Portfolio Manager Insights | Weekly Investor Commentary – 6.22.22

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 6.22.22
Investment Committee

In response to worsening inflation, the Fed raised policy rates by 75 basis points last week, the largest individual hike since 1994. The Fed also sharply lowered their growth projections, increased their inflation forecasts, and boosted their year-end rate target to 3.25%, while emphasizing that they are “strongly committed to returning inflation to its 2 percent objective.” At his press conference, Chair Jerome Powell acknowledged that accelerating inflation is difficult for households and everyday individuals.

As prices have increased for food, gas, and other necessities, investors have grown increasingly concerned about the impact on the economy and markets. How can long-term investors view this difficult investing environment with the proper perspective?

This has been a challenging market because there have been very few places to hide, and there is no doubt that many investors are tempted to sell and simply hold cash. Markets have yet to stabilize this year and the S&P 500 and Nasdaq are both in bear market territory, having declined 23% and 31% year-to-date, respectively. What has made it especially difficult is that bonds have had one of their worst years in history due to the sudden jump in rates. The U.S. Aggregate Index of bonds has fallen 11.5% year-to-date while the corporate index has pulled back 15%.


ALL INFLATION MEASURES ARE NEAR THEIR PEAKS

KEY TAKEAWAYS:

1. All inflation measures are at or near their recent peaks. This is especially true for measures based on consumer prices, such as the Consumer Price Index and Personal Consumption Expenditures.


In many ways, investors are stuck between a rock and a hard place. On the one hand, many are applauding the Fed’s latest effort to combat the highest inflation rates in forty years. On the other hand, doing so by tightening interest rates will likely soften demand for goods and services across the economy. In the best case, spending will slow and inflation will moderate but remain above historical averages. In the worst case, tightening financial conditions will lead to a recession, albeit possibly a mild one.

Mortgage rates of 5.8% and gas prices around $5 are already creating economic weakness in areas such as the housing market and retail spending. Last week’s retail sales report was a negative surprise with consumers spending -0.3% less in May than April. On a year-over-year basis, retail spending still grew 8.1%. However, these figures aren’t adjusted for inflation. So, with the consumer price index rising 8.6% over the same period, consumers most likely received less for their money over the past year, even if they felt as if they were spending more. Thus, it’s no surprise that there are now signs of belt-tightening.

In this environment, there are two facts that long-term investors should remember. First, the temptation to sell investments and hide in cash is even more counterproductive today because high inflation erodes the value of that cash. Additionally, it’s difficult even in more normal times to try to time the market since rebounds can occur when investors least expect them.For both of these reasons, overreacting and shifting from an appropriately constructed portfolio is likely to be counterproductive. It is better to hold onto a diversified portfolio that can help offset these inflationary pressures going forward, even if it has struggled so far this year alongside almost all asset classes. As the old saying goes, it’s best to be fearful when others are greedy and greedy when others are fearful. While there are many reasons to be negative, this is also the best opportunity to take advantage of the most attractive valuations in years.


CONSUMER SPENDING UNEXPECTEDLY
DECLINED LAST MONTH

KEY TAKEAWAYS:

1. Retails sales unexpectedly declined in May compared to the prior month. In all likelihood, the actual numbers are worse than they appear because they don’t account for inflation.
2. These early signs suggest that consumers are responding to high inflation rates for necessities such as food and gas.


THE FED IS STEPPING UP THE FIGHT AGAINST
INFLATION

KEY TAKEAWAY:

1. The Fed raised its main policy rate by 75 basis points in June, the largest individual rate hike in 28 years. However, the Fed can’t control many of the underlying drivers of inflation such as supply chain problems, high energy prices, etc.


Second, markets tend to focus too much on the Fed, even in good times. The truth is that the core drivers of inflation are either out of their control or the result of stimulus decisions made two years ago by the Fed and Congress. Specifically, the Fed acknowledges that it cannot directly address higher food and energy prices which indirectly affect all prices. On a technical basis, these prices, which hurt consumers the most, are important components of “headline” inflation. Traditionally, economists and the Fed closely follow “core” inflation, which excludes the prices that matter the most today, since policy tools can only affect longer-term trends. Perhaps the best the Fed can do is to prevent inflation expectations from worsening and leading to an inflationary spiral. This would be a situation reminiscent of the 1970s in which persistently higher prices lead workers to demand higher wages which further causes businesses to raise prices. It goes without saying that whether this happens will depend on the direction of energy and food prices, which in turn depends on global conflicts and supply challenges.

The timing of the global economic recovery and the war in Ukraine created the perfect storm for the prices that impact consumers the most. Still, oil prices have fluctuated and are now back to the same levels they reached in March. There are also signs that some supply chain and manufacturing problems are easing, including for semiconductors and building materials. So, while these pricing pressures have remained high, they could naturally fall in the coming months. Ultimately, investors ought to focus on what they can control. In this challenging market, sticking with a well-considered financial plan is still the best way to achieve long-term financial goals. Below are three charts that highlight the importance of the Fed’s historic rate hike on consumers and inflation.

The bottom line? Investors ought to stay diversified and avoid the temptation to shift to cash in this inflationary environment. Where the market goes from here will depend heavily on the direction of consumer prices.


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.(2022)

Portfolio Manager Insights | Weekly Investor Commentary – 6.15.22

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 6.15.22
Investment Committee

The last two years have been the perfect storm for inflation. Not only have these trends not let up, they have also accelerated. Rising prices affect all aspects of the economy, from the Fed’s macroeconomic policies to the microeconomic decisions of households and businesses. Concerns over the impact of inflation on interest rates, consumer spending and corporate profits have pushed the broad market back toward bear market territory. How can long-term investors maintain perspective in this challenging environment?

Last week’s data show that the Consumer Price Index, a common measure of inflation, accelerated again in May after briefly slowing in April. Compared to the previous year, consumer prices rose a whopping 8.6%, the fastest growth rate since December 1981. Even “core” CPI, which measures the underlying inflationary trend, climbed 6%.

It’s helpful to review how we got here. Beginning in 2021, global supply chain problems worsened due to strong consumer and business demand as the economy recovered. The war in Ukraine and other factors then led to steep increases in energy and food prices, directly hurting consumer pocketbooks. The competitive labor market has meant shortages of workers and higher wages, eating into the profit margins of businesses. For these reasons, inflation remains the central issue for investors, and there are two broad areas of concern that have weighed on markets.

First, investors are worried that the Fed will be forced to “induce” a recession in order to control inflation. This is exactly what the central bank did under Paul Volcker in response to the stagflation of the late 1970s and early 1980s. By tightening monetary policy, the Fed was able to control runaway inflation at the expense of economic growth. Fortunately, it worked, setting the stage for subsequent growth over the 1980s and 1990s.

While the parallel to the Volcker era is instructive, there are important differences today. Inflation was much worse throughout the 1970s with multiple periods of double-digit price gains over the decade. Not only have all economists and central bankers studied that period extensively but the Fed is already beginning to tighten more quickly, albeit with an unfortunate delay. In contrast, the Volcker Fed didn’t begin to aggressively tighten until 1979 after annualized inflation had already averaged 8.2% for nearly 7 years.

Also, unlike the 1970s, underlying demand in the economy is still fundamentally strong and unemployment is near historic lows. Ironically, this is one reason inflation is a problem in the first place. Thus, if supply were to catch up, prices could theoretically begin to normalize, easing some of the economic stress. So, while a technical recession is always possible as the Fed tightens, we are not beginning with a period of economic stagnation nor a runaway inflationary spiral.

Second, investors are worried that rising prices could harm consumer and business spending. There are already signs of this in this quarter’s corporate earnings. For households, basic necessities like food, shelter, apparel and gasoline are significantly more expensive compared to last year. Gasoline has reached a new peak and energy prices have risen 35% over the past year. Food at home, a category of the Consumer Price Index, rose nearly 12% over the same period. These prices are especially impactful because they are noticeable and unavoidable, leaving families with less to spend on other goods and services.

This has added to the financial stress of consumers. The University of Michigan’s measure of consumer sentiment is now at its lowest level in the history of the index. This measure is directly correlated with consumers’ expectations of inflation, which in turn depends on the inflation they have already experienced via gas and food prices.

So, while this is a very important indicator for markets and the economy, it is entirely backward-looking and based on measures that are widely understood. For this reason, consumer sentiment tends to be a contrarian indicator for the market – i.e., the best time to buy and hold is when consumers feel the worst. Once the underlying economic stress begins to fade, consumer sentiment improves, and markets rebound. This is exactly what took place in the early 1980s as inflation turned around.

What does this all mean? To no one’s surprise, how markets, consumers and businesses do from here depends entirely on the path of inflation. While the Fed is trying to not contribute to the problem, the underlying issues related to supply chains, manufacturing, and energy are outside of their control. If these issues are resolved, and the largest shocks to price are behind us, then many measures of inflation could slowly begin to turn. If inflation stays worse for longer, there could be a bigger impact on corporate profits. Either way, markets are arguably positioned for the worst-case scenario and the Fed is already stepping on the brake.

Thus, investors ought to stay disciplined rather than try to guess the exact direction of inflation. While this is the first inflationary period in four decades, investors have faced numerous market challenges over the past several years. Staying invested in diversified portfolios has been the best approach throughout these periods in order to best achieve financial goals.



Many consumer expenses have seen significant price increases

KEY TAKEAWAYS:

1. The Consumer Price Index has reached new levels, driven by accelerating prices in a number of key categories. Many consumer necessities such as energy, food, and shelter are climbing at their fastest rates over the past 12-months. This directly impacts consumers’ pocketbooks and reduces their ability to spend on other items.


Record gasoline prices hurt consumers

KEY TAKEAWAYS:

1. Gasoline prices, in particular, hurt consumers who often have no choice but to accept greater fuel costs.


Consumer negativity is the worst on record

KEY TAKEAWAY:

1.Inflation has led consumers to feel the worst since the 1980s period of stagflation. Whether this improves will depend entirely on where prices go from here. Still, consumer sentiment tends to be a trailing and contrarian indicator.


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.(2022)

Portfolio Manager Insights | Weekly Investor Commentary – 6.8.22

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 6.8.22
Investment Committee

The question at the forefront of investors’ minds is whether the economy can achieve a so-called “soft landing” in the face of high inflation, rising interest rates, Fed rate hikes, geopolitical conflicts, and other challenges. A soft landing would require the economy to slow gradually without creating a downward spiral in consumer demand and business investment. While the market correction this year has created a challenging investment environment, especially with the steep pullback in growth stocks, a recession is possible but not inevitable. What market and economic measures should long-term investors focus on in the coming months?

First, it’s important to define what is meant by “recession.” When many investors think of a recession, what comes to mind is a historic market and economic crash like the ones experienced during the pandemic shutdown of 2020, the global financial crisis of 2008, or the dot com bust of the early 2000s.

While events like these are always theoretically possible, the problem occurs when investors worry about them at the expense of long-term growth. History shows that doing so is not only unnecessary but counterproductive. For example, during the bull market from 2009 to 2020, investors constantly worried about another financial crisis. Staying invested in a diversified portfolio built to withstand market uncertainty would have been the much better approach.

Instead, a more useful definition of “recession” is simply a temporary decline in economic activity. Prior to the 1990s, there were many short recessions that occurred on a regular basis. These were nothing more than periods of adjustment that reallocated resources within the economy. While there is a real consequence to individuals and businesses, these periods are necessary to move precious economic resources and capital away from unproductive areas to where they can be most valuable. In other words, recessions are a natural part of the business cycle and help sow the seeds of future growth.

Today, an important consideration is that the economy did shrink in the first quarter by 1.5% compared to the end of last year, based on official measures of gross domestic product. Thus, it’s possible for there to be a “technical recession” – that is, two consecutive negative quarters. However, a slowing of the economy, and possibly shrinking by a percent or two, is far different from what many consider to be a recession. Additionally, many other measures of the economy suggest that consumers and businesses are still doing quite well, despite rising prices. The National Bureau of Economic Research, the official organization that determines recession dates, looks at a variety of economic factors and not just at GDP.

Specifically, last week’s jobs report showed that the economy added 390,000 new jobs in May, exceeding what economists had expected. In total, more than 95% of the jobs lost during the pandemic downturn have been recovered, including in hard-hit industries leisure and hospitality. This monthly gain is also well above the historical average of 148,000 per month over the past ten years. This has kept unemployment at 3.6%, one of the lowest levels in history, and near pre-pandemic lows.

The data also show that businesses continue to hire too. Job openings still far outpace available workers by 5.5 million, a historic level. The problem is not whether businesses want to hire – it’s whether they can find qualified workers. Individuals are also quitting their jobs at an above-average pace, a sign that the “great resignation” is continuing. While all of this could change if inflation deeply impacts sales and profits, there are also signs that businesses are successfully passing costs onto customers and sharing gains with workers. Hourly wages of production workers rose 6.5% on a year-over-year basis in May, one of the largest gains on record. All told, workers and the average consumer are in a strong position.

Other recent data highlight that the economy may be slowing but is stable. The housing market, for instance, has been hit by a sharp rise in mortgage rates which have risen above 5%. Still, broad measures of housing prices and activity remain robust. Measures of industrial activity, such as the ISM Manufacturing index, actually accelerated in May. Durable goods orders sped up in April, a sign that industrial and commercial activity was also strong following the first quarter’s negative GDP number.

Thus, the trends suggest that a deep economic downturn is not inevitable. Even were a recession to occur, it would likely look very different from those of the past twenty years.


The job market is strong

KEY TAKEAWAYS:

1. The job market has regained over 95% of the jobs lost during the pandemic. In May, 390,000 jobs were added which, although slower than during the initial pandemic recovery, is well above historical averages.
2. Many areas, including leisure and hospitality, made strong gains. Employment in “retail trade” was the only major sector to have a significant decline in employment.


Companies continue to hire aggressively

KEY TAKEAWAYS:

1. Businesses continue to seek out qualified workers. Job openings are at historic highs, outpacing unemployed individuals by 5.5 million. This is a sign that businesses would hire more if they could.


Hourly wages are rising for many workers

KEY TAKEAWAY:

1. Wages are also rising, partly due to the strength of the labor market which gives employees more bargaining power, and partly due to the overall rise in inflation. In general, higher wages are positive for consumers and the economy.


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.(2022)

Portfolio Manager Insights | Weekly Investor Commentary – 5.18.22

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 5.18.22
Investment Committee

Many investors face the constant struggle of wondering whether the rules of investing have changed. This is especially true today given how much has evolved over the past two years. Investors are adjusting to a new economic landscape of higher inflation, rising interest rates, and tighter Fed policy. Different parts of the market have swung wildly throughout the pandemic recovery, including tech stocks, energy, bonds, crypto, and more. It can be difficult to judge whether these developments change the nature of investing or reflect normal market behavior. In these situations, how can investors stay focused on the core principals of investing?

As the saying goes, those who don’t learn from history are doomed to repeat it. For investors, perhaps the most important historical lesson for the economy and financial markets is that both operate in cycles. There are well documented booms and busts across centuries in addition to those that investors have experienced over the past few decades. However, it’s also the case that markets fluctuate within cycles, making it difficult to judge whether a large market swing is a true turning point or a temporary event.

This matters because some investments are simply more prone to big booms and busts. Technology, for instance, often makes bold promises of reshaping the future. In the cases when these promises are realized, it seems silly to have focused on earnings or valuations in hindsight. The same argument has been made for cryptocurrencies, artificial intelligence, financial technology, and many other sectors. It often feels as if these claims are accelerating alongside technological advancement.

However, the reason to focus on fundamentals is exactly because it is difficult to predict the exact winners. The transformative nature of technology is exciting but also a reason it is difficult to forecast its impact. Trying to predict the tech winners in the late 1990s, among the thousands that did not survive, would have been quite a feat. Instead, using a disciplined portfolio approach allows investors to take advantage of these trends while protecting from downside.


The Nasdaq has fallen into bear market territory

KEY TAKEAWAYS:

1. The Nasdaq is in bear market territory compared to its recent all-time highs. While this is challenging for many investors, it caps off a spectacular run that accelerated during the pandemic.
2. Staying invested across sectors, not trying to pick individual winners, and staying invested are still the best ways to manage this market environment.

Additionally, it can be argued that the impact of the information technology revolution of the past two decades was felt across the entire economy. There is no major corporation today that is not heavily dependent on digital technology, and many “technology” companies are now found across market sectors beyond Information Technology, including Communication Services and Consumer Discretionary. This has helped to boost productivity and increase profit margins via digitization, automation, and more. Thus, focusing on only a single stock or industry doesn’t quite capture the true impact of transformational technologie


Bitcoin and the S&P 500 have generated similar returns

KEY TAKEAWAYS:

1. For investors, risk-adjusted returns are often more important than absolute returns. Bitcoin, for instance, garnered significant attention by rising in spectacular fashion over the past few years.
2. However, with recent problems around rising rates and issues such as stablecoins, Bitcoin and the S&P 500 have generated similar returns over the past several years.

Of course, market prices and valuations can deviate from fundamentals for quite a while, as was the case recently. Trying to get the timing right is nearly impossible, and being too early is often the same as being wrong. Today, the stock market is still well above its levels both prior to the pandemic and at most points during the recovery. For the average investor, trying to time the market rather than holding onto an appropriate portfolio would likely have done more harm than good.

Investors should focus on long cycles and not short-term swings

KEY TAKEAWAY:

1. The stock market operates in cycles. Not only is this normal, but investors should not overreact to short-term pullbacks that occur within a cycle. Instead, the gains that are made in bull markets are what allow investors to gain true financial independence – if they have a well-constructed portfolio and stay the course.

Ultimately, much of investing depends not just on facts and figures but also on our own behavior. While it’s clear that there are manias, booms/busts, and expansions/contractions in the economy and markets, it is difficult to know how any particular situation will play out. What makes this more difficult is that downturns tend to occur swiftly, often with little notice, while rebounds occur slowly and steadily. This means that market pullbacks can drive a greater emotional response even if history shows they occur regularly.

Thus, this challenging market environment is an ideal time to remind ourselves to stay invested, diversified, and disciplined.

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.(2022)

Portfolio Manager Insights | Weekly Investor Commentary – 5.11.22

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 5.11.22
Investment Committee

Perhaps nothing summarizes the investor experience better than the old quote that “nothing worth doing is easy.” The current market environment, as uncomfortable as it may be, serves as a reminder that staying invested is difficult. The very definition of investing involves sacrificing what we could buy and consume today in order to achieve more tomorrow. Over long periods, this is how all investors can transform hard-earned savings into true wealth and financial freedom. What can investors do to focus on the long run when the daily headlines and market swings are alarming?

The tendency to react to what’s happening today at the expense of the next year or decade is a natural one. Last week, the Federal Reserve raised interest rates by half a percent (50 basis points), the largest increase in over twenty years. After a short recovery, major stock market indices began to struggle once again. At the moment, all major U.S. indices are down more than 10% for the year, with the Nasdaq now deeper in bear market territory. This is no doubt a challenging time for many investors, both emotionally and financially, especially for those who are either accustomed to or have only experienced the rising markets of the past decade or more.

One of the core principles of investing is that there is no reward without risk. Simply put, having the fortitude to stick it out when times are tough is exactly why long-term investors are rewarded. In general, this is why stocks have historically achieved greater average returns than “safer” assets such as bonds: these returns are compensation for withstanding greater uncertainty. Occasionally, there may be times when investing seems easy and all prices rise, irrespective of risk, such as over the past two years or during the dot-com boom. When these periods inevitably end, it becomes clear which investors were truly following a disciplined plan and which were just following trends. In times like these, it’s important for long-term investors to remember a few historical facts.


Major indices have swung wildly over the past week

KEY TAKEAWAYS:

1. All major indices are in correction territory and the Nasdaq is officially in a bear market. This level of volatility, while extreme compared to the past two years, is par for the course when investing in stocks.
2. In fact, the reason stock market investors are rewarded over time is exactly because they are willing to withstand a higher level of risk.

First, it’s important to maintain a broader perspective. While the stock market is in the red for the year, zooming out paints a very different picture. The S&P 500 has gained 65% over the past three years, 22% since the pre-pandemic peak in early 2020, and 79% from the pandemic bottom. While investors may prefer a smooth ride, with steady gains day after day, this is unfortunately not how the market operates. Instead, the price of long-term gains is the ability to stomach short-term declines.


Staying invested is the best way to manage challenging markets

KEY TAKEAWAYS:

1. While the temptation to react to market events is natural, history shows that simply staying invested is often the better approach. This is because timing the market is hard if not impossible.
2. Big down days are often followed by up days shortly thereafter. Trying to predict these day-to-day swings is unnecessary and often counterproductive.

Second, a common refrain from the investment profession is that “market volatility is normal.” What this typically means is that the stock market can swing wildly even when there is little new information. This year, the S&P 500 has experienced four distinct 5% declines. While this may seem like a lot, the average year experiences four to five of these pullbacks, most of which recover in weeks or months. The pandemic caused 12 such pullbacks in 2020 and there were eight in 2019 during the global growth scare that year – a time when many expected an immediate recession which never materialized.

In the long run, fundamentals are what matter

KEY TAKEAWAY:

1. Over the course of years and decades, fundamentals like valuations and earnings matter much more than daily headlines on the Fed, individual stocks, politics and more. The strength of the economy, fueled by business innovation and consumer spending, have propelled the stock market forward cycle after cycle.

Third, what drives markets in the long run are not day-to-day headlines, stock predictions, or even year-end targets. Instead, the vibrancy of the economy, the strength of the consumer, and the profitability of companies large and small are what support stock prices over the course of decades. After all, owning a stock is nothing more than owning a share of the profits of a company. While interest rates, inflation, geopolitics, and other factors affect the calculated value of this ownership, these effects also tend to average out over time. At the moment, consensus expectations are that S&P 500 earnings-per-share could rise 10% this year and 9 to 10% each of the next two years. Even if these forecasts decline a bit, these levels of growth can help to support valuations and market returns.

None of this discussion is meant to ignore or downplay the challenges that lie ahead for markets. However, many of these challenges are already widely understood by investors who have been grappling with them for months, if not years. The point is that investing activity can occur over many timeframes, so it’s important for investors to pick the one that matches their financial goals, and to know that the process will be worth it even if it isn’t always easy or comfortable.

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. (2022)

Portfolio Manager Insights | Weekly Investor Commentary – 5.4.22

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 5.4.22
Investment Committee

For some investors it may feel as if the market can’t catch a break. After what has already been a difficult start to the year, last week’s GDP report confirmed that economic growth slowed for the first time since the pandemic began. This news, along with higher interest rates and faster Fed tightening, drove the S&P 500 back into correction territory and the Nasdaq into a bear market. However, there is also positive news beneath the surface that could matter more in the months, quarters and years ahead. What should long-term investors focus on during this challenging period?

The latest GDP report for the first three months of the year showed that the country’s gross domestic product shrank by 1.4% on an annualized, quarter-over-quarter basis. This simply means that there was less spending in some parts of the economy last quarter. While this was a negative surprise, even the 1% growth rate that economists had expected would have been a deceleration. At this point, the drags on the economy are well known – high inflation and energy prices, rising rates, Fed rate hikes, the war In Ukraine, and more.

Under the surface, there were actually some positive signs. Consumer spending grew 2.7% even after adjusting for inflation. Also, while economic growth slowed compared to the previous quarter, it still rose 4.3% when compared to the prior year. It was mostly a decline in government spending, a worsening trade deficit and changes to business inventories that made overall GDP negative last quarter – factors that could rebound too.

Still, the negative headline number has naturally raised concerns over a possible recession. Recessions are casually defined as two consecutive quarters of negative growth. However, the organization that officially decides recession dates, the National Bureau of Economic Research, considers a variety of economic data. Fortunately, these data still look robust, even if they are not perfect. The job market, in particular, is exceptionally strong with unemployment of only 3.6% and wages for hourly workers rising 6.7%.


Economic growth slowed during the first three months of the year

KEY TAKEAWAYS:

1. The economy contracted slightly for the first time since the pandemic began.
2. This was driven by government spending, business inventories, and the trade deficit. Consumer spending was robust during this period despite rising inflation.

For long-term investors, what matters is not that the economy is perfect – it’s that overall growth will support corporate earnings and thus market returns. Companies are still doing well in spite of high inflation and other sources of uncertainty, with an S&P 500 earnings-per-share estimate of $237 a year from now. Over the course of full business cycles, it is profitability that propels stocks and portfolios ahead, allowing investors to achieve their financial goals.

Even if a recession were likely, the reality is that they occur every five to ten years across history. The pandemic-driven recession, for how severe and destructive it was, only officially lasted two months. In other words, these are not surprise events – they are a natural part of the full business cycle of expansion and contraction.


Bull and bear markets behave very differently

KEY TAKEAWAYS:

1.Recessions and bear markets are natural parts of the economic and market cycle. Investors should hold portfolios that can withstand these periods rather than treat them as special cases.
2. Still, bull markets tend to be long, lasting several years if not a decade or more, compared to recessions and bear markets which tend to be much shorter.

In other words, investors ought to hold long-term portfolios that are designed to withstand these periods, ideally with the guidance of a trusted advisor, rather than adjust portfolios on-the-fly. While pessimism can occasionally pay off in the short run, it almost never helps in the long run. Even when the situation fails to evolve as investors hope, investment portfolios that are properly positioned often find a way to perform well nonetheless

Economists expect steady but moderate growth

KEY TAKEAWAY:

1. The negative GDP number for Q1 was driven by factors that are widely known. Economists expect steady but moderate growth in the coming quarters as the economy and world get back on track.
2. This is the case despite inflationary concerns, Fed rate hikes, and more. Investors ought to focus on these long run trends and not a single three-month period.

Thus, the more optimistic perspective for investors is that the economy can continue to grow at a steady pace once it gets over the near-term speed bumps.

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. (2022)

Portfolio Manager Insights | Weekly Investor Commentary – 4.27.22

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 4.27.22
Investment Committee

For some investors, it can be challenging to balance short-term market negativity with positive long-term trends. In the near-term, rising interest rates and international concerns are once again rattling the stock market. Last Friday, the S&P 500 experienced its second-worst day since 2020 by falling 2.8%. Both the S&P 500 and the Nasdaq are in correction territory (defined as a 10% or worse decline from all-time highs) and most other asset classes have struggled this year too.

However, economic data are still coming in strong despite fears around inflation and the Fed, and many of the issues driving markets have been well understood and anticipated by investors. History also shows that declines of this size are normal for markets, even when there are seemingly insurmountable problems. Still, this dilemma may have some investors wondering whether they should abandon diversification and their investment plans altogether. How can investors stay focused amid day-to-day market swings and challenging performance this year?

Most investors intuitively understand the value of diversifying across asset classes such as U.S. stocks, fixed income, international assets, small caps, and more. The purpose of diversification is neither to outperform on any given day, week, or month, nor is it to do better than the S&P 500 or Dow in the long run. Instead, diversification is about generating healthy returns while properly managing risk. By combining different types of assets in an appropriate way, it’s possible to construct portfolios that have attributes aligned with the investor’s long-term goals.

This is important because investors who stick to their financial plans, invest for the long run, and stay diversified are more likely to achieve their financial goals. Unfortunately, those parts of the market that outperform tend to receive the most attention, leading to a temptation to chase what’s already worked even if it’s just a flash in the pan. Conversely, asset classes that underperform over a short period are often shunned by investors, even when their fundamentals are sound and could play a critical role in a portfolio.


Most asset classes are negative this year

KEY TAKEAWAYS:

1. Most asset classes are in the red this year due to rising inflation, the Fed, geopolitical risk, and other challenges.
2. However, diversified portfolios have done somewhat better throughout this period and provide a better balance of return and risk over time.

Today, there are a few key issues driving performance across asset classes. Perhaps the biggest challenge is that interest rates spiked again last week with the 10-year Treasury yield rising as high as 2.94% before retreating. This was its highest level since 2018 and breaks the 40-year trend of falling rates.

On the one hand, sudden jumps in interest rates can have ripple effects across stock and bond markets. Not only do higher rates mean that future cash flows may be less valuable today, which hurts current asset prices, but they can also make interest-bearing assets more attractive. All told, this means there is often a shift from “riskier” stocks to “safer” bonds..


In the long run, being diversified creates a smoother ride

KEY TAKEAWAYS:

1.Diversification has helped investors going back to the global financial crisis. When the stock market came roaring back after the pandemic shutdowns, diversified portfolios benefited.
2. In times of market distress, diversification can help to protect on the downside. Ultimately, it’s better for investors to hold portfolios that allow them to sleep well at night.

On the other hand, interest rates are still well within normal levels. In fact, prior to 2008, the 10-year Treasury yield was never as low as it is today. Even if the Fed accelerates its rate hike plans, which it is likely to do, the federal funds rate would still only be back to its trend from 2019.

Taking a broader perspective, it’s very normal for interest rates to rise during the growth phase of a business cycle. And while inflation is certainly much higher than in the past, there is no reason yet to believe that individuals, businesses, and financial markets can’t adapt to higher rates.

Staying calm helps investors to achieve their goals

KEY TAKEAWAY:

1. This chart highlights the importance of not overreacting to negative market days, including recent pullbacks. Staying invested even when the market is down 2% in a single day has historically been far superior to trying to get out and then back in.

Another issue has to do with international concerns. The war in Ukraine continues to evolve, putting pressure on international relations, Europe, and energy prices. Additionally, China’s ongoing lockdowns amid its zero-COVID strategy could further worsen supply chain disruptions and manufacturing output. In the worst case, this could exacerbate inflation in certain goods. Chinese equities and emerging markets have struggled as a result.

At the same time, recent history in China and other parts of the world suggest that pandemic issues do resolve themselves over time. Other major problems in China, such as fears of a housing bubble bursting late last year, were also resolved by markets and government intervention. So, while there may be repercussions from strict shutdowns, these issues are not necessarily reasons for investors to change their long-term portfolio strategies.

Thus, while every market pullback is challenging and each new situation feels unique, the reality is that diversified portfolios tend to stabilize and recover regardless of the underlying causes. Resisting the urge to overreact to every new headline is the best way for investors to achieve their financial goals.

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. (2022)

Portfolio Manager Insights | Weekly Investor Commentary – 4.20.22

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 4.20.22
Investment Committee

For investors, the temptation to focus on short-term trading at the expense of long-term investing is a powerful one. For those investing for retirement and other important goals, this can be especially challenging during periods of market unease. Similarly, for those focused on cryptocurrencies, NFTs, and other new assets, rising prices over the past two years has created a fear of missing out. This is made worse by the proliferation of social media posts touting how easy it is to turn a thousand dollars into a million, among other claims. In this environment, how can all types of investors focus on time-tested investment principles to achieve long-term financial goals?

One of the most important principles of investing is to take advantage of the power of compounding. Albert Einstein is often quoted as saying that compound interest is the eighth wonder of the world. The idea is simple: as your portfolio generates returns, those returns create additional gains, and so on. This eventually leads to not just linear returns but exponential growth. This phenomenon is what creates real wealth for investors so, in a sense, there is some truth to the social media posts.

What they neglect to mention is that the key ingredient is time. Financial markets are inherently volatile over days and weeks. On a daily basis, the stock market is almost no better than a coin flip, rising only slightly more than 50% of the time, and down days tend to be much worse than up days. This can be frustrating to investors who expect the stock market to consistently rise and achieve its 30-year average total return of 11.5% in any given year.


Compound interest works over long periods of time

KEY TAKEAWAYS:

1. Compound interest is what creates true wealth for investors over long periods of time. Not only do investment returns add to a portfolio, but those returns generate their own returns, and so on and so forth.
2. The rule of 72 is a simple way to understand this compounding effect. It is a rule of thumb that estimates how quickly a rate of return would lead to a doubling of a portfolio, or similarly, what return is needed to double a portfolio in a certain amount of time.

However, even a coin flip that is very slightly in an investor’s favor, when compounded over longer time frames, can generate surprisingly positive results. On a monthly basis, the stock market has risen more than 60% of the time going back three decades. On an annual basis, this percentage jumps to 70%. This does not mean that stretches of poor performance do not occur, but simply that staying invested is often the best approach. Historically, there have been very few instances when investing in the stock market for 10-year periods has resulted in negative performance, and zero instances for 20-year timeframes since the Great Depression. While the past is no guarantee of the future, this underscores the importance of patience when investing toward financial goals.

These investment principles are at odds with how many investors view stock markets, meme stocks, and newer asset classes today. Investing as a way to generate an easy buck, especially via get-rich-quick schemes or hot stock tips, is as old as money itself. It’s for this reason that Benjamin Graham, one of the fathers of value investing, distinguished between investing and speculating. The goal of speculation is to generate short-term gains, often based on limited “research.” Unfortunately, stories of sudden and immediate wealth are what naturally attract attention and interest. This is not to say that speculation has no role in portfolios, but that it should be done in a disciplined way with a long-term investment plan, if it’s done at all.


Stocks perform better over longer time frames

KEY TAKEAWAYS:

1. The stock market can swing wildly over very short time frames. However, over the course of years and decades, stocks have historically trended upward and done quite well based on the business cycle.

Thus, the biggest hurdle to achieving financial goals is not about modeling interest rates, forecasting the Fed, or predicting geopolitical moves – it’s overcoming one’s own biases and inclinations. Although S&P 500 is negative for the year, the reality is that the S&P 500 has gained 96% since the pandemic crash and 30% since the pre-pandemic peak. There is often a disconnect between short-term perception and long-term reality when it comes to market behavior, no doubt amplified by constant headlines.

Investors should focus on their overall portfolios instead of individual assets

KEY TAKEAWAY:

1. While speculation is a natural inclination for investors, it should be done so on a foundation of a portfolio built to achieve long-term goals. This chart shows the importance of focusing on this portfolio first by rebalancing and maintaining an appropriate asset allocation mix.

Like many things, the power of compounding works slowly and positive returns over any individual day, week or month 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. While there are valid market concerns around the business cycle, inflation, interest rates, the Fed, and more, the bottom line is that economic growth is still robust. Patience, discipline and perspective are needed as this business cycle matures.

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. (2022)

Portfolio Manager Insights | Weekly Investor Commentary – 4.13.22

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 4.13.22
Investment Committee

With the uncertainty and market swings of the past few years, it’s understandable that some investors would seek the safety of cash. On the surface, holding cash means not having to cope with the ups and downs of the stock market due to the pandemic, global conflicts, rising interest rates, the Fed, and more.

However, this is only true over the shortest of timespans. Over months, years and decades, the value of cash is quietly eroded by inflation, and the missed opportunities of not being properly invested can add up. This is why, for long-term investors, managing behavior and emotions is just as important as managing portfolios. Doing so helps investors stay on track to achieve their financial goals, while helping them to sleep well at night too.

There are three main problems with sitting on cash today. First, high inflation – the worst in four decades – is eroding the value of cash, especially when it sits in a regular checking or savings account. By not earning a sufficient level of interest or generating a return, the purchasing power of one’s hard-earned money falls each year. According to the Consumer Price Index, energy costs have increased more than 25% over the past year, food prices nearly 8%, the cost of shelter 4.7%, medical care services 2.4%, and so on. Even as inflation rates settle down, this corrosive effect will no doubt continue.

This is the hidden cost when investors seek the safety of cash. The balance on a bank statement may feel safe since it is stable, unlike the fluctuating value in an investment account. However, what matters isn’t the dollar amount of cash but what it can purchase. Inflation means that the same number of dollars buys fewer goods and services each year, even when the number remains the same. Thus, portfolio growth is needed to keep an investor’s purchasing power at par, let alone to create real wealth.


While cash is attractive when markets are scary, its value quietly erodes over time

KEY TAKEAWAYS:

1. Many investors are drawn to cash when markets are volatile. However, the challenge with cash is that it doesn’t protect against inflation. Even savings account and CD rates are still at historic lows despite rising interest rates.

The second problem is that cash and savings accounts still generate little to no income, even with medium and long-term interest rates rising. As of March, the national rate for a 12-month CD was still only 0.14%. In other words, locking up $1,000 of cash for 12-months would only yield $1.40 when inflation would have eroded its spending power by $80, based on the Consumer Price Index. In this example, the real inflation-adjusted rate is what matters.

Additionally, Treasuries with the shortest maturities still yield very little relative to long-term rates, and it will take time for savings accounts and Certificates of Deposit (CDs) to catch up. The 3-month Treasury yield has risen to 0.7% but this is still well below its peak of 2.45% in 2019.

The picture is very different for other parts of the bond market. The yields on Treasuries, mortgage-backed securities, and corporate bonds are now above their historical averages. Investment grade bonds, for instance, now generate 3.9% per year compared to their average of 3.4% since 2009, and 2.2% one year ago. Of course, investing in corporate bonds and those with longer maturities involves risk, especially as interest rates rise. This is why it may be important to build a portfolio using diversification, laddering, and other tools, ideally with the support of a trusted advisor.


Rising bond yields make savings accounts less attractive

KEY TAKEAWAYS:

1. In contrast to savings accounts, bond yields for government and corporate issues are rising. In many cases, these yields are above their historic averages.

Third, for those saving and investing to achieve financial goals, shifting a portfolio to cash may provide short-term comfort but will most likely jeopardize long-term gains. Finding the right balance between resisting the urge to react to short-term news, while taking advantage of the long-run growth of the market, is the biggest challenge all investors face.

For professional investors, cash is simply another asset class with particular characteristics that can be combined with stocks, bonds, alternatives, and more. The right mix that takes advantage of all asset classes can achieve a much better balance of risk and reward. This is the preferred way to manage portfolios while improving investor confidence and avoiding the urge to time the market.

Diversified portfolios have performed well over time

KEY TAKEAWAY:

1. For investors who prefer cash to protect their portfolios, holding diversified assets is often a much better approach. Not only does this protect investors on the downside, but it helps to generate long-run growth.

Ultimately, cash is an important part of any portfolio if used appropriately and in moderation. Having the discipline to save enough cash in the first place is the first step toward financial freedom. Investing that cash in the right portfolio is what grows savings into real wealth.

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.(2022)

Portfolio Manager Insights | Weekly Investor Commentary – 4.6.22

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 4.6.22
Investment Committee

Of the hundreds of market and economic indicators that investors watch closely, perhaps none is as important as the shape of the yield curve. Not only does it summarize the state of the economy, but the level of interest rates across the yield curve directly affects investors, businesses and individuals. It’s for this reason that markets had a mixed reaction to last week’s yield curve inversion, the first time it’s occurred since 2019 prior to the pandemic. This adds to investor concerns over inflation, the Fed, the war in Ukraine, and more. What does this mean for long-term investors and could it be different this time?

Although the yield curve is a technical concept, the basic idea is easy to understand. A yield curve is just a graph that shows the level of interest rates across different time horizons, or maturities. In plain English, it tells you what interest rate you would earn if you invested in a new note or bond issue for that duration, be it 3 months or 30 years. Typically, when investors talk about the yield curve, they are referring to one based on government-issued Treasury securities.

These rates are important for those investing for portfolio income, taking out a mortgage, applying for a personal loan and more. However, the yield curve is arguably much more important as an economic indicator. This is because the shape of the yield curve tells us about the health of the economy and where we might be in the business cycle.

Traditionally, economists and market professionals look at the difference between 10-year and 2-year Treasury yields. Since we often plot these yields on a graph, when the difference is large, we say that the yield curve is “steep” (it slopes upward to the right). When the difference is small, we say that the yield curve is “flat.”

The shape of the yield curve changes throughout the business cycle. Early on, all rates are low as the economy comes out of recession. Long-term rates then begin to rise as growth picks up, followed by short-term rates that are influenced by the Fed as it tightens policy. Thus, it’s natural for the curve to flatten over time, giving us a hint as to how far along the cycle may be.

Eventually, the curve flattens so much that it “inverts” – i.e., when it slopes downward instead. As of last week, the 10-year Treasury yield reached 2.38%, the 2-year 2.44% and the 3-month Treasury note 0.5%. The fact that the 2-year yield was higher than the 10-year is what signals this inversion to many. However, deciding how to measure and interpret this can be tricky. There are three important facts to highlight:

First, while yield curve inversions may predict eventual economic downturns, they don’t tell us about their timing. For example, the yield curve flattened significantly in the mid-1990s, remained flat for a few years, inverted for a period in 1998, then re-steepened. The bull market then continued for another couple of years before the recession in 2001.

Of the six recessions since the early 1980s, some form of yield curve inversion occurred anywhere from 9 to 23 months before, during which markets often performed well. Thus, yield curve inversions are a blunt tool that should not be interpreted as a market timing indicator. Instead, history suggests that being positioned properly throughout these events, with an appropriate combination of stocks and bonds, preferably with the advice of a trusted advisor, is much more important.


The yield curve has inverted

KEY TAKEAWAYS:

1. The yield curve inverted last week based on the 10-year and 2-year Treasury yields.
2. Other measures which use shorter-dated maturities still show significant steepness. These rates will likely rise as the Fed accelerates its rate hike process.

Second, the reality is that not much has changed for long-term investors over the past week. The flattening of the yield curve has been driven by well-known factors such as inflation, the economic rebound, ongoing pandemic outbreaks in certain parts of the world, supply chain problems, and geopolitical risk. Even the Fed’s rate hike was fully anticipated by the market, which is one reason that stocks have rebounded.

In fact, other measures of yield curve steepness have not inverted in the same way. While using 10’s and 2’s is common, comparing the 10-year yield to the 3-month shows that the short-end of the curve is as steep as it’s been going back to early 2017. Similar measures, such as the “near-term forward spread” which is also accepted as a recession indicator, is the steepest it’s been since the early 2000s. Other leading economic indicators have softened but have not turned negative. So, not only is the timing unclear, but which measure to focus on is often determined in hindsight.


Yield curves are a blunt tool for predicting recessions

KEY TAKEAWAYS:

1. While yield curve inversions do precede recessions, they do not predict their exact timing. Over the past 50 years, recessions have occurred anywhere from 9 to 23 months after the 10-year Treasury yield falls below the 2-year – a large variation in timeframes.
2. Additionally, there are other factors that could affect the yield curve this time around.

Third, even with the curve flattening, real inflation-adjusted interest rates are still stimulative for the economy. In fact, all interest rates along the yield curve are still in negative territory once taking inflation into account. This may resolve itself as inflation cools and policy rates rise. However, negative real rates are usually viewed as accommodative for the economy, just as they were a decade ago.

Real, inflation-adjusted interest rates are still supportive

KEY TAKEAWAY:

1. Economists often focus on “real” interest rates – i.e., interest rates after adjusting for inflation. At the moment, these real rates are still extremely accommodative. They continue to be negative which is often supportive of economic growth.

Thus, the goal of any long-term investor is still to stay balanced throughout all phases of the market cycle, and not to focus on day-to-day changes in market and economic indicators. A recession is always possible and, in the longer-term, is inevitable. But trying to predict its exact timing isn’t just difficult – investors run the risk of missing out on opportunities in the meantime. Interest rates are sending mixed signals based on the level and the shape of the yield curve. Investors ought to stay balanced and avoid overreacting.

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. (2022)

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