recent highs. Despite the issues related to supply chains both wholesale and retail inventories are rising, real personal disposable incomes are down year over year and the U of Michigan survey of consumer spending intentions are at their lows of the 1980 recession fifty years ago.

Economic Armageddon is not being forecast here but the likely single best wager may very well be the significant shortfall of what the 2022 economy has on offer versus the fed’s forecast 3.8% GDP growth rate. The state of the national as well as the global economy is, in a word, fragile, and the belief that global economic conditions are able to support a sustained rise in the inflation rate is just not a realistic one. The unfortunate truth is that the economic conditions since the Global Financial Crisis of thirteen years ago continue to linger like an unwelcome house guest and there has been an absence of anything of sufficient influence upon that reality to materially alter it. So, muddle through is our near-term destiny and another round of quantitative easing in the next twelve months is likely a much better wager than a “three handle” for US economic growth rates.

The November stock market was an interesting and not very positive one though seeming to confirm the beliefs of those who claim the past is prologue for the future. Proponents of the value of the investment discipline of portfolio diversification are left with Thanksgiving pumpkin pie on their face having to explain why anyone should own anything except large cap technology stocks. Foreign developed markets were down 4.5% for the month echoing US small cap’s decline of 4.3%. The value stocks of the S&P 500 were down 3.3%. Meanwhile, the technology stock index was +4.5% for the month led by Apple’s 10.5% rise. Investors in indices though are increasingly attendees, knowingly or not, of the tech stock party, with Microsoft and Apple now representing one-eighth of the S&P 500 and the eight largest holdings, all technology companies, a full quarter of the index. Investors in the US large cap growth indices are increasingly investors in a technology index as those eight names are now 50% of the weighting of that particular market sector.

November saw most investors equity holdings decline 2.25 % though 60/40 portfolios are still enjoying attractive year to date returns of approximately 10% on the back of the equity markets 15.5% contribution. The challenge for investors is to materially build upon the profits accumulated in the first half of the year with the first quarter providing returns of near 5% and the second mirroring the first with another near 5% return. The 3rd quarter was slightly negative for most with a – 0.5% return. October was +3.5% but November was – 1.5% so there we are. Will Santa Claus come bearing gifts? Yes Virginia, and many other states as well, there is a Santa Claus!

Mark H. Tekamp, December 3, 2021

Here & Now Is Better Than Ever!

 


Mark H. Tekamp
November 15,
2021

Goldilocks & The Two Stairs

Yes, there are two paths you can go by, but in the long run…as we wind on down the road
…And if you listen very hard the tune will come to you at last Lyrics, “Stairway to Heaven”; Led Zeppelin

 

An observer of the financial markets, echoing what might be described as consensus thinking, opined “with economic growth weakening and inflation increasing, the risk of a reversal is increasing.” The Wall Street Journal, wishing to add it’s amen to the higher inflation chorus, headlined a story “Inflation is the nemesis of every investor. Here’s what you should be doing to protect your wealth.” The New York Times, also joining those walking up the higher inflation stairs, contributed “The Bond Market Says Inflation Will Last. You Should Be Listening.”

Walking down the inflation stairs has recently become an increasingly lonely journey but there is a law of the economic sort that supports walking in that direction; The Law of Diminishing Returns and, more specifically, how it relates to the most significant economic phenomenon of our time, debt. When debt exceeds a certain level the cost of servicing it exceeds the return it generates leading to lower economic growth rates. The most conservative estimate of the level of government debt at which this occurs is 90%. Its current level is 125%. This may explain the depressed levels of economic growth we’ve experienced thus far in the 21st century leaving our economy 26% smaller than if had grown at the 2.2% annual rate of the prior one-hundred years. Eyeballing a chart of US GDP growth since 2000 shows an economy with peak rates of growth lower than those preceding it and with troughs of growth also lower. Simply stated, as an increasing amount of our more slowly growing national income is diverted to service the ever growing amount of accumulated debt it leaves a lesser amount available to reinvest back into the economy to support economic growth. The classic definition of inflation is too much money chasing too few goods. For the average American too much money isn’t happening.

Longer term we have issues clouding the vistas of our brightening horizon but for the next several quarters perhaps we should place Goldilock’s “not too hot, not too cold” bowl of porridge back on the table. The closing of much of the national economy the past eighteen months dramatically shifted the consumption preferences of US consumers from services to goods, explaining the quantity of Amazon.com boxes on front porches. Unfortunately, only 14% of workers in this country are employed in the goods producing part of the economy. As the services portion of the national economy continues to reopen the employment prospects of our fellow citizens will brighten considerably. Pre-pandemic there were 6 million job openings. Today there are 10.7 million. The component of the Conference Board’s Consumer Confidence report detailing attitudes towards the job market are at near record high levels of optimism. Wages in the United States rose 9.5% year over year in August. So, with incomes set to rise and inflation past its peak and now declining, what’s not to like?

The October Consumer Confidence report revealed that the percentage of consumers expecting higher stock prices was lower than those expecting lower prices for the first time this year. This occurrence in a year in which stock prices are higher year over year has happened only nine other times in the past thirty-five years. In those prior instances the stock market was 6.65% higher three months later, nearly triple the 2.32% average return.

The S&P 500 made a low on October 4th, closing the month +7.6% from that level and +7.0% for the month. The leader of the parade to new highs though was some distance ahead of other markets including foreign emerging markets +1%, foreign developed markets +3.2% and small cap stocks +4.25%. In a market led by, and sometimes dominated by, the ultra big cap tech names, that universe has lost an element of its market leadership as Face Book was -4.7%, Amazon +2.7% (and only +3.5% year to date) and Apple +5.9%. Consumer Discretionary stocks led the market rising 12.1% with 9% of that number explained by Tesla’s meteoric rise of 43.65%. Year to date, the S&P is now +24% with Energy +56.7%, Financials +38.3% and Real Estate +30% notably outperforming. With bonds flat for the month the 60/40 portfolio was +3% for the month and is +11.5% year to date.

 

Mark H. Tekamp/November 1, 2021

Seven & Oh?

“The gray-eyed morn smiles on the frowning night, Checkering the eastern clouds with streaks of light.” – William Shakespeare

 

“Rate Surge Sends Stocks Tumbling. Worst Day Since March” read one headline on September 29th. The Wall Street Journal , seeking to contribute towards investors understanding of the stock market’s sour mood, offered by way of explanation “…concerns that higher inflation…will stick around longer than expected…as well as data that has shown that U.S. economic growth is starting to slow.” And so ended the market’s seven consecutive months of gains, if not in tears then at least a sniffle or two as September’s 4.7% decline in the S&P also consumed most of the prior three months gains, leaving that index up barely half a per-cent for the not so sunny quarter.

In a world with many problems searching for hard to find explanations, the reason for this market decline is a relatively straightforward one. If one lays a chart detailing the past eighteen months’ growth of corporate earnings on top of a chart of the rise of the S&P 500, it is clear that one explains the other. The market is not inexpensive based upon current valuations so anything that calls into question the ability of those earnings to continue to rise at their expected rates will soon lead to unpleasant conditions for investors. So fellow travelers…peering over the near term horizon should we expect fair weather or foul?

One of the least recognized but most valuable means of understanding the source of the ebbs and flows of financial markets is to recognize that most often it is not whether the news is good or bad that matters, but whether that news was better or worse than EXPECTED. As we enter into October the length of the litany of woes the market is currently digesting is a long one. Debt ceilings, Federal Reserve “tapering”, inflation, economic growth rates, supply chain disruptions, China and the pandemic. The current consensus is that these are all likely to trend in a negative direction. The reality though may well be that the near term future will contain an unexpected amount of sunshine. The pandemic, or at least its economic consequences, is now almost entirely behind us. The closing down of much of the global economy, and its subsequent reopening, has been extraordinarily disruptive but markets will have ironed most of those wrinkles smooth by next Spring. Inflation is indeed transitory with its peak now past and now likely trending lower. The economy will not boom but it will exceed expectations. Evergrande’s looming bond default does not signal a reprise of the Global Financial Crisis. And no, the Federal Reserve will not short circuit our economic recovery by a near term lifting of interest rates, and the better news on inflation will remove that element of pressure that it do so.

With many of the different sectors of the stock market having taken divergent paths only to end with similar year to date returns, still there are some outliers and they are interesting. The poor orphan Energy stocks were up 8.84% for the month and yet are -1.8% for the quarter versus the S&P’s +.6%. The Growth stocks of the S&P’s returned -5.8% for the month but +1.8% for the quarter while the Value stocks were -3.3% for the month but -.9% for the quarter. Technology stocks were -6.4% for the month but are outperforming the S&P year to date 19.3% to 15.9%. Financial stocks, whose weighting in Value stocks is similar to Technology’s in growth, have been the market’s most consistent sector year to date as their -2.2%, 2.3% and 24.9% returns for the month, quarter and year have allowed them to outperform Technology for each of those periods.

 

Mark H. Tekamp, October 2, 2021

Teeter Tottering

“I look like I’m stable, like nothing can move me, I look like I’m steady, like nothing will shake me.
I’m unable to balance, my emotions and all, As I sit alone on this teeter totter”
– Vishal Duti “Teeter Totter”

 

Our fellow citizens celebrated August’s 2.98% rise in the S&P 500, the seventh consecutive month of positive returns, by expressing their wish to go short the US economy. CNBC, reporting on the preliminary August reading on Consumer Sentiment, headlined their August 13th story “Consumer sentiment measure falls to pandemic-era low, sees one of largest drops on record”. Adding a bit of fuel to that particular fire, ADP’s August report on employment disclosed that 374k private sector jobs were created, a significant shortfall from the 626k expected.

Certainly all the roads we have been and will be traveling upon will not be straight and so we may not be heading to Rome but perhaps they do lead us to an economy preparing to greet us with a great deal more light than shadow. The scanning of a day’s headlines on the economy from Bloomberg are interesting. “Turkey Rebounds From Virus Contraction With Record Growth”. “Chile Central Bank Hints at Overheating, Cuts Back Stimulus”. “The Global Economy Is Shrugging Off the Delta Variant, For Now”.  In analyzing the current state of our national economy it may be helpful to take an extra step or two back and exercise our gift of perspective. Quite possibly our economic future will be a great deal better than many expect it to be and likely a great deal better than it has been the past eighteen months.  

For many investors, observing the headline indices like the S&P, the market, while profitable, would seem to be lacking in significant entertainment value. Some may see this as a “watching paint dry” market but if one looks at it a good deal more carefully it is also possible to observe the wry smile of the Mona Lisa. Forgive the mixing of metaphors, but this year’s market has been actually the tale of two markets. 

At 7:30 am Wednesday, May 12th, the Federal Reserve reported the Consumer Price Index increase for April. It was a big number and larger than the one expected. The market had already started to decline that Monday and from that day’s open to Wednesday’s low the S&P declined by 4%. By June 1st the market had fully recovered from that modest pull back but the market after May 12th is one that is dramatically different than the one prior to that date. Year to date as of May 11th the S&P 500 was +10.8% but the Value stocks were +16% and the Growth stocks +6% with Small Cap stocks narrowly outperforming the S&P at +11.5%. Energy stocks were +38% and Technology +3.9%. Since May 12th through August 31st its been a record played in reverse. The S&P is up an additional 11.4% but Growth is +19.1% and Value +3.4%. Energy stocks are -6.5% and Technology stocks are +20.1% with Small Cap stocks up less than half that of the S&P +6.6%. Interesting. Truly it has been a market where it’s been better to be content with just being in the pool as opposed to hazarding a guess as to which side its preferable to inhabit.

As mentioned above, its been seven consecutive positive months in a row for this market. If you are thinking of records, the S&P accomplished the feat of eight consecutive months in 2017 as well as 2007. For August the equity side of investor’s portfolios returned 2.5%. The Growth side of the S&P was +4.15% and Value +1.7%. Small Cap stocks returned 2.2% and Foreign Developed markets continued their performance gap vis a vis US stocks returning 1.45%. With the approximate .50% return on the fixed income share of the portfolio the 60 equity 40 fixed income and cash portfolio returned 1.60% for the month and has returned 12% for the year to date.

 

Mark H. Tekamp | September 1, 2021

Bull Market Blues

“Well, first you got to want to get off, bad enough to want to get on in the first place
And you better trust in your lady luck, Pray to God that she don’t give up on you right now”
– lyrics, Johnny Cash “Bull Rider”

 

One of the more interesting phenomenon currently existent in the financial markets is the disconnect that exists between the reality of most investor’s current experience and how it is perceived by those receiving its benefits. The titles of some of the numerous commentaries on the stock market are revealing. “Boom to bust. More signs of a major market top.” “Impending final crisis 2.0?” “Morgan Stanley warns – Major stock market correction.” “The bull market: A bubble of epic proportions.” “ALERT: Analyst predicts 80% Market Crash This Year.” The readings of the CNN “Fear & Greed Index” are interesting as well. Currently at 24 on a scale of 0 to 100, it is at a level indicating extreme fear, and significantly below the levels of 41 one month ago, 62 one year ago, and as a contrarian indicator, is close to levels that historically have preceded significant market increases.

Possibly explaining at least some of the distance that exists between perception and reality is that the stock market is being fed by the liquidity being supplied to it by both the monetary (Federal Reserve) and fiscal (the administration and congress) authorities. In a “bad news is good news” feed back loop, what the markets most want to be served is the “not too hot and not too cold” bowl of Goldilocks’ porridge, with economic growth rates sufficiently robust to support higher levels of corporate earnings but with the economy sufficiently weak to justify the need for its continuing fiscal and monetary support. Wild cards in the deck investors have to play include a continuing pandemic that will possibly provide sufficient motivation for the administration to extend the various economic support measures currently in place past their September 30 termination dates and Congress’s passing a $1 trillion plus infrastructure spending bill.

Aficionados of the “not too hot” type of economic data certainly have been pleased with what they have been served this past month. Q2 GDP rose 6.5%, normally an extremely robust number, but materially below the estimate of 8.4%. The New York Fed is now forecasting a Q3 GDP growth rate of 4.1%, down from 5.3% six weeks ago. The supply disruptions afflicting the economy appear to be fading as businesses that plan to add to their current inventory levels are reaching four to five month lows. Further confirming the “not too hot” condition of the economy are claims for unemployment benefits that continue to hover near the 400,000 level, twice their pre pandemic level, and new home sales at 14 month lows.

Regardless of the state of investors’ attitudes toward stocks, the market in July continued its bullish ways with the S&P 500 registering a +2.4% return and with nine of its eleven sectors positive. Energy, which still holds the lead for the year at +30.3%, was a notable laggard in the latest month declining 7.2%. Positive returns outside of large cap US stocks though are becoming a bit more difficult to find. Small Cap stocks declined 2.5% for the month though, with a 20.5% return for the year, they continue to narrowly outperform the S&P 400’s +17%. Foreign Developed Markets at +.90% significantly outperformed Foreign Emerging Markets -9.8%, whose returns were impacted by China’s -13.1% fall. For 60/40 portfolio investors, the equity portion’s +.25%, with lower returns earned on fixed income and cash assets, created a 0.15% return for the month and +8.30% year to date.

 

Mark H. Tekamp July 31, 2021