Portfolio Manager Insights | Weekly Investor Commentary – 3.3.21

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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.

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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.

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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.

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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)

Portfolio Manager Insights | Weekly Investor Commentary – February 24, 2021

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PORTFOLIO MANAGER INSIGHTS

WEEKLY INVESTOR COMMENTARY | FEBRUARY 24, 2021
Investment Committee

Recent frigid weather across the American South resulted in state emergencies, including in Texas where millions were without power and potable water for several days. And while Texas has an independent energy grid, the disruption to oil production and refineries was felt across global energy markets. Amid ongoing investigations and political finger-pointing, many investors may be asking how this could affect their portfolios.

It goes without saying that energy is the lifeblood of the economy, with global oil demand reaching 100 million barrels per day prior to the COVID-19 crisis. Although there is increasing attention on renewable energy sources, including among investors, fossil fuels still constitute the vast majority of energy use.

Oil and natural gas prices tend to be highly correlated with economic booms and bust, as was seen during the mid-2000’s housing bubble when crude reached historic records and, more recently, during the nationwide lockdown when oil prices plummeted. This latter episode resulted in a negative price of oil when financial investors were forced to pay to get rid of contracts in order to avoid taking physical delivery.

Less than a year later, oil prices have recovered somewhat as the economy has rebounded. These episodes are a reminder that disruptions to energy markets can occur at any time. Challenges facing U.S., Middle East, and other regional producers are always possible. Fortunately, it appears that production can eventually get back on track, inventory levels can cushion the shock, and demand is still relatively weak due to the pandemic.

Longer-term, there are three key ways, among many, in which energy has a mixed impact on diversified investors. First, the performance of the energy sector directly impacts the S&P 500. For instance, the 2014/2015 oil price crash resulted in an 80% earnings decline for the energy sector, causing an “earnings recession” for the overall market. Although this didn’t result in a broader bear market or economic recession, it was certainly felt by investors and those who work in the industry.

More recently, rising oil prices have helped to boost the sector. While earnings are far from their levels prior to 2014, they have climbed significantly from their 2020 lows. This is one reason that energy sector shares have climbed over 20% this year. Second, higher energy prices are effectively a tax on consumers and businesses. Gasoline prices have been rising steadily since last year with the national average of regular unleaded climbing 80 cents to around $2.50 per gallon. Although many Americans are driving less during the pandemic, higher gasoline prices eventually filter through to all goods and services.

Finally, higher energy prices fuel concerns of rising inflation. While inflation measures usually exclude volatile categories such as food and energy, rapid increases in these prices can make them hard to ignore. So far this year, commodities have outperformed the S&P 500 as an asset class by returning over 9%. There are even those calling for a new “commodities supercycle” – a decades-long rise in commodity prices and production. Whether this occurs has yet to be seen. In the meantime, the increases in prices, demand and supply of oil, metals and agriculture commodities mirror the economic recovery.

It will take time for the dust to settle on the recent disruptions in the South. The ongoing challenges to the energy industry may take time to work out as well, especially for those who depend on it for the livelihoods. In the meantime, investors ought to focus on the longer-run implications of rising energy prices beyond recent headlines.

Oil prices have been recovering steadily since the COVID-19 lockdown began

KEY TAKEAWAYS:
1.) Oil prices have been recovering since they fell into negative territory last year.
2.) Recent weather events in the American South have disrupted production, pushing prices up further.

Oil prices have direct consequences for the energy sector and the overall stock market

KEY TAKEAWAYS:
1.) Oil prices directly affect the energy sector which, in turn, impact the overall stock market. This was best seen during the 2014/2015 oil price collapse which resulted in an “earnings recession” for the broader S&P 500.
2.) Conversely, higher energy prices have helped to boost the sector significantly since the 2020 lows.

Gasoline prices have been rising, affecting all consumers and businesses

KEY TAKEAWAYS:
1.) Energy prices, and gasoline specifically, directly impact consumers and businesses. While prices are still below their long-term averages, they have been rising over the past year.
2.) Due to how rapidly prices are rising, fears of inflation have spurred across the country.

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. (2021-85)