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

Dousing Housing?

“There’s no place like home, there’s no place like home, there’s no place like home.” – Dorothy, The Wizard of Oz

 

“Manic Housing Market Needs a Calming Dose of Deregulation”. So headlined Bloomberg on June 1st. “An inflation storm is coming for the U.S. housing market.” Thus warned Marketwatch on June 26th. By now, most of us are aware that residential home prices are, and have been, heading higher, with the median sales price in May reaching $374,400 versus $317,100 a year earlier. Employing our recollection of Economics 101 many of us would assume rising prices are a result of higher demand. That would not be correct. Mortgage applications for new home purchases are at their lowest level since May 8th, 2020 and are down 20% from the end of last year. So, if rising demand does not explain rising prices, then it must be shrinking supply. Well, no. Supply is actually rising. The supply of existing homes for sale is at 5.1 months, a 50% increase since September of last year. Housing starts in May were 1, 572,000 versus an average rate of 1,200,000 in the three pre-pandemic years of 2017 to 2019.

Looking at median home prices on an inflation adjusted basis is perhaps the best way to understand just how extraordinary the rise in housing prices has been. At the start of 1960 it was $174,079, in 1980 $187,505 and 2000 $206,620. The low in the past ten years was February 2012’s $198,688. With the $374,400 figure for May home buyers are now paying 88% more than just over nine years previously. This may serve to explain the headline of a story posted by Reuters on June 23rd “U.S. new home sales tumble to one-year low as prices soar.” It may also explain the polar opposite perspectives of home builders and home buyers. A confidence index for homebuilders is at 81.0, down slightly from 90 in March but still at a thirty year high. Homebuyer’s though feel somewhat differently. At 74.0 it contrasts dramatically with the 108.0 in March of last year which had marked the prior thirty year low. So, to summarize, prices are at historical highs, demand is falling and supply is rising. Wondering which direction home prices may be heading?

Wishing to perpetuate our housing tale just a bit further, equity market investors may have felt they were holding a “full house”. The last five days of June saw consecutive rising prices. The month was the fifth in a row with higher prices and the 8.2% return for the S&P in Q2 was the fifth straight quarter with over 5% gains, the first time that has occurred since 1945! In the race towards new highs though, the market did exhibit signs of fatigue in June. Foreign developed markets were down 1%. Emerging markets were up 1%, small cap stocks +1/3% and mid cap stocks -1%. Five of the eleven S&P equity sectors were negative and Technology regained its leadership role rising 6.9%.

The leadership of the market had rotated last November favoring small cap stocks, value over growth and foreign performing in line with domestic. In March that leadership began to revert back to its prior sources and that is exhibited in the Q2 rates of return. The S&P returned 8.4% with mid cap +3.5% and small cap +4.3%. S&P value stocks are still outperforming growth stocks year to date 16.3% versus 14.3% but with growth’s +11.8% return for Q2 versus value’s +4.9% that gap has significantly narrowed. The year to date rise in interest rates was entirely contained in Q1 with AGG, a widely used index of returns on taxable investment grade bonds, +.83 for June, +1.77% for Q2 and -1.66% year to date. For 60/40 portfolios returns were 4% for the quarter and are now 8.6% year to date.

 

Mark H. Tekamp/July 6, 2021

Inflation Fixation

“Not only is there but one way of doing things rightly, but there is only one way of seeing them, and that is, seeing the whole of them.” – John Ruskin

 

At 8:30 am on Wednesday, May 12th the U.S. Bureau of Labor Statistics issued its much anticipated news release of the latest Consumer Price Index number. “The Consumer Price Index …increased 0.8 percent in April…over the last 12 months the …index increased 4.2 percent…this is the largest 12 month increase since…September 2008.” The next day’s Wall Street Journal described the stock market’s reaction. “The Dow and the S&P 500 post their steepest three day decline in nearly seven months, while a sharp rise in consumer prices heightened concerns that interest rates could be headed higher.” The May 31st edition of Barron’s cover story headlined “10 Ways to Cash In on the Shortage of Just About Everything.”

Pulling open the curtains and looking at the details though we find a reality that is a bit more, shall we say, nuanced. At near 16 million 10% of the US labor force is currently receiving unemployment benefits, seven times their pre-COVID level. 444 thousand who were working LOST their jobs the week of May 15th, a level twice that of the averages of pre-pandemic levels. Though the opening of the economy has created shortages in some areas of our economy both retail and wholesale inventories INCREASED in April. Last month’s Citigroup Economic Surprise Index fell below 50 for the first time since June of last year indicating that more economic data is coming in below rather than above expectations. The University of Michigan Consumer Sentiment Survey DECLINED from 88.3 in March to 82.8 in April. The Cleveland FED’s Ten-Year Expected Inflation Index, which was at 1.58% prior to the release of the CPI figure, is now LOWER at 1.57% and the Atlanta Fed Wage Growth Tracker shows that expected wage gains which were at 3.4% in December have DECLINED to 3.2%. As for the fear of rising interest rates, the 10 Year US Treasury rate, which closed at 1.607% the day BEFORE the release of the CPI figure, found itself at the close of May 28th at 1.581%. 

The stock market has been accused of a lack of association with historical average valuations. The saga of the run to the stratosphere in the FAANGM stocks (Facebook, Amazon, Apple, Netflix, Google (aka Alphabet) and Microsoft) is well known to most investors. Indeed, the 642% return for those stocks since end of year 2012 in contrast to ONLY 140.2% for the S&P 500 excluding those companies, has led some to wonder whether this has been less of a bull market than a mania in certain stocks. Interestingly though, in recent months the arguably least overvalued areas of the market have acted as a magnet for investor’s capital. The growth and value components of the S&P 500 have created nearly identical returns in the past twelve months, 40%, but in the past seven months value is up 37%, half again greater than the 24.5% for growth. The seemingly perpetually under achieving Foreign developed markets have enjoyed returns equal to that of the S&P year to date and small cap stocks 23% returns thus far in 2021 are not far from double that of “the big boys” in the S&P 500.

The .66% return for the month of the S&P 500 hides pockets of significant strength in this market. Energy +6.6%, Financial +5.9% and Materials +4.8%, Foreign Developed Markets + 3.5% and the Eurozone’s +4.4%. Not too shabby. The 60/40 Equity/Fixed Income portfolio having returned 1.3% for the month (the Equity portion returning 1.4%) is now sitting (hopefully not resting!) on an 8.7% return year to date. That’s not too shabby either.

 

Mark H. Tekamp, June 1, 2021

Taxiing or Take Off?

“Contradictions do not exist. Whenever you think that you are facing a contradiction check your premises. You will find that one of them is wrong.” Ayn Rand from “Atlas Shrugged”

 

There it was on the front page of the April 30th edition of The New York Times. “U.S. Economy’s Strong Start Signals a Stellar Year.” One year ago, who would have thought that our journey through Covid would have led to unbridled economic optimism, predictions of accelerating growth and booming financial markets with the euphoria only slightly tempered by concerns about rising inflation and interest rates?

Like red flags to bulls investors certainly appear to be drawn to rising prices. The plurality of those expecting rising versus declining equity prices has risen from 8% in January to 22% in March and 64% in April. They are bearish though on the bond market with 65.2% expecting interest rates to rise and only 7.9% the reverse, the lowest since March 2019 and possibly not coincidentally prior to a 1% decline in rates the following four months. The prospect of higher mortgage rates though has not discouraged the public from its plans to purchase a home with that number now at 8.9%, the highest since April 2002. Nor have prospective buyers been dissuaded from those plans by the need to pay more for what they plan to purchase with the Case-Shiller home price index charging forwards at a 17.6% annualized rate the past five months through April, the highest rate since the 2003-2007 bull market run in residential real estate.

A more careful examination of the current state of our reality though may reveal a somewhat more complex state of affairs. 16.56 million of us are still receiving unemployment benefits, eight times their pre-pandemic level. Government benefits now represent a 28% share of personal income contrasting with 16% pre-pandemic. In the first quarter of this year wage and salary income rose by $156 billion, a mere one-fourteenth of the $2.25 trillion in transfer payments received in the quarter. Perhaps this explains the variance in the level of optimism in how we view our present and future. The Conference Board’s Consumer Confidence Index rose to 121.7, a significant improvement over the 109.0 level in March. (The pre-pandemic level was 132.6). Deconstructing that index though between its present and expectations (i.e., future) subcomponents, reveals future expectations declining to a five-month low. Finally, the shipments of durable goods (goods not for immediate consumption) have trended downwards on a quarter over quarter annualized rate from 33.1% in Q3 2020 to 18.3% in Q4, 10.3% in Q1 2021 and 1.8% in April.

Investors would have been hard pressed NOT to have made money in April. Looking over a list of fifty-eight indices only TWO were negative, India and Japan, both Covid related. The S&P was +5.29%. That pesky variance with the Dow Jones Industrial Average persists which was +2.69%. The November 2020 reversal of that year’s prior market leadership (Small Cap versus Large Cap, Value versus Growth, Energy versus Technology etc.) which showed signs of reversing last month persists with Growth +6.83% and Value +3.65%, Small Cap up only a third of the S&P rise at 1.85%, Foreign Developed Markets +2.95% and Emerging Markets +1.20%. Energy, up 31.7% for the year, was barely positive at +.7% and Technology, up 7.7% for the year (versus the S&P’s 12.0%) was +5.20%. The 60 (equity)/40 (fixed income & cash) portfolio returned 3% for the month and is now +7.3% year to date with the equity portion returning +4% for the month.

 

Mark H. Tekamp, May 2, 2021

Your – oh! March 2021 Commentary

“Europe is so well gardened that it resembles a work of art, a scientific theory, a neat metaphysical system. Man has re-created Europe in his own image.” – Aldous Huxley

Financial - Heritage Wealth - HWMG -

For investors, Europe is not so much a place given up for lost as simply forgotten. And when not forgotten, the glimmerings of its continuing existence are likely to be reminders of the imperfections of the human experience. “In another locked down, disrupted Easter, a tired Italy can’t escape the virus.” So said The Washington Post. “German finance chief says Covid surge shows now is not the time to reopen economy.” That from CNBC. Describing the continent in its entirety CBS News headlined “New wave of coronavirus infections sweeps across Europe.” So life goes forwards in much of the world but in Europe seemingly it remains the same. Clearly not a good time to buy European stocks, right? And what if one owns them? Should they sell them?

Curiously though, the markets seem to be saying something entirely different. The Markit Manufacturing PMI indicator measures the rate of growth of the most cyclical of the economic sectors and so serves as a very good indicator of the trend for the remainder of the economy. In March there were six countries with a stronger PMI number than the US. Five were in Western Europe including #1 Germany and #4 Italy. The German number was the highest in twenty-five years and dramatically exceeded expectations. The European stock markets may be telling us that there is more where this is coming from. The Euro STOXX 50, a sort of Dow Jones Industrial Average for large European companies, has handily outperformed the S&P 500 year to date 6.74% versus 5.77%. The best performing European stock market of all? Italy, outperforming the S&P for the month 5.31% versus 4.24%.

Has anybody noticed the divergence in the performance of the Dow Jones Industrial Average versus that of the S&P 500 in recent months? The ten-year average returns for the two indices, 12.93% and 13.81%, and the five year returns of 15.85% and 16.23% are reasonably close to one another but this year to date is a bit of a different story. January’s -2.10% versus -1.01%, (S&P & DJIA) February’s 3.17% versus 2.76% and March’s 6.62% versus 4.24% result in a Q1 2021 return of the two indices of 7.76% for the DJIA and 5.77% for the S&P. Finally, in a revelation of the pursuit of reverse near symmetry, from January 4th through February 12th the S&P outperformed the DJIA 4.7% to 2.8% but from March 4th through March 29th the DJIA outperformed the S&P 4.6% to 3.0%. That would seem to be, as we say in the trade, statistically significant.

currency-money

March, while one-third of the quarter, bore some distinguishing qualities very much its own. Small cap stocks (as measured by the Russell 2000) were up 1.39% for the month, one-third of that of the S&P, though returning 12.90% for the quarter, more than twice that of the S&P. In the large cap space value continued to outperformed growth 6.31% to 2.72% for March and 10.91% versus 2.22% for the quarter. Foreign stocks underperformed the US market (despite the strength of the European markets) with returns of 2.51% for the month and 3.99% for the quarter. The 60% equity 40% fixed income portfolio returned 4.39% for the quarter and 1.11% for the month with the equity portion of the returns (6.73% for the quarter and 2.76% for the month) being offset by the modest negative returns of the fixed income portion due to the rise in interest rates during the quarter.

 

Mark H. Tekamp; April 7, 2021