Nolte Notes 9.21.2020

The rough season for stocks is upon us, and so far, the financial markets have not disappointed. Most of the focus is and has been on the technology sector, which remains overvalued on many metrics. Other parts of the markets have declined some, but at a much slower pace than technology. The big news of the week was the Fed meeting, where little was done, and plenty was inferred. It was not a surprise rates were held at zero and indications were for rates to stay there for at least a few more years. Inflation got a pass, and many wondered if inflation would ever be a problem again. Former Fed Chief Volker must be flipping in his grave! Chair Powell exhorted Congress again to pass additional stimulus as the Fed could only do so much for the average consumer. The financial markets reacted negatively, hoping that they would announce additional financial measures and monetary easing to help keep the markets going. When that announcement did not come, stocks headed south. The coming week will focus on housing, with the release of home sales for August. One thing to keep an eye on is lumber prices, as the prices have nearly tripled from their lows of early April to the end of August, only to drop by a third this month.

The meek may indeed inherit the world, but the laggards this year are getting their day in the sun this month. The higher the exposure to technology, the worse the performance – exactly the opposite of the results through the end of August. More concerning has been the breakdown of some of the market internals. Like the net number of rising vs. falling stocks. After peaking mid-August, ahead of the SP500 apex at the end of August, the net number is back to July levels, when the markets were 4% lower than today. Daily volume has been expanding when stocks prices are falling and contracting when they rise. Again, a recent development that points to additional weakness ahead. At this point, additional weakness is not a market collapse, but a rotation toward parts of the markets that have not done well this year and away from technology stocks.

The declaration by Fed Chief Powell that interest rates are likely to remain at current zero rates for the next couple of years means income investors will continue to be starved trying to get some income safely without being subject to the wild swings in stock prices. While inflation is not returning quickly, the Fed feels confident in their ability to stave off “runaway” inflation as Volker did in the 80s by nearly killing the economy after hiking rates into the teens. A chapter that I am sure investors would not rather revisit. The implication is that the Fed would be much slower in hiking rates as the economy gains steam. This would mean that inflation would be running a bit higher and without at least similar wage gains, the average worker could find themselves losing purchasing power. A worry for another year, but one that needs to be kept an eye on.

Technology is dead, long live technology! A rather perverse argument is making the rounds these days. If investors believe the economy will not be recovering and everyone will remain “in place” (whether working, schooling or just living), then technology will continue to be a winning bet. However, if the economy continues to recover (estimates for a 30% gain in GDP in the third quarter!) many of the other parts of the market and sections of the economy should regain their footing and perform well, especially relative to the currently expensive technology sector. Finally, there is some better performance from international markets. As the dollar has weakened and better virus numbers from many emerging market countries, they are beginning to perform better than the US market. In fact, since the end of May, emerging markets is handily ahead of the US. We have seen this “head-fake” more than a few times over the past three years. Maybe this time for sure!

The rotation toward value and away from growth/technology sectors continues to gain steam during September. We are looking (again) at international holdings and may begin to slowly accumulate shares in the months ahead. As has been the case for months, bond investors should be expecting minimal returns as interest rates are not likely to move much over the next few years.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.

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SVP Paul Nolte Interviewed on WGN Radio

Paul Nolte, Wealth Manager at Kingsview Partners, discusses saving for retirement.

Click here to listen to the interview

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CIO Scott Martin Interviewed on Fox Business News

Chief Investment Officer Scott Martin interviewed on Fox Business News.

3:55

SVP Paul Nolte Interviewed By Reuters

Reuters interviews Paul Nolte, SVP & Sr. Portfolio Manager as Wall Street gains 1% on deal news, vaccine hopes

Merger and vaccine-related news has “really lifted the market,” said Paul Nolte, portfolio manager at Kingsview Investment Management in Chicago.

Click here for the full article

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Nolte Notes 9.14.2020

Like the dog that finally caught the car, investors in the markets are wondering now that the market is/has corrected, now what? It is not likely that the correction is yet over, as many of the highest-flying stocks have “only” dropped 15-20% and remain significantly higher on the year. There has been a bit of rotation toward the more beaten down portions of the markets, although nothing is standing out as a clear winner. Back at the economy and virus updates, the weekly jobless data was less than inspiring. The weekly jobless claims have been dropping at an ever-slower rate and last week were essentially flat from the prior week. The flipside is the monthly report on job turnover (JOLTS), which shows plenty of openings and a low level of job layoffs. Finally, the inflation data was a bit hotter than expected, which is not a surprise, as the economy continues to open. The ability of businesses to increase prices after cutting during the pandemic is just coming back. The coming week is loaded with economic data and includes the Fed meeting, where we hope to find out more about how the Fed is likely to handle monetary policy. Finally, retail sales will be watched closely for an indication of consumers appetite to spend even as the extra government aid rolled off in July.

The SP500 has declined just under 5% so far this month, which qualifies as roughly halfway to an actual correction. Of course, there has been more pain in tech stocks, as they have jumped more than the rest of the market since March. As a result, more “value” strategies have been winning the performance race over the past two weeks. We have seen this shift a few times since March, as growth takes a breather for a few weeks and then comes roaring back. The market internals favor a continuation of the corrective nature of the market, with the net advancing stocks to declining at their lowest levels since early July. Half of the SP500 stocks are above their short-term average price which is well down from over 80% at the end of August. As investors begin to eye the November election, we expect stocks to be very volatile day to day, with a likely downward bias over the next few months.

Yield spreads, specifically the difference between the 2 and 10-year treasuries, have been very instructive in pointing the way for the economy. Historically, coming out of a recession, the difference in yields of these two securities get quite large very quickly. These “spreads” began rising quickly as the financial crisis unfolded, indicating the flood of money coming from the Fed. It took nine months to increase nearly 2 full percentage points. Today, after six months of “recovery” the spread has increased by less than half a percentage point. The implication is that instead of rocketing out of a recession with inflationary forces rising, this recovery is likely to be very tepid with little inflation. What this means for fixed income investors is a long period of essentially zero interest rates on savings and low interest rates in general for the next few years.

Signs of a still weak economy can be gleaned from the performance of the energy sector. This is the most sensitive to economic activity. After peaking at yearend, energy prices fell nearly every week before finally bottoming at the end of April and doubling over the following two months. However, since the end of June, oil prices have increased very modestly and by last Friday, closed at its lowest levels since mid-June. Technology joined energy as the worst performing sectors within the SP500 last week, while basic materials and industrials were at the top. Given the size of the technology sector at over 25% of the SP500, it will be the tail that wags the performance dog for the market. Some defensive sectors, like consumer staples and utilities (a bond surrogate) should hold up while the other parts of the market go through its normal corrective pattern. At this point, we expect nothing more than a correction, but that could change if the economic data fails to impress investors and the yield curve (described above) does not get steeper soon.

The repositioning of portfolios, taking profits in technology focused funds and shifting toward more value investments will continue IF the correction is more than past “head fakes” that we have seen since the March bottom. Bond investors are likely to see modest returns in the years ahead due to the very low interest rate environment today.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.

2:30

Wells Fargo Advisor Joins Kingsview in Alpharetta, Georgia

Kingsview’s newest Partner Aaron Das has joined the firm as of September 11, 2020. Mr. Das was born in India, moving to Atlanta when he was eight years old and has remained in the area ever since. After graduating from Emmanuel College with a degree in Business Administration, he began his career in financial services as a banker for BBT Bank, Wachovia, Wells Fargo and then transitioned to Wells Fargo Advisors as a Financial Advisor where he managed over $50,000,000 in assets.

At the Kingsview Alpharetta office, Aaron will continue to deliver measured and personalized guidance to his clients, embracing the firm’s no-nonsense approach to advice, investment management and financial planning. Though prior firms often hindered his ability to fully embrace the fiduciary model, he is grateful to have found with Kingsview a true independent platform to offer sophisticated wealth management services.

“We are extremely excited to welcome Aaron as the newest Partner to our firm,” noted Chief Executive Officer Sean McGillivray. “Our industry has done a poor job of engaging clients and delivering on the promises they make. Aaron’s experience, knowledge, and approach of putting his client’s interests first will continue to advance our desire to transform the industry.”

Kingsview’s newest Alpharetta, GA office can be found at 11175 Cicero Dr., Suite 100 and can be reached at (470) 695-0463.

Click here to view Aaron’s Bio

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CIO Scott Martin Interviewed on Fox Business News

Chief Investment Officer Scott Martin interviewed on Fox Business News.

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Nolte Notes 9.8.2020

When Apple is larger than the English market and Tesla aligns with Visa, is this the dawning of the age of technology? With serious apologies to the 5th Dimension, it seems as though investors believe the is new age knows no limits. Indeed, Apple last week was larger than the entire equity market in England and Visa and Tesla were roughly equal in market capitalization. This new age may be showing signs of cracking, as the tech heavy OTC markets fell just over 6% in two days. Back at the economy, the much-awaited employment report was decent, but failed to excite investors. While still creating more jobs in one month than at any time prior to this year, the number was below last month, and prior months revisions were also lower. The sheer size of the monthly changes in all the economic data makes it hard to determine what is “normal” or how far we are from a more normal economy. We do know companies are making some of the temporary layoffs permanent and the consumer has pulled in their spending a bit during July. As makes its way to the autumnal equinox later this month, investors will be watching the election polls more closely, trying to divine the next big move in stocks. They may be looking in all the wrong places and instead should keep an eye on the economic data.

Could we finally be seeing the beginnings of a market correction that has been expected for the better part of two months? The tech run was going to end at some time, and without as much as a good reason (yet), investors started taking profits in companies that have run up 2-3 times their level just a few months ago. The broader market held up relatively well, but the tech market is providing some similarities to the late 1990s, if not with stratospheric valuations, but with still historically high prices to earnings estimates. Given that earnings will be taking a few years to reach once again the 12/31/19 peak, today’s prices project a total return of only a few percentage points from here. Better hunting grounds are in the stocks that have been left behind, like small US and even international. Staying away from tech in 2000-03 allowed investors to avoid the brutal 50% drawdown by tech issues in the aftermath of the 2000 tech bubble.

Interest rates bounced last week, providing little in the way of shelter from the equity storm late in the week. Investors felt the Fed’s shift toward “average” inflation will mean that inflation will be running “hot” in the years ahead and bond investors want to be compensated for that risk. However, as we highlighted last week, inflation is not likely to be running far ahead of the target 2% level due to slower population growth and lower overall productivity. Watching commodity prices as a clue as well shows pricing for a broad basket of goods remains below year ago levels. There should be plenty of time to get more defensive in the bond market ahead of higher inflation numbers. Right now, our best guess is that interest rates remain relatively stable around current levels for the next 2-5 years, so there is plenty of time before we need to worry about persistently higher inflation.

Almost as quickly as the calendar flipped to September, did stocks flip to the downside. As mentioned above, technology has been the main culprit for the particularly good markets since the March bottom and last week for the poor end of the week. We have seen technology stocks take a few breathers since the March bottom, most recently during July and again in late May. Each time, tech has come roaring back. Is this time different? It is way too early to tell, however the relative valuations of the sector vs. others as well as the large growth asset class vs. other asset classes are pushing levels last seen in 2000. We have begun to take some of the tech weight off the table in favor of more value and some small cap funds. The betting on Wall Street is that the Fed will ride to the rescue if the equity markets fall much beyond 20% from their peak levels, as they have done in past big market declines. As a result, investors are very willing to take risks beyond what makes sense in a “normal” functioning market. At some point that will change and maybe sooner than later.

As mentioned last week, we are shifting toward value and taking profits in many of the technology sector ETFs and individual names that have run up so much this year. While not yet increasing cash, we think the neglected parts of the market can do well through yearend, even if tech struggles.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.

2:30

CIO Scott Martin Interviewed on Fox Business News

Chief Investment Officer Scott Martin interviewed on Fox Business News.

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CIO Scott Martin Interviewed on Fox Business News

Chief Investment Officer Scott Martin interviewed on Fox Business News.

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