Portfolio Manager Insights | Weekly Investor Commentary – 5.5.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 5.5.21
Investment Committee

Economic growth is heating up as consumers spend more, businesses ramp up activity and record amounts of government stimulus flow through the system. In general, this is great news and represents the rosiest scenario that economists could have imagined just a year ago. However, such exceptional growth and market returns also call into question the sustainability of the business cycle. How can investors maintain balance in their portfolios when both the economy and markets are soaring?

First, it is important to understand how quickly the overall economy has recovered. Last week’s GDP report showed that the economy grew by an annual pace of 6.4% in the first quarter. Not only is this well above the historical average of around 2%, but it also follows stellar growth rates of 33.4% and 4.3% in Q3 and Q4 2020, respectively. At this point, real economic activity is less than one percent below its pre-pandemic level. Many other data, from manufacturing activity to retail sales, are near once-in-a-lifetime levels.


THE ECONOMY HAS NEARLY RETURNED TO PRE-PANDEMIC LEVELS

KEY TAKEAWAYS:
1. GDP grew by 6.4% in the first quarter compared to the final quarter of 2020. This is one of the fastest growth rates in decades and puts the level of activity within less than a percent of its pre-pandemic level.

2. Although the National Bureau of Economic Research has not yet declared an end to the recession, there have now been three consecutive strong quarters of growth.

In many ways, resurgent growth should not be surprising. Even during last year’s lockdowns, factories and equipment were still in working order, employees maintained their training and skills, and those businesses with strong balance sheets were able to reopen quickly. Businesses in some industries were either unaffected or were positioned to thrive.

Economists often refer to this type of rebound as “transition dynamics” – i.e., the economy accelerating to catch up after a crisis, made possible because the productive capacity of the country was still intact. This is in stark contrast to the 2008 global financial crisis when much of the business activity leading up to it became less valuable overnight.

Thus, the second factor for investors to consider is that policymakers learned in 2008 that fiscal and monetary stimulus could play significant roles during the early stages of recoveries. After all, supporting households can be important when the contribution of consumer spending to GDP has only grown over the past two decades, outpacing both business investment and government spending in relative terms. The fact that the financial crisis and the pandemic differ significantly has not affected the policy playbook. Supporting those sectors and individuals that are still struggling is one reason Congress and the Fed continue to provide economic stimulus and keep interest rates low.


CONSUMPTION SPENDING IS EVEN MORE IMPORTANT TODAY

KEY TAKEAWAYS:
1. One reason both Congress and the Fed continue to provide economic stimulus, via government spending and low interest rates, respectively, is that some sectors and individuals are still struggling despite the overall economic boom.
2. The chart above shows the make-up of economic activity today and in the past. Consumption spending by households and individuals has only grown relative to business investment and government spending.

Of course, the long-term effects of such freely flowing money is controversial, especially when it comes to its impact on inflation. At the moment, there is evidence of rising inflation in certain areas, especially among economically important commodities, as well as overall prices coming off their pandemic lows. However, the long-term, runaway inflation that many fear has not been experienced in the U.S. since the early 1980s since technology and globalization tend to make goods and services cheaper. This does not mean that sustainably higher inflation isn’t possible, but that these forces would need to either reverse or be overcome. Ultimately, the Fed has made it clear that they would welcome higher inflation expectations among businesses and consumers.


INFLATION FEARS LINGER AS THE LABOR MARKET IMPROVES

KEY TAKEAWAYS:
1. Although recent inflation statistics, such as CPI at 2.6% and PCE at 2.3%, are only somewhat higher, some economists and investors worry about the long-term consequences of government stimulus.
2. Over the past forty years, however, inflation has tended to stall out during the business cycle even as unemployment continues to fall.

Finally, and perhaps most importantly for investors in this environment, the economy and markets are connected but only loosely so. They often appear to be tied together by a bungee cord – the market can move further and faster than the economy for a time, but one or the other will eventually need to adjust. In hindsight, the market will seem either rational or irrational based on whether the economy catches up, as it has successfully done over the past year.

Unlike last spring, however, valuations today are near historic highs and some economic risk factors, including rising inflation, are already affecting investment portfolios. The economy is growing rapidly, justifying the enthusiasm in the stock market over the past year. For long-term investors, it is more important than ever to stay disciplined and to stick to well-considered financial plans.

Historical references do not assume that any prior market behavior will be duplicated. Past performance does not indicate future results. This material has been prepared by Kingsview Wealth Management, LLC. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate their ability to invest for the long term. Investment advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser. (2021-194)

Portfolio Manager Insights | Weekly Investor Commentary – 4.28.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 4.28.21
Investment Committee

One of the beneficiaries of the lockdowns and social distancing measures of the past year has no doubt been the housing market. It is well known that many flocked to the suburbs, moved to warmer climates and traded up their homes during the early stages of the pandemic. As a result, home prices have continued to reach new all-time highs that have eclipsed the mid-2000’s housing boom. As the economy and world return to pre-pandemic levels, how does this affect everyday investors and what impact might it have on broader markets?

Naturally, housing is a basic human need and has a profound impact on our everyday lives. From an investment and economic perspective, the housing market is both itself an investable asset class as well as a macro-economic indicator of financial health. Recent data paint three important pictures from these perspectives.

First, the housing market can tell us about the economic health of consumers since homes are the largest asset for many households and mortgage payments are usually the largest expense. This creates a “wealth effect” associated with the value of one’s home – the higher and more stable that value is, the higher their perceived net worth and the more willing consumers are to spend. Although real estate is illiquid, even the perception of changing asset values may be enough to spark changes in behavior. Thus, rising housing prices have likely contributed to consumer and investor confidence – both of which have jumped in recent weeks. Combined with higher savings rates, the average consumer is likely to be a strong position.

On the other hand, fast-rising home prices make it more challenging for new homebuyers. Fortunately, interest rates are still low by historical standards even after climbing in the first quarter. The average 30-year fixed mortgage rate is still around 3%, well below the 4% average since 2008 and 6% longer-run average. While low rates have contributed to higher home prices, they also help to offset them and increase affordability.


HOME PRICES ARE CLIMBING TO NEW HISTORIC HIGHS

KEY TAKEAWAYS:
1. The S&P/Case-Shiller index of housing prices has climbed to new peaks – both nationwide and across the top 20 cities.

2. This began to occur soon after the COVID-19 lockdowns as many sought more personal living space. Since then, the trend has only accelerated alongside the economic recovery.

Second, the housing market itself continues to face high demand and significant supply constraints, even with COVID-19 restrictions subsiding. The supply of homes available for sale, measured in terms of the number of months needed to sell, is near historic lows of 3.6 months. As a result, both building permits and housing starts have zoomed past historic averages. That this surge has been concentrated in single-family homes is consistent with the anecdotal experience of those seeking more, and better, living space.

Rising housing demand also puts pressure on other parts of the market. Lumber prices, for instance, are at historic records, rising more than 5x from the April 2020 low. Other materials including granite, bricks, concrete blocks, paint and more have all increased. While there are micro-economic factors in each of these markets, some economists expect it could take years for some of these prices to normalize.

Finally, rising home prices have contributed to the real estate sector of the stock market gaining 16% this year after declining in 2020. While only a portion of this index is related to residential real estate, the re-opening of the economy has pushed many parts of the sector higher. Continued supply/demand pressures, low interest rates, the economic recovery and other factors could continue to move in the favor of some of these industries.


THE INVENTORY OF HOMES IS NEAR HISTORIC LOWS

KEY TAKEAWAY:
All-time record home prices are due to limited supply and increased demand. At the moment, the months’ supply of homes is only 3.6 months – near historic lows. This has led to a surge in building permits and housing starts across the country.


THE PRICES OF LUMBER AND OTHER COMMODITIES HAVE SURGED

KEY TAKEAWAY:
New homebuilding activity has also resulted in historic records for the prices of lumber and other housing materials. This has surpassed even the recoveries in other economically sensitive commodities such as oil and copper.

As always, this is a key reason investors should stay diversified and consider a wide variety of sectors and asset classes. The housing market has been a positive sign for the macro economy, individual homeowners and the broader stock market. Below are three charts that highlight recent data around this important sector. The housing market has been strong during this recovery which is a positive sign for the economic rebound. Investors ought to remain diversified across sectors as the cycle evolves.

Historical references do not assume that any prior market behavior will be duplicated. Past performance does not indicate future results. This material has been prepared by Kingsview Wealth Management, LLC. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate their ability to invest for the long term. Investment advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser. (2021-190)

Portfolio Manager Insights | Weekly Investor Commentary – 4.21.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 4.21.21
Investment Committee

The past few weeks have seen one blockbuster economic report after another. From the 916,000 jobs that were added in March to retail sales jumping 9.8% month-over-month, these are some of the best economic numbers we could see in a lifetime. At the same time, much of this was anticipated due to the nature of last year’s shock and the natural recovery from the shutdown. As the stock market continues to reach new highs seemingly every week, how should investors interpret these economic numbers and stay focused on the long run?

It’s important to distinguish between a mechanical recovery from last year’s lockdowns, the effects of stimulus, and a sustainable acceleration in growth. Even if the economy were to simply return to pre-pandemic levels, economists would expect high growth numbers for a period as the world reopens. The fact that this has occurred swiftly is a nice surprise but hardly unusual. At the moment, consensus economic projections are for U.S. GDP to recover to pre-pandemic levels by the end of 2021.


MANY MEASURES OF ECONOMIC ACTIVITY ARE AT MULTI-DECADE HIGHS

KEY TAKEAWAYS:
1. The ISM manufacturing index has reached its highest level since the early 1980s.
2. Other measures, including the non-manufacturing index, are near historic highs as well. Across the board, there is clear evidence that economic activity is strong.

Similarly, government stimulus to the tune of trillions of dollars would reasonably be expected to boost overall spending by individual and businesses for a time. The latest jump in retail spending can be partially attributed to the timing of stimulus checks. However, without a further change in consumer and business attitudes, stimulus alone is not enough to sustain a long-term recovery.

These factors are important and their contribution to the early stages of the recovery cannot be overstated. However, the more important question today is whether there will be a change in individual and corporate expectations that causes growth to accelerate – beyond the initial bounce-back and one-off stimulus bills. As markets rise ever higher, this appears to be what some investors expect.

This would have to go beyond pent-up demand – i.e., the purchasing of goods that were delayed last year – and could be a reaction to factors such as being stuck indoors for months. For instance, a household might choose to buy a nicer car than planned, or splurge more on an international vacation. Businesses might anticipate this behavior and seek to invest in future growth today, further boosting capital expenditures, hiring and wages. Whether we call this “animal spirits,” a multiplier effect or any other term, this is what would allow the recovery to transform into sustained growth.


CONSUMER SPENDING IS AT HISTORIC LEVELS

KEY TAKEAWAYS:
1. Recent retail sales numbers show that consumer spending rose at the highest pace in history. It jumped 9.8% in March compared to February which constitutes a 27.7% increase from the year before.
2. While there are some “base effects” when comparing to last year, the timing of stimulus checks and the continued reopening of the economic have contributed to these strong numbers.

So far, it is unclear if this will take shape. However, the stock market appears to be pricing in this possibility. The market is not always correct, but when it is, it appears to be prescient in hindsight. This has been the case over the past year when the market began to rebound last April even as most parts of the country were locked down for several more months.

This is also the key to rising inflation expectations which the Fed has attempted to achieve for over a decade. Even with prices rebounding from last year’s lows, headline CPI rose 2.6% over the past year. This is an acceleration from recent history, and is notionally above a 2% Fed target, but is quite tame compared to periods of runaway inflation decades ago.


INFLATION HAS RISEN BUT IS STILL TAME

KEY TAKEAWAYS:
1. Despite these historic economic gains, last week’s data show that inflation is still relatively muted. Headline CPI rose 2.6% over the past year – higher than in recent memory but is still tame compared to historic peaks.
2. While the rate of inflation could continue to rise over the next year or two, there is no evidence yet that this will translate into runaway inflation.

Thus, the market is no longer just expecting a simple recovery but a continued acceleration in growth due to the economic reopening, government stimulus and excitement among consumers and businesses. While investors should continue to cheer positive economic news, they should also remain balanced and disciplined as the stock market continues to reach new highs. The economic recovery is strong, but this has pushed the stock market toward historic valuation levels too. Investors should stay invested and remain disciplined as the cycle evolves.

Historical references do not assume that any prior market behavior will be duplicated. Past performance does not indicate future results. This material has been prepared by Kingsview Wealth Management, LLC. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate their ability to invest for the long term. Investment advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser. (2021-180)

Portfolio Manager Insights | Weekly Investor Commentary – 4.14.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS

WEEKLY INVESTOR COMMENTARY | 4.14.21
Investment Committee

It goes without saying that rising markets are positive for investors. However, as with all things, maintaining balance is the key to long term success. Just as investors often find it difficult to stay invested when markets pull back, many also find it challenging to stay focused when markets are roaring. After all, it is human nature to chase returns and to be afraid of missing out. Even when investors intellectually understand that market gains cannot accelerate forever, there can be emotion-driven excuses for why this time is different. This is true even for investors who may have been fearful of returning to the stock market just a year ago.

If history teaches us anything, it is that staying invested with a well-thought-out portfolio and financial plan is the key to long-term success. Doing so helps investors to capture the upside as markets rise over long periods while protecting from downside when they inevitably decline over shorter ones. Just as a sensible sedan, SUV or minivan may not be able to keep up with a race car on an open highway, they will handle the inevitable potholes and traffic jams much better. And, in the end, they will reach their destinations in a safer, more comfortable manner.

Today, there are three key reminders for investors as markets continue to reach new all-time highs. First, recent surveys of investor sentiment suggest that bullishness is now near historic levels among everyday investors – a stunning reversal from a year ago. That this is occurring in lockstep with rising markets should be no surprise, especially with the S&P 500 and Dow each having returned over 10% this year with dividends. Investors – fueled by past returns, media coverage, low interest rates and interesting new assets – are seeking new ways to invest.

However, history shows that investor sentiment is often a contrarian signal – a sign that investors are focusing too much on return and too little on risk. This was certainly true during the dot-com era and the housing boom but has also taken place periodically over the past decade. While this is by no means a timing indicator – markets can rise much longer than many expect – it is a reminder for long-term investors to avoid being distracted from their plans.

Second, while many fundamental factors have continued to push markets higher, investors should not expect markets to accelerate forever. At this point, the expectation for GDP and corporate profits to recover later in 2021 is widely understood and priced-in. Broad market valuation levels remain close to dot-com era highs based on these expectations but can improve over time as the recovery advances. In general, there are no significantly undervalued sectors across the stock and bond markets. This further emphasizes the need for discipline and risk management.

Third, although the broad market continues to climb higher, the sectors and areas driving this have changed over the past several months. Areas such as small caps, value stocks, energy, commodities, financials and more have surged during the recovery after falling behind technology and growth stocks last year.

Thus, it is important to not only focus on the headline index numbers but to understand what is driving performance beneath the surface. It is also important to focus on how each of these areas fit into a well-constructed portfolio, perhaps with tilts to asset allocations.


INVESTOR BULLISHNESS IS NEAR RECORD LEVELS

KEY TAKEAWAYS:

1. The spread between bullish and bearish everyday investors is at its highest level in years. In general, investor sentiment tends to be a contrarian indicator and signals when investors are overly optimistic.
2. However, by no means is it a timing indicator. Thus, today’s readings tell us that investors ought to remain disciplined as markets continue to climb to new peaks.


THE OVERALL MARKET CONTINUES TO REACH NEW ALL-TIME HIGHS

KEY TAKEAWAY:

1. Broad stock market indices continue to rise, fueled by strong economic growth and corporate profits. What has driven this under the hood has shifted over the past year, however.


THE AREAS DRIVING THIS OUTPERFORMANCE HAVE SHIFTED THIS YEAR

KEY TAKEAWAYS:

1. The rotation in the market, driven by the reopening of the economy, has resulted in changes to sector and style leadership. While growth and technology stocks performed well last year, this year’s performance has been broader.
2. Areas such as value, small caps, energy, financials and more have led the way. It’s important for investors to periodically re-evaluate their asset allocations to make sure they are aligned with their long-term objectives.

Investors ought to stay focused in the months to come. Stock market pullbacks are impossible to predict but are inevitable nonetheless. The goal of long-term investors is not to swerve in and out of markets based on past returns, but to stay invested in an appropriate portfolio through both good times and bad. Although the rising market is positive, investors ought to remain disciplined as the economy and corporations continue to recover

Historical references do not assume that any prior market behavior will be duplicated. Past performance does not indicate future results. This material has been prepared by Kingsview Wealth Management, LLC. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate their ability to invest for the long term. Investment advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser. (2021-174)

Portfolio Manager Insights | Weekly Investor Commentary – 4.7.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS

WEEKLY INVESTOR COMMENTARY | 4.7.21
Investment Committee

Despite the jump in interest rates this year, the yields on many corporate bonds remain low. This is driven by many of the same factors that continue to push the stock market higher: the strong economic recovery and rebound in corporate profits. Last week’s blowout jobs report, for instance, showed that 916,000 jobs were added in March and the unemployment rate fell to only 6%. While this is great news in general, it makes it even more challenging for investors to generate sufficient portfolio income.

This is because there are two major factors that determine corporate bond yields. The first is the level of interest rates in the economy, usually measured by U.S. Treasury yields. These have risen significantly this year as the economy has recovered but are still near historic lows compared to the past several decades. For example, the 10-year Treasury yield, after more than tripling from its lowest point one year ago to 1.7%, is still well below the 2008 low of 2.1%.

And while higher yields are positive for investors going forward, rapidly rising rates can be problematic for existing bond holdings – a challenge known as duration risk. At the moment, the U.S. Aggregate bond index is down 3.1% for the year. This is similar to 2013 when interest rates rose swiftly during the Fed “taper tantrum” – the last time the index was negative on a calendar year basis.

The second and perhaps more important factor today is credit risk. This measures and compensates investors for the riskiness of a bond issuer above and beyond Treasuries. When interest rates are extremely low, credit risk can play a much larger role in providing sufficient income, as was the case over the last business cycle. Also in 2013, for instance, high yield bonds returned 7.4% even as Treasury bond prices fell.

It’s due to the combination of these two factors that corporate bond yields are low: although interest rates are rising, spreads continue to compress as the economy improves and the outlook for corporate profitability brightens. After all, if companies are more likely to pay their bondholders on time, the level of yield that investors need to compensate for risk is lower – even for the most speculative issues. At the moment, the spreads on high yield bonds are near their lowest levels since the mid 2000’s.

Unfortunately, there are still no easy answers for generating sufficient yield. This will continue to depend on individual goals and portfolios – one key reason that investors can benefit from proper financial advice and guidance.

Just as they have since 2008, investors need to weigh credit and duration risk relative to the rest of their portfolios. They may also need to consider alternative sources of yield, whether in other sectors of fixed income, dividend-paying stocks or taking a total return approach. The latter, for instance, can be attractive when spreads are falling and bond prices are rising. A diversified high yield index returned 7.1% in 2020 and is slightly positive year-to-date.

Ultimately, staying diversified and focusing on broader objectives, rather than just income, is most likely the best approach for investors with longer time horizons. Portfolio income remains scarce. Investors ought to stay diversified and consider alternative sources of yield.


CORPORATE BOND YIELDS REMAIN LOW EVEN AS INTEREST RATES RISE

KEY TAKEAWAYS:

1. Credit spreads continue to collapse as the economy recovers and profitability improves. Although this has boosted returns for more speculative parts of fixed income, this has also amplified the challenge of generating yield.


YIELDS ARE MUCH LOWER TODAY THAN OVER THE PAST CYCLE

KEY TAKEAWAYS:

1. The chart above compares today’s yields in traditional sources of yield to averages since 2009, which was already a low-yielding environment.
2. There are no simple answers today with traditional sources of bond yield at much lower levels.


A MORE DIVERSIFIED APPROACH MAY BE NEEDED

KEY TAKEAWAYS:

1. Investors may need to broaden their search when considering sources of yield.
2. They may also need to broaden their approach and focus on diversification and total return rather than just income.

Historical references do not assume that any prior market behavior will be duplicated. Past performance does not indicate future results. This material has been prepared by Kingsview Wealth Management, LLC. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate their ability to invest for the long term. Investment advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser. (2020-683)

Portfolio Manager Insights | Weekly Investor Commentary – 3.31.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS

WEEKLY INVESTOR COMMENTARY | 3.31.21
Investment Committee

The S&P 500 and Dow both reached new all-time highs last Friday. Year-to-date, the stock market has continued to grind higher despite short-term worries around the pandemic, a retail trading frenzy, the Fed, inflation, tech stocks, the Suez Canal and more. Even as we write this, there are new questions around forced block trades from a failed hedge fund and the potential ripples across the market. It is in times like these that investors ought to focus on the long-term trends rather than the day-to-day headlines vying for their attention.

It may surprise some investors to learn that this is the 35th time the market has achieved a record level since the recovery began just one year ago. That may seem unbelievable except that, by definition, the stock market often spends most of its time at or near all-time highs as it rises during bull markets.

This has certainly been the case since 2013 when the S&P 500 recovered from the global financial crisis. Additionally, despite bouts of market turbulence this year, the biggest decline in the S&P 500 has only been 4%. This may feel unusually small to some investors given how large the move in interest rates and certain sectors, such as tech, have been. Fortunately, the rotation benefitting areas originally hit hard by the pandemic, including energy, materials, and industrials, has offset poor performance in high-profile sectors. Still, it is important to remember that the annual decline at some point each year tends to be closer to 15% on average, before recovering and ending on a positive note.

This is not to say that the stock market will rise indefinitely or in a straight line – it surely will not. Instead, it is that there is often a gap between what we believe may matter and what actually does. It is not the fact that the market reaches all-time highs that causes it to pull back. What matters more than what stocks have done recently are the underlying trends that affect profits, valuations, and long-run investor expectations. The ultimate impact on investor portfolios depends on whether they stick to their plans.

Thus, this early phase of the market cycle requires investors to carefully balance two factors. First, the economy continues to recover which is driving markets higher. It likely makes sense to stay invested as the new business cycle evolves and to stick to long-term asset allocations. There will no doubt be more hiccups around inflation, monetary policy, the U.S. dollar and more as this develops. However, history has shown that stocks tend to rise over long periods of time as the world improves.

Second, even as they stick to their financial plans, investors ought to remain disciplined and avoid complacency, especially while valuation levels are elevated. At the moment, the broad market trades at a price multiple of 22 times next-twelve-month earnings – near its historic peak of 24.5x during the dot-com bubble. Of course, this is due to the collapse in earnings during the pandemic lockdowns. If earnings can fully recover and achieve new levels by the end of 2021, as many expect, this ratio could slowly fall to more attractive levels.

THE STOCK MARKET CONTINUES TO REACH NEW HIGHS DESPITE SHORT-TERM CONCERNS

KEY TAKEAWAYS:

1. The stock market reached new all-time highs recently the 35th time they have done so over the past year. This should not surprise experienced investors since the underlying economic trends are favorable.

Thus, this early phase of the market cycle requires investors to carefully balance two factors. First, the economy continues to recover which is driving markets higher. It likely makes sense to stay invested as the new business cycle evolves and to stick to long-term asset allocations. There will no doubt be more hiccups around inflation, monetary policy, the U.S. dollar and more as this develops. However, history has shown that stocks tend to rise over long periods of time as the world improves.

Second, even as they stick to their financial plans, investors ought to remain disciplined and avoid complacency, especially while valuation levels are elevated. At the moment, the broad market trades at a price multiple of 22 times next-twelve-month earnings – near its historic peak of 24.5x during the dot-com bubble. Of course, this is due to the collapse in earnings during the pandemic lockdowns. If earnings can fully recover and achieve new levels by the end of 2021, as many expect, this ratio could slowly fall to more attractive levels.

The same is true when assessing the valuations across sectors and styles. Tech-related industries and growth stocks are still relatively expensive after their bull runs last year. While some of these investments can still make sense, it may be necessary to re-evaluate these holdings and consider portfolio adjustments. This is an area in which having a trusted advisor is crucial, since the goal is often to make tilts to well-thought-out asset allocations, not to abandon them altogether.

THE LARGEST PULL BACK THIS YEAR HAS ONLY BEEN 4%

KEY TAKEAWAYS:

1. Although many of the episodes that have grabbed investor attention have felt volatile, the largest intra-year decline has only been about 4% this year.

2. Markets have swung in both directions, however, the S&P 500 is still positive for the year.

THE MARKET AND CERTAIN SECTORS ARE NOT CHEAP

KEY TAKEAWAYS:

1. Despite positive markets, investors ought to remain disciplined. Valuations across the market are still elevated and are close to historic peaks.

2. These could moderate over time as the economy and corporate profits improve. Now is the best time to evaluate asset allocations as the cycle evolves.

Thus, investors face a balancing act between taking advantage of the business cycle and staying disciplined. While this is a difficult
balance to strike amid constant distractions, history has shown that those who are able to do so have a better chance at achieving their
financial goals.

Investors should stick to their asset allocations and consider tilts in order to help them stay invested. Although there will no doubt be
more market-moving headlines the rest of the year, the underlying long-term trends are positive.

Historical references do not assume that any prior market behavior will be duplicated. Past performance does not indicate future results. This material has been prepared by Kingsview Wealth Management, LLC. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate their ability to invest for the long term. Investment advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser. (2021-144)

Portfolio Manager Insights | Weekly Investor Commentary – 3.24.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS

WEEKLY INVESTOR COMMENTARY | 3.24.21
Investment Committee

As the economic recovery gathers steam and vaccine distribution accelerates, many investors are concerned about how the Fed may react.

If inflation and long-term interest rates continue to rise, will the Fed keep policy rates at zero and allow the economy to overheat? Or will they be forced to raise rates and end the party sooner than expected? What does history tell us about Fed policy and how could it affect investors?

In a way, history is repeating itself as worries about the Fed take center stage, just as they so often do during recoveries. The irony is that, during the mid-2010s after the global financial crisis, investors were worried about a Fed “liftoff” – i.e., the start of federal funds rate hikes. Today, investors are more concerned that the economy may overheat and spark runaway inflation if the Fed does not raise rates. All these concerns are taking shape even as the COVID-19 crisis continues, a factor that is well outside of the Fed’s control.

The role of the Fed has traditionally been mundane: to manage interest rates to keep the economy balanced. Their dual mandate to keep inflation low and employment high requires careful monitoring of economic conditions and adjustment of interest rates. Low interest rates can spur economic growth, which is why they are used in times of crisis, while high rates tend to slow the economy. This is a careful balancing act that is as much art as science.

At the moment, Chair Powell and the Federal Reserve Open Market Committee have made it clear that they do not intend to increase the federal funds rate until at least 2023 and possibly 2024. This is partly because many sectors of the economy may take longer to recover from the pandemic. For instance, the Fed and other policymakers consider a wide array of job market data beyond the headline unemployment numbers. Many data, including individuals that are newly discouraged from seeking work and those that may have been misclassified by official surveys, suggest that “true” unemployment is still much higher than average.

An equally important consideration for the Fed is that inflation has been much lower than expected since at least 2008. Whether this is due to trends such as technological deflation and globalization is the subject of academic debate. Regardless of the causes, the Fed’s position is that it will tolerate overheating inflation since it has run so cool for so long. It will likely do so especially if this allows unemployment to fall to pre-crisis levels.

What does this mean for investors? First, inflation has been declining for decades. And while there are reflationary pressures as the economy bounces back from the pandemic, this is a far cry from the double-digit inflation rates experienced during the 1970s. Investors should consider what higher inflation means to their asset allocations and personal income statements without over-reacting and expecting a stagflationary environment.

THE FED HAS KEPT POLICY RATES LOW THROUGHOUT THE PANDEMIC

KEY TAKEAWAYS:

1. This chart shows that the federal funds rate is adjusted based on economic conditions. The Fed kept policy rates low from 2008 to 2015 in response to the global financial crisis. The Fed also took emergency action last year to stimulate the economy at the start of the pandemic.

2. The federal funds rate is still at the zero lower bound today, and the Fed is still buying assets and growing its balance sheet, despite the ongoing economic recovery.

Second, investors often fear the onset of Fed rate hikes even though history suggests that they are a natural and inevitable part of the business cycle. A few tumultuous periods such as the taper tantrum aside, the normalization of the Fed’s balance sheet and rate hikes from 2013 to 2019 occurred alongside a strong bull market.

FED OFFICIALS DON’T EXPECT RATE HIKES UNTIL 2023 OR 2024

KEY TAKEAWAYS:

1. Despite the recovery, the FOMC does not expect rate hikes to begin until at least 2023. This chart shows the Fed’s “dot plot” – i.e., each individual member’s expectation of rates at the end of each calendar year.

2. While more officials expect rates to pick up sooner, the first hike is still years away based on current estimates.

FED RATE HIKES ARE A NATURAL PART OF BULL MARKETS

KEY TAKEAWAYS:

1. If history tells us one thing about Fed rate hikes, it’s that they are nothing to fear.

2. Rate hikes have occurred alongside rising stock markets across history, whether or not investors have agreed with monetary policy decisions.

Of course, market expectations and projections made by Fed governors are based on information available today – an improvement or deterioration in any of the economic data could lead to a different policy path. Additionally, none of this addresses concerns that the Fed has provided too much stimulus over the past two cycles – and that there could be long-term consequences.

What these consequences will entail and when they will occur are the subject of speculation. What is certain is that focusing too much on Fed decisions distracts investors from what truly matters: sticking to their long-term asset allocations and achieving financial goals. There are many uncertainties surrounding the economy and the Fed. Investors should stay focused on their long-run asset allocations, consider the effects of rising inflation and interest rates, and resist over-reacting to Fed actions.

Historical references do not assume that any prior market behavior will be duplicated. Past performance does not indicate future results. This material has been prepared by Kingsview Wealth Management, LLC. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate their ability to invest for the long term. Investment advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser. (2021-141)

Portfolio Manager Insights | Weekly Investor Commentary – 3.17.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS

WEEKLY INVESTOR COMMENTARY | 3.17.21
Investment Committee

With the latest $1.9 trillion stimulus package now signed into law, over $5 trillion has been authorized over the past year to combat the economic impact of the COVID-19 pandemic. Like its predecessors, this bill provides checks to households, supports small businesses, extends unemployment insurance, funds healthcare initiatives and more. Although this spending is not without controversy, that this level of relief has been passed one year after the lockdown began speaks to the long-term impact of the economic shutdown.

The fact that stimulus spending at this moment is controversial is due to the nature of the recovery and the ability to provide targeted relief. While the overall economic recovery has been strong and is expected to accelerate throughout 2021, this is not universally the case. This divergence is often referred to as a “K-shaped recovery”
in which some sectors (tech, online retail, etc.) have not only bounced back but grown, compared to sectors at the
“epicenter” (brick-and-mortar retail, restaurants, travel, etc.).

Although this disparity has clearly impacted stocks, the rotation from pandemic-resistant sectors to epicenter ones has already taken shape. This is partly due to the strong performance of growth and tech sectors over the past twelve months, high valuations among those sectors, and the re-opening of the economy alongside vaccine distribution. Year-to-date, the energy, financials, industrials and materials sectors have led the market while information technology and healthcare are flat. The equal-weighted S&P 500 has also outperformed the standard market-weighted index – an indication that gains are broader than at the start of the recovery.

THE FEDERAL DEFICIT GREW TO 15% OF GDP IN 2020

KEY TAKEAWAYS:

1. History shows that the federal budget deficit tends to expand during times of crisis. This was true during the Great Depression, World War II and the global financial crisis.
2. The question is whether spending will moderate once the crisis subsides. While stimulus spending continues, a growing economy will also improve this outlook over time

In the context of this economic and market turnaround, the latest stimulus package raises three important considerations for investors. First, many investors are concerned about federal spending over the past year. During the government’s 2020 fiscal year (which ends in September), the CARES Act pushed the federal deficit to 15% of GDP – even worse than during the 2008 financial crisis when it reached 10%.

In 2021, federal spending will continue to increase but GDP will also improve, helping to keep this ratio in check. Historically, the deficit jumps in times of crisis but then moderates as spending returns to normal and the economy grows. Of course, “normal” over the past 70 years has involved persistent deficits. While it’s unclear what the limits of the federal debt will be, it’s well understood why the government was forced to spend to keep the economy on life support over the past year. The question is whether there will be political pressure to improve budgetary discipline as the recovery continues.

HOUSEHOLDS ARE SAVING MORE

KEY TAKEAWAYS:

1. Household savings have remained high even as the economy has improved and consumer spending has returned. In the short run, this is a sign that consumers are cautious.
2. It is also a positive sign for the health of consumer finances and for a possible future increase in consumer spending.

ECONOMIC ACTIVITY CONTINUES TO ACCELERATE

KEY TAKEAWAY:

1.) . Industrial activity continues to accelerate, a good sign for overall economic growth across the country

Finally, business activity has recovered remarkably well. By many measures, industrial and manufacturing activity in the U.S. is growing at the fastest pace in 3 years. Job gains have accelerated in recent months and there are now nearly 7 million open positions across the country – not too far from the historic pre-COVID peak. The market has begun to reflect this reversal as manufacturing-related sectors, including ones tied to commodity prices, have surged.

Thus, while there are still many uncertainties surrounding the recovery, the situation has improved dramatically from just a year ago. Although the stimulus package is not without controversy due to its size and timing, it’s clear that many individuals and businesses still need support.

Historical references do not assume that any prior market behavior will be duplicated. Past performance does not indicate future results. This material has been prepared by Kingsview Wealth Management, LLC. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate their ability to invest for the long term. Investment advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser. (2021-119)

Portfolio Manager Insights | Weekly Investor Commentary – 3.10.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS

WEEKLY INVESTOR COMMENTARY | 3.20.21
Investment Committee

Investors have grown uneasy over the past few weeks as stock and bond markets have swung in both directions. Although last week’s jobs report confirmed that the economy is recovering steadily and the new $1.9 billion stimulus package passed by the Senate will provide even greater support, there are fears that the market has run too far too fast. This echoes many investor concerns over the past several years, including last spring when the market began its recovery.

From the perspective of markets, there are two competing views on the recent jump in interest rates. Rising rates and a steepening yield curve could mean that the economy will overheat, sparking runaway inflation and forcing the Fed to pull the plug sooner than expected, all of which may be bad for both stocks and bonds. On the other hand, rising rates could simply be the result of a recovering economy which is good for stocks in the long run. The tension between these two views creates uncertainty for the market.

At the moment, there are not many reasons to believe the former is more likely. Long-term interest rates naturally rise early in any economic recovery and the yield curve was much steeper in the early stages of the last two cycles. And while there may be reflation as prices recover from the economic shutdown, low inflation is a product of decades-long global forces that have little to do with COVID-19. That said, many sectors have performed exceptionally well over the past year and valuations are certainly elevated, potentially justifying some shifts in allocations.

Despite daily swings, the worst stock market pullback this year has only been 4%

KEY TAKEAWAYS:
1) Although there has been much attention on daily market movements – with several moves larger than 1% over the past few weeks – the truth is that the largest pullback has been about 4%.
2) This has been followed by several large gains too. The average year experiences a pullback of about 15% even though the majority of years end up positive.

Thus, in many ways, how everyday investors react to uncertainty is often more important that what they are reacting to. It is not simply that there are always worries on investors’ minds whether it’s the pandemic, federal deficit, retail investor trends, tech stocks, and other issues. It is that, for many, every episode of market volatility feels different. There is a sense that this could be the big one – a correction or crash that makes it seem foolish to have ever been optimistic.

This is why the biggest hurdle to achieving financial goals is not about modeling interest rates – it is overcoming one’s own behavioral and cognitive biases. Although the last several weeks have felt volatile – no doubt amplified by daily headlines and coverage – the reality is that there has not even been a 5% pullback in the S&P 500. The stock market has fallen 20 days this year but has also risen 23 days, close to the slightly-better-than 50/50 average across history. Thus, there is often a disconnect between perception and reality when it comes to market behavior.

The average year experiences many 5% pullbacks

KEY TAKEAWAYS:
1.) From a behavioral perspective, investors experience many 5% pullbacks in any given year. Last year, with the pandemic rattling markets, there were 12 such pullbacks – the highest since the 2008 crash.
2.) It may be surprising to some investors that there have been no such pullbacks so far in 2021.

The key for long-term investors is that the stock market tends to rise over long periods of time even if it can swing wildly in the short run. How can this be if there are almost as many down days as up? The fact that markets are up slightly more than 50% of days compounds over time. On a monthly basis, the stock market has risen more than 60% of the time going back 30 years. On an annual basis, this percentage jumps to over 70%. Since 2003, the stock market has been positive 78% of years.

Like many things, the power of compounding works slowly over time and positive returns over any individual day, month or year are never guaranteed. Market pullbacks and corrections may grab attention and headlines, but it is the slow building of wealth in the face of never-ending market fear that works in investors’ favor over the course of years and decades.

Focusing on longer time frames is the key to success

KEY TAKEAWAYS:
1.) Staying invested over long periods of time is still the most important investment principal.
2.) Although there are always reasons to be concerned, staying focused over years and decades is what allows investors to build their savings into wealth.

While there are valid market concerns around interest rates, valuations, the Fed and fiscal stimulus, the bottom line is that the economy is still recovering. Businesses small and large are seeing their top-line numbers improve and are rebuilding their balance sheets. Patience, discipline and perspective are needed as this plays out.

Historical references do not assume that any prior market behavior will be duplicated. Past performance does not indicate future results. This material has been prepared by Kingsview Wealth Management, LLC. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate their ability to invest for the long term. Investment advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser. (2021-119)

Portfolio Manager Insights | Weekly Investor Commentary – 3.3.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS

WEEKLY INVESTOR COMMENTARY | March 3, 2021
Investment Committee

The sudden rise in interest rates has spooked some investors. Fears of runaway inflation, the Fed losing control, and concerns over highly-valued sectors have resulted in renewed market volatility. Of course, this adds to the ever-growing wall of worry around the pandemic, tech stocks, retail investor behavior, and more just two months into the year. While shocks to interest rates can certainly rattle markets, history shows that these events are positive in the long run. How can patient investors keep all these concerns in perspective as the outlook remains uncertain?

First, it is important to understand the many factors that influence interest rates. In the short run, the buying and selling of bonds can mechanically push rates lower or higher. When investors are concerned about the world, as was the case early in the COVID-19 pandemic, they often buy Treasuries and similar securities as a “flight to safety.” This increases the prices of these bonds and lowers their yields. The opposite is true when investors sell bonds, whether because they fear inflation or seek greater risk and reward, which pushes interest rates higher.

Over time, through this buying and selling, interest rates settle in at levels that correspond to expectations on economic growth and inflation. Thus, interest rates can be both reflections and forecasts of economic trends. Rising rates signal the possibility of stronger growth ahead which is often positive for riskier assets like stocks. So, although spikes in interest rates can be disruptive, especially if it impacts the borrowing costs of individuals and corporations, rising rates are usually a positive sign for markets once the dust settles.

______________________________________________________________________________________________

INTEREST RATES HAVE JUMPED IN RECENT WEEKS

KEY TAKEAWAYS:

1.) Medium and long-term interest rates have risen this year, stoking concerns over the Fed, inflation and more. It’s not unusual for longer-term rates to rise at the beginning of a recovery, as was seen in 2001 and 2009.
2.) Still, short-term shocks to rates can affect markets and the “real” economy by impacting borrowing rates for individuals and corporations.

Second, rising interest rates are thus normal and are not necessarily something to be feared by investors. They are consistent with the positive economic data over the past several weeks, including an improving job market, recovering industrial production, and the on-going rollout of vaccines. While some may be concerned about an overheating economy and accelerating inflation, these are unlikely to be the case today. The recovery is still in its early stages and inflation has been muted over the past decade due to several global trends.

However, this does mean that investors should keep a close eye on their asset allocations, and possibly seek expert guidance. Many fixed income sectors have declined this year as a result of higher interest rates and shrinking credit spreads, with the overall U.S. Aggregate Bond Index down 2%. Valuations for some bonds are elevated and finding income will continue to be a challenge for investors, just as it has been since 2008. Fortunately, fixed income will likely still provide a counterbalance to portfolios in periods of uncertainty, even if yields are lower.

_______________________________________________________________________________________________

MANY FIXED INCOME SECTORS ARE UNDERPERFORMING

KEY TAKEAWAYS:

1.) Rate spikes and shrinking credit spreads have resulted on a drag across fixed income sectors.
2.) The U.S. Aggregate bond index is down over 2% while Treasuries and Corporates have suffered losses year-to-date as well. It is certainly the case that lower yields and higher valuations make investing in fixed income more challenging.

Finally, if the past two business cycles have taught us anything, it is that Fed rate hikes are nothing to fear if they occur alongside an improving economy. In fact, the fear is often worse than the ordeal itself. For instance, the 2013 short-term spike in rates known as the “taper tantrum” was a consequence of investors over-reacting to then-Fed president Ben Bernanke’s comments. Although rates spiked for a few months, they eventually settled back down. The stock market continued to rally for years thereafter.

At the moment, market expectations of the first Fed rate hike have been pulled up from 2024 to early 2023 – still nearly two years away. In general, the previous cycle showed that the Fed can maintain their monetary policy goals in the face of market skepticism. In fact, it kept the federal funds rate at the zero-lower-bound from the global financial crisis until December 2015, despite a recovering economy and rising stock market. Although it is understandable that the market often scrutinizes the Fed, it’s often more important to focus on the underlying economic trends instead.

_______________________________________________________________________________________________

FIXED INCOME HELPS TO MAINTAIN PORTFOLIOBALANCE IN UNCERTAIN TIMES

KEY TAKEAWAY:

1.) Fixed income will likely still provide stability to portfolios in difficult market environments. Sticking with the most appropriate asset class allocation in order to achieve long-term goals is still the primary challenge for investors today.

For long-term investors, all of this reinforces the need to stay focused on financial goals rather than daily market headlines. Investors should remain patient and disciplined as the market adjusts to the economic recovery. Maintaining a proper portfolio mix to achieve long term financial goals should continue to be the main focus.

Historical references do not assume that any prior market behavior will be duplicated. Past performance does not indicate future results. This material has been prepared
by Kingsview Wealth Management, LLC. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or
course of action. Opinions expressed herein are current opinions as of the date appearing in this material only. All investments entail risks. There is no guarantee that
investment strategies will achieve the desired results under all market conditions and each investor should evaluate their ability to invest for the long term. Investment
advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser. (2021-94)