About the author

Paul Nolte

Paul Nolte has been serving families’ financial needs for over 30 years. Before joining Kingsview in 2014 as a financial advisor and a member of the investment committee, Paul managed portfolios at a private wealth advisory firm. He also served as a Lead Portfolio Manager for Banc One and National City, helping set investment policies for portfolio managers firm wide.

With his strong interest in analytics, Paul devises a financial strategy that helps clients plan for the future – not only theirs, but also for their beneficiaries. He tailors his advice for each client by integrating their life goals and personal finances while also working with their attorneys and accountants to cover all their financial needs.

Paul has also served in various capacities on the boards of the Elmhurst YMCA, DuPage Easter Seals, Elmhurst Swim Team, Elmhurst Police Pension and Elmhurst Fire Pension. You can hear him regularly on WGN and WBBM Radio in Chicago as well as quoted in various business outlets nationwide.

– Illinois Wesleyan University, BA Business 1984
– DePaul Kellstadt Graduate School of Business, MBA Finance 1992
– Chartered Financial Analyst® designation awarded 1993
– Member, CFA® Society of Chicago


Nolte Notes 5.10.21

May 10, 2021

“Jobs, jobs everywhere and not one to be had”. With apologies to Samuel Coleridge, the jobs report on Friday was in stark contrast to the news earlier in the week of large drops in weekly jobless claims. Employment reports embedded in various survey data also indicated that payroll gains would be close to 1 million, not just a quarter of that guess. Given the huge whiff, it would not be a surprise to see stocks take a header and drop a few percentages. However, they rose nearly 1% as investors feel the monetary spigots will remain wide open, fueling further stock gains and potentially higher inflation along the way. Excuses for the miss abound, from lingering fears about covid while heading back to work, schools still in hybrid and parents needing to hang around the house while kids are home. Finally, some point to the generous unemployment programs that are keeping potential employees at home until at least September, when the benefits are set to expire. Of course, the weaker report emboldened others to push for even more benefits.

The economy is in a strange place. Manufacturing is running full out and having trouble finding “stuff” needed to make their “stuff” (hence the rising prices on various inputs like steel, copper, grains, etc.). Services are beginning to come online as restrictions ease. Yet they are having trouble finding workers and still have capacity restrictions and higher prices for their needs (like jet fuel and foodstuffs). Housing is booming as many are leaving the larger cities and heading to the ‘burbs. Lack of building (and higher lumber/copper prices) has pushed up home prices at a pace last seen in ’07. GDP growth was over 6%, yet the calls for more stimulus and keeping the Fed’s rate policy in place were heard following the report. The key question is whether the combination of the enormous stimulus package (as well as the one proposed) and higher input prices for all sorts of goods will indeed be “transitory” or much more lasting than is presently assumed. Inflation in the financial markets have been deemed a good thing, however now that it is spilling over into the “real economy”, it could pose problems for officials.

Bond investors cheered the poor employment report, as they believe the easy monetary policy will continue for longer than expected. Since hitting 1.74% in mid-March, the 10-year Treasury yield has eased to 1.60%, trading in a very narrow range. If the bond market is indeed worried about inflation, it is not yet showing up in yields. Even the spread between short and long-term bonds has contracted when it would be expected to expand as the economy heats up. Investors in low-grade corporate bonds are not worried either, as high yield rates are their closest to Treasury yields ever, meaning the margin of default risk has never been lower.

Even with the much lower-than-expected job growth last month, the “re-opening” trade in the market continues to lead the way. Small US stocks and large US value have been out in front much of the year and have regained their leadership roll over the past two weeks. The dollar has weakened as well, allowing international investments to lead their US counterparts. A concentrated portfolio of US technology stocks has been the big winner over the past decade, starting in the depths of the financial crises of 2008 and (likely) culminating with the rollout of the vaccine late last year. Investors are paying a hefty premium for growth, as the average price to earnings for growth is 30x, 50% higher than that for value stocks. Both are at historically high levels, but for those that need to always be fully invested, the near historical difference between the two would argue that investors should be buying value and selling growth. The “reversion to the mean” trade would help investors who have a diversified portfolio of large/small/international holdings perform better than the averages, which are still dominated by large growth names.

The circular argument of “why are stocks going up? Because people are buying. Why are they buying? Cause stocks are going up”, will come to an end at some point. There are not yet any hints that stocks are going to do much more than correct their torrid run this year. A large “wow” drop is not yet in the cards. Still scanning the horizon for signs though…

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.


Nolte Notes 10.5.2020

Good-bye and good riddance to September, the first down month since the March market bottom. Though the quarter ending in September was very good, investors are increasingly worried about the election. With the revelation that President Trump has Covid, the election “season” gets tossed on its ear. The economic data from last week was generally good. The employment rate fell below 8%. That came as a large part of the unemployment left the workforce, while those looking for jobs took longer to find one. In general, the economic data signals a recovery that is losing its mojo and in need of additional stimulus, which given the President’s condition, may have a better chance than not in the weeks ahead. The coming week will be light on economic data points and will be the lull between the quarter end flurry of economic news and the start of earnings season. It is expected that earnings likely bottomed last quarter. Outside of the technology sector, how much did earnings really pick up from a slowly recovering economy? One final bit of good news. October is known for market crashes. However, it also marks the beginning of the best quarter of the year, especially in an election year.

While the markets snapped their four-week losing streak, it was not a pretty week. Trading volume rose as the markets declined. Investors anxious to buy early, were selling by the end of the day. Those strong opens and weak closes are not healthy over the intermediate term as it indicates stocks are held by “weak” hands. Unless stocks continue to gain this week, the advance decline line will put in the third “lower high” since August. Looking more like steps heading lower, it is another indication that stocks are still struggling to find their footing. A strong week this week could turn that tide and get the markets looking much better heading into the election as well as finishing up the year on a positive note. The market seems to be reacting more in the short-term to political news than the economic data, which is decent, just not as fabulous as it was a few months ago.

Just when things look precarious for bond investors, the bond markets surprise everyone. Yields have been rising ever so gradually. However, the “non-treasury” portion of the market, like corporate and high yield bonds continue to do well, taking their place as “equity like” bond investments. It is in this time of economic recovery that yields typically rise as inflationary fears enter the market, tight supplies, and rising spending. Usually the longer-term treasury yields rise to compensate for higher inflation rates, while corporate bonds “rejoice” as their changes of paying principal increase with economic growth. Surprisingly, the bond model is now actually forecasting lower interest rates. Higher utility stocks and lower commodity prices have been the key in shifting the model toward a better overall outlook on interest rates.

The better utility stock prices highlighted above is not all that great for stocks, as the utility index is performing better than the SP500. Since the SP500 peaked at the end of August, utilities are over 6% ahead of the SP500. Consumer staples and other “defensive” parts of the markets are shining compared to the broader indices. If the more defensive portions of the markets are leading, it pays to be cautious. Even the international portion of the market is doing relatively well. Down for September, but much better than the SP500. Last week the much maligned small, midcap and value portions of the markets took center stage. We have seen this show before, but like Bullwinkle’s hat trick, maybe this time for sure! The typical shift from growth to value has been expected for the past few years but has yet to make more than a month or two appearance. If the economic openings can stick, investors are likely to shift toward the more beaten down portions of the markets, which would mean value over growth.

As if on cue, the markets rallied last week, after four tough weeks in September. October, even with the historical reputation for crashes, marks the beginning of the best portion of the year. If the economic growth can pick up and we see a bit of help from Washington, investors are likely to be rewarded for being invested.

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.


Nolte Notes 9.28.2020

Without a furious rally early in the week, this will mark the first month since March that the markets have declined. Judging by the various comments in the financial press, an economic collapse is on the horizon. While sensationalistic, the economy is showing some signs of slowing in key parts that could spell some trouble. As has been the case since the beginning of the economic shutdown, we look at the “high frequency” data points to determine if things are opening, stagnating, or backsliding. From people moving through the airport to restaurant reservations to using phone apps for directions. All are showing modest improvement during the month of September, but that “rate of change” has slowed from the summer months. The weather has been very nice in the northern climes, but the beginning of fall marks the beginning of the end of dining outside. The focus, at least temporarily, will shift this week to the elections as the first of three debates is set to take place on Tuesday. The economic data will be coming hot and heavy afterwards, culminating in the monthly jobs report that will get the usual scrutiny. Another week of tossing and turning all night!

Fear is once again entering the financial markets. Last week marked the fourth consecutive week that the SP500 fell, the first time that has happened since August of last year and only the third time in the last five years. It is little wonder that investors are beginning to worry. Even the market decline in March was split into two terrible weeks around one positive. From a very short-term perspective, one third of stocks are trading below their short-term average prices, the lowest since the March bottom. Historically, the markets should rally some from this point, however the political and still rough economic data may keep a lid on any “friskiness” in the market. The volatility is likely to remain through the election. Once the election is in the rearview mirror, stocks could stage a yearend rally as investors sigh a bit of relief and turn back to the economic and virus data.

One of the indicators for the stock market is the spread between high yield bonds and treasuries. Historically, the spreads get very wide when the economy hits the skids and this year was no different. Once past, those spreads get smaller as investors begin getting comfortable with an economic recovery. This time around, those spreads are indeed much lower than in March, however they have hooked up over the last few weeks. This is being confirmed with a narrowing of yields in the treasury market. Both indicate the recovery remains in question and the potential for another leg lower in the economic data remains relatively high. Even the performance of the very safe utility sector has outpaced the SP500 nearly every day since the start of September. The uneven recovery is likely to keep investors on edge until we get better medical data on a vaccine.

One of the “tells” in this market is the action of technology stocks. They skated through the March decline and came out the other side as market leaders. They were leaned on heavily as people worked from home and ordered nearly everything online. Technology has become the “conservative” play if the economy struggles to reopen. However, one other sector also provides some insight into investors desires to take on risk, utilities. As we noted above, the utility sector has been performing well vs. the SP500 since the start of the month. This has coincided with the market correction and was also a leading indicator of the market decline early in the year. Small and mid-cap stocks have done well during September as investors sold some of their tech shares. That said, there has been no changes in the ranking of the various industry groups within the SP500. Technology remains at the top, while energy sticks at the bottom.

While stocks have fallen in four straight weeks, they may be ready to rise this week as investors may be coming back into the technology sector after many companies have fallen 15-25% this month. The debates, election and earnings will keep investors focused and still jumpy, so volatility is likely to remain with us for the next 4-5 weeks.
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.


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.


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.


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.


Nolte Notes 8.30.2020

Outside of a few hours this month in Chicago, it has been sunny and warm. Outside of four trading days, the markets have advanced 18 trading days and jumped nearly 10%. With the Fed keeping rates at zero for the foreseeable future, and expectations for a vaccine for Covid, what is not to like about stocks? Like the weather in Chicago, it will change, and these warm, sunny days will be just a memory. The economic data continues to improve but remains a long way from “normal” or even looking like a recession. The markets do like the fact that the numbers are improving, which is more important than the magnitude of the improvement. Whenever the data points begin to turn down, the markets will struggle. Because of the historic economic shutdown, the seasonally adjusted data points have become useless. The adjustments have been made to incorporate seasonal factors in employment, retail sales, etc. However, looking at the raw data, weekly jobless claims continue to improve, and housing has been “on fire”. Both are key components of the overall economy and will need to show sustainable improvement in the weeks/months ahead for the markets to maintain a positive tilt.

The relationship between the stock market and the economy is strained. The economy, while improving, still has 10% unemployment. More layoff announcements are coming as business remains slow. The service sector, which has become more than two-thirds of the economy, is stuck in low gear without the economy completely open and due to continued concerns surrounding Covid. The coming week will be chock full of the heavy economic data points that will get analyzed over the holiday weekend. From the surveys on manufacturing and services (both are showing expansion) to the unemployment report on Friday, there will be plenty for economists to chew on. It is expected that another 1.5+ million jobs were “created” during the month of July. Finally, due in large part to government assistance, spending continues to expand. Nonetheless without an extension, spending may start contracting in the coming months as 27 million people are still unemployed. The economy is improving, just not as quickly as many expected five months ago.

The big news of the week for financial markets was not the Republican Convention, but the online version of the Fed’s Jackson Hole annual confab. Unveiled by Chair Powell was their new policy in addressing inflation. Going forward they will be focused more on the average rate of inflation rather than a target of 2%, which has been in place since 2012. As measured by the Fed’s preferred core personal expenditures (PCE) inflation has been fairly consistently below 2% since 1996. Various Fed programs, from quantitative easing to cutting rates to zero have not managed to boost inflation in over 20 years. Why? Some is due to the lack of population growth in the US (and in most developed countries) as well as a heavier reliance on technology. Those trends will not be reversing anytime soon, so no matter what the Fed is doing, inflation is likely to remain relatively low in the future.

August historically has been one of the poorest months for stocks and fast on its heels is September. This August was extremely good for stocks, and more gains are anticipated into September as economic conditions continue to improve. The market averages do not fairly represent what is happening to most stocks, as we have highlighted over the past few months. If we weight all the stocks in the SP500 equally, that average is still down for the year, while the SP500 is up over 10%. Technology stocks are up over 30% for the year, small stocks are down over 5%. International has barely made it back to the zero line. Finally, the disparity between “growth” and “value” is at its largest spread in history. So, while the markets may continue to rise in the months ahead, it is likely to be coming from the value parts of the markets. The market differences are becoming reminiscent of the late 90s, the last time technology ruled the markets to this extent. Investors holding “non-tech” faired rather well in the early 2000s as the market “averages” dropped from 2000-’03.

We have been slowly shifting away from technology and toward more “value” and smaller stocks. Over the coming years, the more ignored portions of the markets are likely to perform better than the headline technology names in the years ahead. Bond investors are not likely to see higher interest rates anytime soon, as the Fed will be keeping rates low for the foreseeable future.

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.


Nolte Notes 6.29.2020

Nothing matters until it does. The focus on Wall Street has been on the opening of the state economies, the generosity of the Fed and the US government providing money to the financial and economic systems. The financial markets took off, well ahead of the economic data, and seemingly solely on the Fed largess until last week. Then the virus numbers started rising as people began going about their business as usual. The rise in cases worried investors that the second wave is upon us and the economy will have to once again shutter, meaning earnings will take that much longer to recover, additional resources will be spent and the “V” recovery becomes wishful thinking. The economic data does show the economy is recovering; however, the weekly jobless claims and continuing claims are not coming down as quickly as many were expecting. The holiday-shortened week will have the unemployment figures released ahead of the fourth of July and should provide plenty to chew on over the three-day weekend.

The markets have been holding up well in the face of persistently high virus numbers in the US, however, last week succumbed to selling pressure as worries about the second wave spread across the southern US. Most disconcerting has been how quickly many stocks “lost” their staying power above short-term average prices. After 90% of all stocks recently were trading above their 50-day average price, that figures have fallen below 60% and in jeopardy of getting below 50%. The story is worse when looking at long-term average prices, where the figure poked above 50% and today is below 25%. The net number of advancing to declining stocks is also rolling over, all of which paints a much more negative picture for stocks going forward. While the SP500 is barely trading above its average prices, many other broader indices have dipped below last week. Much like the reaction to the virus spread, the markets are taking a breather from the heady rally that nearly recovered all the losses in March.

The interest rate picture remains a bright spot for investors. As low as rates are today with the 10-year treasury at 0.66%, there remains room for yields to decline further if the recovery proves elusive. The Fed continues to buy bonds, supporting not only treasuries but also corporate bonds through their various programs. The yield curve, which steepened following the March bottom in stock prices, is once again flattening out. This is a warning sign that the economy remains tentative at best and could take longer than many expect in getting back to “normal”. As a result, bonds should be a good hiding place while stock investors figure out where to turn to next. Inflation should not (yet) be a concern for bond investors. Once the economy fully recovers, we should begin to see inflationary signs, but that date remains well in the future.

Technology continues to be the “safe” trade for investors. While we are working from home and ordering things online, these companies have been direct beneficiaries. As a result, technology is now gone into “overbought” territory, meaning a correction in prices or selling of technology and buying of other sectors or asset classes is likely at hand. The flattening of the yield curve and overall high valuations of the markets, in general, is beginning to give us pause about the sunny outlook for stocks. Within the SP500, there are now only three sectors that are trading above their average short-term prices, which was as high as eight of the ten in positive territory a month ago. While it may be sunny and warm poolside, storm clouds are beginning to gather over Wall Street. At this point, a correction in stock prices has been overdue but worries about the virus spread may provide fuel for more than a corrective selling phase for stocks.

At this point, we are taking off some of the “risk” in the portfolios, taking hefty gains in technology stocks, and increasing the bond exposure, especially treasuries. This may be a temporary shift, and actions by the government or the Fed for additional measures may allow us to reinstate a more bullish tilt. This is not a “bearish” call, but a realization that stocks, and investors, may be taking a summer holiday.

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.


Nolte Notes 6.8.2020

The “game” of estimating economic numbers is rather humbling. There are so many variables, revisions and things not accounted for that hitting the actual estimate is a lesson in futility. Take the jobs report, in a “normal” month, the margin of error is usually 10-20,000 jobs. As states open slowly and get caught up on past filings for unemployment, it was estimated that jobs were still being lost in May. Payrolls actually expanded and the unemployment rate fell. The jobs report was much better than expected and created a surge in the stock market, capping the best three-week period since 2009. The employment report was one of many that were “better than expected” over the past two weeks. Many of the absolute numbers were awful, but vs. what was estimated, they were better. Wall Street operates in the world of recent data trends. If the trend is better, things are getting better and stocks should be rising. If the trend is getting worse, Wall Street looks around for the Fed to help by cutting interest rates and stocks rise. Heads they win, tails you lose. It does not make sense for those looking in from outside “the club”, but Wall Street has always moved to its own beat.

The last time we have seen the markets put together a two or even three-week run like this was coming off the 2009 bottom. Unusual in that the SP500 has already run higher by 40% over the past 50 trading days. Many are calling this a “blow-off” top that will reverse by August as everyone piles back into the markets. However, the rally is broadening out rather than getting narrow. The former leaders (technology and healthcare) are starting to take a back seat to the more cyclical portions of the market. Volume increased as the markets rose and the number of stocks rising vs. falling has been decidedly bullish. That does not mean stocks continue to race higher, but that any inevitable rest that may happen should be a good time to add to equity positions. It is crazy to think that the economy is contracting by over 5% and unemployment is likely to remain over 10% by yearend, yet the markets are within a stone’s throw of yearend or all-time highs. Such is the power of “free” money from the Fed.

Confirmation of the shift in the equity markets can be seen in the bond market. Even as the Fed has been regularly buying bonds and bond ETFs, interest rates are rising. The 10-year treasury is approaching 1%, which is not a big yield, but it was below 0.50% just a few weeks ago. Always worrying about something, investors may begin to be concerned that higher yields become competition for stocks as they can garner “safe” returns more than stocks. We are a long way away from that, but as the stock market rises and valuations get stretched, bonds will become a much more interesting asset class again. The Fed continues to hold the key and will be meeting this week to discuss interest rate changes (expect nothing), but may begin to explain what their expectations are for the remainder of the year, which will be very interesting to hear.

We saw signs of rotation to other parts of the markets two weeks ago and last week it came through in spades, with small-cap doubling the return of the SP500. International did very well as did the beaten-down financials and energy sectors within the SP500. The larger the stock, the worse the performance. It is this rotation that may provide some fuel for further gains. The largest stocks held up during the market decline in March and are now expensive relative to many other parts of the markets. The disparity between estimated returns of the largest US stocks (roughly 2%) and small stocks (over 10%) for the coming five years is at the widest it has been since 2000. That marked the beginning of a seven-year run for value, international and small stocks that then culminated in the financial crisis. These big market declines (Tech bubble, financial crisis, Covid) tend to be periods that mark a shift in market leadership. We may be in the early stages of that shift today.

So much for a market rest last week, as the SP500 jumped 5%. Still looking for a rest, but the longer-term outlook for stocks outside of the largest US stocks is brightening. Diversification away from large tech and growth names may allow for better performance in the months and years ahead. The Fed will be important to watch later this week about their plans to continue to support the financial markets.

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.


Nolte Notes 6.1.2020

Spoken in the tones of Maxwell Smart: Would you believe the SP500 could get over 8000 by New Year’s Day? Including weekend and holidays, the markets have increased at a pace rivaling the one month decline from the February peak to the nadir in late March. A long, strange trip does not even begin to capture the events of the past three months. The trillions of dollars spent by Congress and the buying of bonds by the Fed has done more for Wall Street than Main Street and part of the reason for the disconnect between consumer confidence and investor sentiment. Earnings are not likely to recover nearly as quickly as expected as dislocations, broken supply chains and spending habits are not likely to snap back. Yes, states and many businesses are beginning to open, but with some new protocols that are not going to result in booming businesses like the end of 2019. An easy bet would be that the SP500 does not maintain the same pace of the past month and there will be some reconciliation between the generosity of the Fed and Congress and the daily reality of getting back to work. Heaven forbid there is a surge in cases or postponing of the economic opening. The financial markets will not react kindly.

The market has put together quite a run over the last two weeks. Both weeks saw a better than 4 to 1 ratio of advancing to declining stocks on the week. The volume of advancing stocks doubled that of declining stocks mid-week, showing a strong appetite for stocks by investors. While the markets have put on a show since the March bottom, much of the excitement has been contained within the first hour of trading. The Dow has increased nearly 7000 points from the bottom. Looking at the first hour of trading, the Dow added 6500 points just within that hour. In the final hour of the day, the Dow dropped 500 points. What that means is that stocks really did not move too much over the course of the trading day. If you were not in the market the night before, you missed that opening jump in stocks the following day. Healthy? No, as retail investors tend to be very active in the first hour, while the specialists (or smart money) tends to be more active at the end of the day.

As the economy begins to open, commodity prices are beginning to perk up as well. Still down significantly from a year ago, they have been moving gradually higher over the past month. Interest rates have perked up a bit from their very-low levels as the Treasury is issuing a ton of bonds to pay for all the stimulus. All of this is pushing the bond model toward the negative zone, meaning that interest rates could be rising in the months ahead. Since late 2018, there have been a few weeks that were negative as interest ultimately fell to near zero. This change does not mean rates are going to soar, but it means to be a bit more cautious about extrapolating the past well into the future. This means that the discussion about negative interest rates could be a bit premature.

There are some small signs that there is a rotation underway from technology and healthcare and towards some of the lagging groups like consumer discretionary and even financials. Smaller stocks, value, and international all bested the SP500 last week. Whether the rotation lasts more than a few weeks is yet to be seen, but these parts of the markets provide some of the better overall returns due to their poor relative performance to the large US growth stocks that we have been highlighting over the past few weeks. Since many of the technology names also are large contributors to the SP500 performance, it may be that the index takes a bit of a breather and allows some of the economic data to play some catch-up. It may be hard to believe but a few decades ago the kings of the markets included AT&T, Exxon, and IBM. Yep, dinosaurs. What will be said about this decade’s behemoths?

The markets have had a tremendous few weeks and are likely due for a rest. Whether that means some of the market leaders take a break while others jump to the fore or a retracement of some of the recent gains, we should get a feel for that the next few weeks. Bond investors could be seeing interest rates slowly rise in the months ahead as the Fed and government begin to back away from their intense support to the financial markets.

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.