Portfolio Manager Insights | Weekly Investor Commentary – 12.1.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 12.1.21
Investment Committee

In less than a week, the COVID-19 variant known as omicron has renewed public health concerns around the world. While the World Health Organization has stated that it could have “severe consequences,” reports from South Africa where the “variant of concern” was first identified suggest that symptoms have been mild. Only time will tell how severe – or not – the public health implications may be, especially as vaccination rates rise and other safety measures become commonplace.

Through all this, it’s more important than ever for investors to distinguish between public health issues – which can be fraught with politics and strong personal beliefs – and what’s best for their portfolios. If the pandemic has taught us anything, it’s that staying focused on the long run is the best approach.


There are growing public health concerns over the new COVID-19 variant

KEY TAKEAWAYS:

Key Takeaway: 
1. Investors have experienced multiple waves of COVID-19 during the pandemic. Still, the most impactful was the first wave when the economy was shut down.
2. Subsequent spikes, including due to the delta variant, have not even come close in terms of their economic and market impacts.

It’s generally accepted that COVID-19 is now “endemic” – i.e., like the flu or common cold, it’s here to stay. Unfortunately, this means that whether due to omicron or another strain, it is only a matter of time before new variants create public health concerns. Like the original COVID-19 strains and later the delta variant, these worries can escalate quickly due to the pace of infection. It’s possible for these variants to spread to multiple continents by the time they are identified, named, and appear in the news.

At the onset of the pandemic, this exponential pace created significant challenges for everyone, not least of which was the emotional toll of isolation and social distancing. Fortunately, the situation today is quite different. Individuals and businesses alike have fresh experience and playbooks for dealing with the pandemic and there is a much better understanding of the risks. Without diminishing the public health challenges ahead, this means that there is a stark distinction between how officials should respond to the ongoing crisis and how investors should respond in their portfolios.


Even before this, cases were rising as winter nears

KEY TAKEAWAYS:

1. Cases have been rising even before omicron due to the colder fall and winter months. Despite this, economic activity has remained solid and job gains have accelerated somewhat.

The delta wave that began in the summer showed that this is the case. Although infections spread rapidly, the death rate remained relatively low. Most importantly for investors, the economic and market impacts were minimal, especially when compared to the initial shutdown measures in 2020. Through that wave and the more recent uptick in cases, economic growth has been strong, hiring activity has accelerated, profits have reached record levels, and markets have continued to achieve new all-time highs. All this despite concerns around inflation, supply chains, politics, the Fed and more.

Of course, investors should always expect periods of market volatility. This is true even in the best of times, let alone when markets are at new highs and valuations are still above average. It is still true that the market has been quite calm by historical standards this year, despite occasional shallow pullbacks. What has made this possible is the strength of the economic expansion which is now over a year and a half in age. While there may be periods of short-term turbulence ahead, business cycles tend to last for many years if not decades.


Diversification is still the best approach for navigating the years ahead

KEY TAKEAWAY:

1. Whether or not the latest variant of concern becomes a serious public health and economic issue, diversification and staying invested are the best ways to invest through the next period.
2. This was true during the initial market pullback last year. While the past is never a guarantee of the future, those investors who stayed focused were rewarded within a matter of months.

In the end, portfolio diversification is still the primary tool for investors to achieve their financial goals while protecting from downside risk. The market crash that began in February 2020 emphasized that while trying to sell holdings and moving to cash are tempting, a rebound can occur when investors least expect it. Holding fast with an appropriate portfolio was the best approach throughout these periods.

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)

Portfolio Manager Insights | Weekly Investor Commentary – 11.17.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 11.17.21
Investment Committee

Perhaps the biggest side effect of the rapid economic recovery is the historic number of job openings across the country. This has led to a wave of individuals quitting their jobs in search of greener pastures, a phenomenon that has been dubbed the “Great Resignation.” Historically, this is often what happens after economic shocks as many find new work that best utilize their skills. While this is great news for many, especially those who can command higher pay or benefits, it also highlights challenges for businesses and the economy. What does the Great Resignation mean for economic growth and investment portfolios in the years ahead?

The labor market affects all investors in many ways. The most obvious manner is that it directly impacts our personal lives, in addition to those of our families, friends and neighbors. For instance, whether or not inflation-adjusted wages have kept pace is a core issue in the wealth inequality debate. It’s no secret that both the 2008 global financial crisis and the pandemic worsened these effects.


Job openings and turnover are near record highs

KEY TAKEAWAYS:

Key Takeaway: 
1. Job openings are near historic levels. This has prompted many to quit their jobs in search of better opportunities.

In addition, work is more than a paycheck. Right or wrong, it often defines who we are and can be an important part of achieving personal fulfillment. While this effect is not directly financial in nature, it does affect societal and economic trends.

Thus, one of the most difficult challenges for the economy over the past two decades has been the decline in the “labor force participation rate.” This occurred as large numbers of working-age people gave up on finding jobs. The participation rate peaked in 2000 and has been falling due to a number of factors including an aging population, globalization and technology. These latter factors have allowed for goods and services to be produced elsewhere and with fewer workers. Especially when the job market is otherwise stagnant, it is easy to become discouraged and then give up altogether.


Long-term unemployment is falling

KEY TAKEAWAYS:

1. One group that has benefited from these trends is those who have been unemployed for half a year or longer. These long-term unemployed are fewer today due to the economic expansion and the sheer amount of hiring activity across industries.

In the long run, this can create labor shortages in certain industries. In the short-term, however, job openings being near record levels – 10.4 million across the country in September – is positive news. This means that positions are available and businesses would like to hire at the fastest rate in history. That the quits rate has accelerated alongside openings to 4.4 million per month means that many are successfully finding attractive jobs or are confident they can find them quickly.

The caveat is that not all jobs are created equal. The fact that these positions are open means that businesses are having trouble finding enough qualified candidates in their industries. This may mean they don’t have the right skills, especially in high-tech sectors, aren’t in the right geographic location, or that there are other mismatches. Like other supply chain bottlenecks plaguing all businesses, a shortage of qualified workers can harm growth and expansion plans.


Participation rates have stabilized

KEY TAKEAWAY:

1. Unfortunately, the labor force participation rate, which measures the number of people who want to work, is still very low. This measure has been declining for decades due to a variety of factors which were worsened by the pandemic.
2. Many hope that the level of job openings can help to get workers off the sidelines and back into great roles.

The hope is that, over time, job openings entice working-age people to come back into the labor force and the participation rate rises. Workers might re-train to match high-growth areas and wages might adjust based on hiring demand. This could help to accelerate economic growth in addition to improving personal financial situations.

From the perspective of long-term investors, the labor market is a broad signal of economic health. It’s for this reason that investors watch the monthly jobs report so closely. The fact that unemployment has fallen significantly, job openings are at records, wages are picking up, individuals are finding better opportunities, and labor force participation has stabilized are all positive signs. Below are three insights that can help investors better understand today’s job market shifts.

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)

Portfolio Manager Insights | Weekly Investor Commentary – 11.10.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 11.10.21
Investment Committee

After much anticipation, the Fed has announced that it will begin reducing its monthly asset purchases. Investors have spent months wondering when this process would start given the strong recovery and ongoing market rally. While markets have been taking this in stride, some investors are understandably nervous about what this may mean for their portfolios. Uncertainty around Fed policy is one reason investors ought to maintain a long-term perspective on their investments and financial goals.

Topics like Fed tapering, rate hikes, the Phillips curve and others can seem complex, but it’s important to separate the how from the why. Mechanically, the Fed’s tapering process is simply the first step toward returning to a more “normal” monetary policy. It begins to slow the purchases of Treasury and mortgage-backed securities that began last year as part of the Fed’s emergency response to the pandemic, based on its 2008 financial crisis playbook.


The Fed is slowing its bond purchases

KEY TAKEAWAYS:

Key Takeaway: 
1. The Fed announced its “tapering” process which simply means that it will slow its bond purchases. Rather than purchasing $120 billion of Treasury and mortgage-backed securities per month, it will reduce this by $15 billion each month beginning in November.
2. Even at this pace, the Fed’s balance sheet will grow to $9 trillion by the time it ends its asset purchases in mid-2022.

The pace of $120 billion per month has caused the Fed’s balance sheet to balloon to over $8.6 trillion – significantly larger than the pre-pandemic peak of $4.5 trillion. By reducing these purchases each month beginning in November, the Fed would still be buying bonds through May 2022. This would add up to $420 billion which would push its balance sheet above $9 trillion.

It’s important to underscore the fact that the Fed is still buying assets, just at a slower pace. Shrinking its holdings may not happen until much later. After tapering began in 2014, the balance sheet did not begin to shrink until 2018.


Interest rates are rising in anticipation of fed rate hikes

KEY TAKEAWAYS:

1.Short-term interest rates have been rising. This is because the tapering process is the first step in eventually raising the fed funds rate.
2. The Fed has communicated via their Summary of Economic Projections that most officials expect to hike rates once by the end of 2022.

While the how is quite involved, the motivation for the tapering process is simple: the Fed is refilling the punch bowl at a slower pace before it removes it altogether. This makes sense at a time when emergency stimulus is no longer needed and when monetary policy is arguably playing a smaller role. After all, inflation is rising not necessarily because Fed policy is too loose, but because of strong demand and supply disruptions. The Fed has made it clear that they have little control over these factors.

At the same time, it could still be considered a policy mistake for the Fed to keep financial conditions too easy for too long as inflation heats up, even if they can’t directly control the underlying causes. This is especially true at a time when consumers and markets are beginning to expect higher short- and medium-term inflation. The classic runaway inflation scenarios, such as a wage-price spiral, involve an ever-higher expectation of inflation which can become a self-fulfilling prophecy. To stop this, the Fed would have to take dramatic steps.


The market expects the Fed to hike rates faster

KEY TAKEAWAY:

1. Market-based expectations, on the other hand, have been adjusting upward. At the moment, fed funds futures suggest that there could be at least two rate hikes by the end of 2022.
2. Over the past year, the Fed has adjusted its expectations toward the market, not the other way around.

Thus, there are conflicting fears among investors around a) the Fed normalizing then tightening policy, and b) the Fed not tightening enough to combat inflation. Fortunately, the market has taken the shift in Fed policy in stride so far, and history supports this. After endless concerns and some market volatility in 2013, financial markets performed well the rest of the cycle. This occurred despite not only tapering but a shrinking Fed balance sheet and several rate hikes. Ultimately, it was the strong underlying trends in the economy that mattered most.

Similarly, while there are concerns building within the market as the “everything rally” continues, it’s unlikely that reduced bond purchases or a few rate hikes will be what derail current trends. Instead, all market cycles have their ups and downs related to growth, profits, interest rates and valuations. Focusing on these factors instead can shed more light on the state of the market than focusing on the Fed alone.

In other words, investors should continue to hold balanced portfolios that match their financial goals, rather than focus too much on when the Fed will finally raise rates one-quarter of one percent.

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)

Portfolio Manager Insights | Weekly Investor Commentary – 11.3.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 11.3.21
Investment Committee

The business cycle is advancing despite a number of investor concerns, one quarter after the economy returned to pre-pandemic levels. And while the pace has decelerated, this is normal after last year’s extreme rebound. For investors, this is important because an economy that is expanding – even at a slower rate – is what supports a robust bull market. What should those worried about their portfolios expect from the economy going forward?

Last week’s data show that U.S. GDP grew by 2% in the third quarter compared to the second. Although this is slower than many had hoped, this was due to factors that were widely anticipated: the delta variant, supply chain bottlenecks and a deceleration in consumer spending. When looking at the bigger picture, not only did the economy grow 4.9% in Q3 from a year ago, but personal consumption expenditures came in better than expected and both investment and government spending flipped from negative to positive.


The economy grew less than expected in the third quarter

KEY TAKEAWAYS:

Key Takeaway: 
1. The economy grew at a 2% annualized rate in the third quarter when compared to the second. This is slower than expected but is due to well-understood factors. What matters is that the economy is continuing to grow despite a number of challenges.

When considering economic data such as these, it’s always important to focus on a broader perspective. The glass-half-empty view is that last quarter’s growth rate is the slowest since the recovery began, especially compared to the previous quarter’s 6.7% figure. The reality is that investors should not expect the types of growth that occurred right after businesses reopened last year, regardless of supply constraints and inflation. The 33.8% rebound in Q3 2020 was possibly a once-in-a-lifetime event and only occurred because the economy shrank by 31% at the start of the pandemic. Clearly, the strong growth rates of the past year benefited from the reopening and should taper off over time.

Of course, the situation never seems perfect. During the previous cycle, investors were constantly faced with intractable concerns such as structural debt problems, Fed policy, government spending, the Eurozone crisis and, ironically, the fact that inflation was too low. Despite this, the S&P 500 rose 400% over the course of an 11 year period. Similar patterns can be found across all business cycles through history.


Consumer spending is the largest part of the U.S. economy

KEY TAKEAWAYS:

1. Consumer spending continues to be a major part of the U.S. economy. The fact that consumers are in a strong and stable position is a positive sign.

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.

Thus, the more optimistic perspective for investors is that the economy can continue to grow at a steady pace. The average consumer is in a strong financial position, especially as the unemployment rate continues to fall, and industrial activity continues to expand. Although not all Americans are doing well, they will begin to benefit with cases of the delta variant low and businesses growing.


A strong economy can support long market cycles

KEY TAKEAWAY:

1.History shows that recessions and market crashes are short while bull market expansions are long – if they are supported by steady economic growth.

For long-term investors, it’s important to keep in mind that recessions and bear markets tend to be sudden and last for months, while bull markets and economic expansions tend to be steady and last for years if not decades. Positioning for the latter, without focusing too much on any individual data point, is the best way to achieve 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.(2021)

Portfolio Manager Insights | Weekly Investor Commentary – 10.27.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 10.27.21
Investment Committee

Inflation continues to be a hot topic for investors as markets adapt to worsening supply chain disruptions. However, not all inflation is the same and today’s environment requires a clear understanding of what’s driving prices higher. More importantly, this can affect portfolios and financial plans in different ways. How should investors react to today’s inflation rates with the right perspective?

All investors understand that the prices of individual goods and services can be affected by supply and demand. Common sense tells us that when supply falls and/or demand rises in a competitive market, prices will tend to rise. This is true whether we’re talking about used cars, lumber, houses, computers, sneakers or concert tickets. Business owners are faced with balancing these factors every day.


The market is adapting to higher near-term inflation

KEY TAKEAWAYS:

Key Takeaways: 
1. The market has been adapting to stubborn levels of inflation. Even if inflation is “transitory,” the longer they last, the less investors can ignore their effects.
2. TIPS prices now reflect higher inflation rates over the medium-term before falling in the long run..

In cases where supply is artificially disrupted, there can be a “deadweight loss” to society since there are willing buyers who miss out – not just because prices are temporarily high, but because there may simply not be enough goods available. Recent examples are toilet paper and hand sanitizer at the start of the pandemic when a surge in demand caused widespread shortages. Governments and businesses can try to control prices or impose quotas but this doesn’t solve the underlying problem and can create its own imbalances.

While challenging, few economists would describe the situations above as “inflationary.” Instead, the term inflation usually refers to a broad-based increase in prices across an economy. Historically, these price increases are attributed to factors that can affect the macro-economy, like monetary policy or an overheating growth rate.


Consumers expect higher prices too

KEY TAKEAWAYS:

1. Consumers are feeling the pinch of supply disruptions as price increases affect a variety of daily goods and services.
2. This survey of expectations suggests that consumers believe prices will remain high before coming back down in the medium-term.

This is what makes today’s situation unique. Prices are rising across the board not necessarily because of the Fed, but because bottlenecks in today’s global world affect nearly all industries. This is akin to the supply curves of these industries all being impacted at once and is not dissimilar to the oil crisis of the 1970s. Just as there is no way to avoid higher energy costs, there is no way to avoid long delays for the materials and supplies that businesses and consumers need. This reduces availability and raises costs.

Thus, when investors talk about “inflation” today, what they really mean is “supply chain disruptions.” Similarly, when investors debate whether higher inflation is “transitory” or not, they are really debating whether they are due to short- and medium-term supply problems or longer-term factors such as Fed policy.


Inflation quietly erodes the value of cash

KEY TAKEAWAY:

1.Over time, inflation quietly erodes the value of cash. The average savings account at today’s interest rates is effectively losing thousands of dollars per year due to higher inflation.

How this is resolved requires a combination of macro forces related to global energy and port capacity, and micro forces on an industry-by-industry basis. Still, the longer this goes on, the more it will affect inflation expectations among businesses, consumers and financial markets. Both TIPS breakeven inflation rates and inflation expectations from the University of Michigan’s Surveys of Consumers are near multi-decade highs. Other measures, such as CPI, PCE and PPI, are also near record levels. Only time will tell if they begin to fall once the year-on-year comparisons to the pandemic fade.

For savers, inflation slowly erodes the value of hard-earned cash. If your daily purchases cost more, it doesn’t really matter if it’s due to factory shutdowns in Asia or the size of the Fed’s balance sheet – the effect on a household’s bottom line is the same. Unlike traditional gains and losses which are explicit on a monthly statement, the balance in one’s checking account may stay the same. However, the amount of goods and services that can be purchased with that cash will fall silently over time.

For investors, different causes of inflation can have a big impact on portfolio strategy. Slow and steady inflation lends itself to assets that match this time horizon, possibly including TIPS, real assets and more. Sudden spikes in prices due to supply constraints may lend themselves more to sector and industry tilts. Over time, the differences between these two causes may be blurred – but long-term expectations have yet to rise to the same extent.

Ultimately, it’s important for investors to maintain perspective on today’s price increases. Inflation is a reason to stay invested to offset the negative impact to purchasing power.

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)

Portfolio Manager Insights | Weekly Investor Commentary – 10.13.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 10.13.21
Investment Committee

It’s impossible to understand today’s economy and markets without a clear perspective on global supply chain disruptions. From computer chips to the availability of workers, supply bottlenecks are raising concerns around economic growth and inflation. One major contributor to these worries is the energy sector with oil prices rising above $80 per barrel, the highest since 2014. What implications will this have for the economy and long-term investors?

Even as investors focus more and more on renewable energy sources, the world is still primarily driven by fossil fuels. The International Energy Agency (IEA) estimates that global oil demand was 100 million barrels per day prior to the pandemic and could recover to 96.2 million barrels per day by the end of 2021. The sharp economic rebound has helped to boost demand after oil prices plummeted during the pandemic. At one point, the price of the front-month contract fell to negative territory for the first time in history due to a lack of oil storage capacity.


Oil prices are rising due to supply constraints

KEY TAKEAWAY:

1. Oil prices have been rising over the past 18 months due to surging demand and limited supply. This is consistent with broader supply chain bottlenecks across the global economy.

Supply has been slower to keep up. OPEC and Russia (known collectively as OPEC+) have raised production only modestly and U.S. producers haven’t filled the gap as they have cut costs and improve efficiency. Dwindling natural gas supplies and inventories are expected to spill over into oil markets. Places like the U.K. are dealing with gasoline shortages while China is suffering rolling blackouts. Altogether, these forces are pushing energy prices higher.

Energy prices affect investors in many ways. First, today’s oil and natural gas prices are symptomatic of supply chain issues facing almost all industries. Not only are shortages of raw materials and labor impacting production and manufacturing, but logistics are hamstrung with container ships stuck waiting to unload. While it’s normal for energy costs to rise over the course of a business cycle, as they did before 2008 and during the last cycle, today’s situation is somewhat unique.


U.S. oil production hasn’t kept up with demand

KEY TAKEAWAYS:

1. While U.S. energy companies were expected to serve as the marginal “swing” producers, their production levels have yet to fully recover.
2. Coupled with limited supply increases from OPEC+, rising demand has boosted energy prices to multi-year highs.

Thus, even with U.S. consumers in a strong financial position, supply constraints are impacting economic growth. While this should eventually be resolved, it’s hard to estimate how long it will take and will depend on each industry. Some economists, the Fed included, still believe that these factors are “transitory” and could be resolved in 2022.

Second, higher energy prices are negative for U.S. consumers and businesses since they boost the cost of products and services directly and indirectly. Gasoline, for instance, has risen from a nationwide average of around $1.75 a gallon to over $3.25 today. However, it’s also the case that energy prices, including gasoline, have been relatively low for much of the past 7 years.


The energy sector has benefited from higher prices

KEY TAKEAWAY:

1. The energy sector has benefited from higher prices with the S&P 500 Energy index gaining 50% year-to-date.
2. Many investors had avoided the sector over the past few years due to poor performance. This is further evidence that investors should stay diversified both within and across markets since predicting exact winners and losers is difficult, if not impossible.

Third, from an investment perspective, the energy sector has been a volatile component of diversified portfolios. The shale revolution which began in the early 2010’s, has faced many ups-and-downs as over-supply became an issue before the pandemic. This led to the underperformance of the sector for years, which most likely caused some investors to avoid energy-related assets.

However, for those who are properly diversified, the energy sector accounts for just under 3% of the S&P 500’s market capitalization. The fact that the sector has gained 50% this year alone, and 81% over the past twelve months, emphasizes the importance of investing within and across markets. It’s difficult to know what may or may not outperform in any given year, especially once a sector falls out of favor, and thus it’s important to be broadly diversified.

Thus, rising oil prices are both a reflection of supply chain problems as well as a factor that will directly impact consumers and businesses. Although oil prices are above $80, there are reasons to believe that the economy can still grow steadily, especially if more supply can come online. Long-term investors ought to stay diversified and focused on the underlying issues rather than the day-to-day movements of energy prices.

Investors should maintain perspective on supply chain issues rather than day-to-day oil price movements. Staying diversified across sectors is still the best way to manage through the current environment and to achieve 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. (2021)

Portfolio Manager Insights | Weekly Investor Commentary – 10.6.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 10.6.21
Investment Committee

As we begin the final quarter of 2021, the economy is shifting from a recovery phase to a sustained expansion. Investor sentiment has shifted alongside this, swinging from bullishness to bearishness. This is understandable because, while the underlying trends are positive, it’s no longer the case that the economy and markets have nowhere to go but up. Challenges such as the pace of growth, fears of stagflation, debt problems in China, Fed policy, the government debt ceiling and more are weighing on investors’ minds. How can investors balance risk and reward with a long-term perspective during the final months of the year?

The truth is that investing is never easy except in hindsight. In the moment, there are always concerns that worry investors, even when they have a sound financial plan and portfolio strategy. Just this year alone there have been topics as far ranging as the presidential transition to the delta variant and Afghanistan. Yet, the S&P 500 gained nearly 16% with dividends this year through the end of the third quarter. The markets repeatedly show that those who are able to stay disciplined and look past the daily headlines are often rewarded, regardless of how quickly market sentiment turns.


The economic expansion is still strong

KEY TAKEAWAY:

1. The economy is still growing rapidly 18 months after the unemployment rate peaked at 14.8%.
2. U.S. GDP has surpassed pre-pandemic levels, as have corporate profits, and many measures of activity are at multi-decade highs. Despite investor fears, the underlying growth trends are still positive.

Today, the big issues that weigh on markets can seem nearly insurmountable, as they often do. The nature of the short recession last year, which only lasted two months, and the swift recovery have been unlike any cycle in history. This has made it difficult to measure and interpret traditional economic data such as inflation and growth rates. Even when the data return to pre-pandemic levels, the year-over-year percentage changes can be extraordinarily large.

On top of measurement and interpretation issues, there have also been real structural challenges, most notably around global supply chains. Much of this is rooted in the on-going disruptions in manufacturing and shipping that have affected industries from semiconductors to construction materials. While it’s reasonable to expect that these issues will be resolved, trying to predict the exact timing is difficult if not impossible. The computer chip shortage is still a major problem while lumber prices have already fallen significantly.


Inflation remains high and will depend on supply constraints

KEY TAKEAWAYS:

1. Inflation remains elevated across a number of traditional measures. The PCE inflation rate favored by the Fed, for instance, is at its highest levels since the early 1990s.
2. The Fed itself has made it clear that their inflation targets have been reached, setting the stage for a reduction in asset purchases.

These problems not only affect the performance of companies, stocks and sectors, but they are also an input into monetary and fiscal policies. One of the Fed’s key mandates is to keep prices stable which will require reducing asset purchases and eventually hiking rates. At the same time, Congress and the White House are actively pursuing new spending measures, which will also impact tax policy. While these headlines naturally garner investor attention, seasoned investors have been through many such periods over the past two decades. In almost all cases, the best course of action was to stick to appropriately-tailored investment plans, ideally with the support of a trusted advisor.

Perhaps then the biggest shift in markets over the past several weeks is that interest rates have begun to rise after pausing for two quarters. This has put downward pressure on tech-related sectors, counter-balancing improvements in areas such as energy and financials which have benefited from these trends over the past year. Not only will interest rates likely climb further, but investors should continue to expect higher levels of volatility. Only at the end of the third quarter did the S&P 500 experience its first 5% pullback for the year. Such short-term pullbacks are normal for markets and investors should be comfortable with greater uncertainty in the months to come.


The Fed will likely begin tapering soon

KEY TAKEAWAY:

1. The Fed will likely begin tapering its asset purchases in the fourth quarter. The central bank has been broadcasting this possibility for much of the year and has made it clear that tapering will be a gradual process that will last well into 2022.
2. They have also communicated that rate hikes will require a different, more stringent set of criteria and will likely not begin until after their asset purchases end..

It’s important to emphasize that this is all occurring against a backdrop of a strong economy and robust corporate profits – factors that do not depend on how investors feel. Ultimately, long-term investors ought to position themselves for years and decades, not days, weeks or months. By most measures, we are still early in the business cycle despite the shared feeling that the pandemic has lasted a lifetime already. Achieving financial goals requires true dedication and discipline, regardless of what markets are concerned about in the short run.

For many, jobs are the key metric since the pandemic directly impacted individuals’ ability to work and earn a living. Over 75% of the jobs lost during the pandemic have been regained and the unemployment rate has fallen to only 5.2%. While some sectors are still struggling to recover, others are struggling to hire workers fast enough. There are officially more job openings than unemployed individuals – an imbalance that is positive but that speaks to the changing nature of worker skills, job locations and more.


Government spending and the debt ceiling are front and center

KEY TAKEAWAY:

1. Partisanship in Washington is on full display as a number of issues are being discussed. In the short run, the debt ceiling is the most pressing concern for financial markets which fear a repeat of 2011’s fiscal cliff scenario.
2. In the long run, new spending proposals will have an important impact on infrastructure, taxes and more.

Many different factors are often referred to under the term “inflation.” Traditionally, inflation is seen as a monetary phenomenon. This made the 2010’s perplexing to many investors since vast amounts of monetary stimulus failed to materialize in the form of pricing pressures. Today, the biggest inflationary factors are the swift economic rebound and the on-going supply chain disruptions. While impossible to predict accurately, these effects will likely improve over time.

For investors, this means that there will likely be upward pressure on interest rates over a long period of time. Still, investors should not overreact to these gradual rate rises, especially given the extraordinarily low level of rates today.


International markets still have diversification benefits

KEY TAKEAWAY:

1. Although emerging markets have stumbled this year due to the delta variant and challenges in China, staying internationally diversified is still important.
2. Many of the challenges around debt, shadow banking and regulation in China have been in focus for over a decade. And while these issues are coming to a head, the Chinese government is likely to be in a position to cushion any major fallout.

While these developments are important to watch, investors ought to maintain a long-term perspective on the impact of Washington policy on markets. Financial markets and portfolios have performed well across a variety of party leadership and tax regimes. Regardless of how one personally feels about new bills and proposals, it’s important to focus more on staying invested.

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)

Portfolio Manager Insights | Weekly Investor Commentary – 9.22.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 9.22.21
Investment Committee

Many investors are concerned about risks building within the global financial system. These worries cover a wide variety of issues including the pace of the recovery over the past 18 months, the amount of emergency fiscal and monetary stimulus, inflated asset prices, new debt default concerns in China, and more. While these topics are important to understand and monitor, there are always reasons to fear that the sky is falling. Rather than overreact to every new headline, investors should maintain the right perspective, stay invested and remain diversified. After all, long-term investors are rewarded precisely because they have the patience to look past short-term market problems.

Even though the situation around the Chinese property developer Evergrande is still developing, there are already parallels being drawn to Lehman Brothers in 2008 and even Long-Term Capital Management in 1998. The size of a potential default would be roughly $300 billion and there are fears of contagion to related parties and contracts. There are also no signs yet that the Chinese government will intervene. While these events have captured the market’s attention, there are three facts that investors should remember.


Emerging markets are volatile but have rewarded patient investors

KEY TAKEAWAY:

1. Emerging markets have been the most volatile region. However, investors who include these assets in well-diversified portfolios have been rewarded over long time periods.

First, markets have been worried about a “China hard landing” since at least 2010 as the country’s growth rate has slowed. From 1980 to 2010, Chinese real GDP grew by 10% per year – an astonishing pace as it caught up to the rest of the world. Growth then slowed to between 6-8%, although this still outpaces the rest of the world. These are based on official government statistics so the actual numbers could be lower.

Many feared that this slowdown would worsen the imbalances that had been growing within the Chinese economy. One key area of concern has been the so-called “shadow banking” system – financial activity that takes place in non-traditional and less regulated channels such as through wealth management products – and whether it would create a 2008-style financial crisis. So far investors’ worst fears haven’t materialized. One argument which is even more relevant today is that China’s command economy gives it the tools to control a crisis, up to a certain limit, even if it does not directly bail out the defaulting entity.


EM stocks are attractively valued, especially with new concerns

KEY TAKEAWAYS:

1. Unlike U.S. and developed market stocks, emerging markets have faced significant volatility over the past several months. In addition, they have been slower to recover from the pandemic slowdown.
2. As a result, their valuation levels are much more attractive than other regions despite comparable earnings growth rates.

More recent concerns around Chinese government interventions and regulations add to this backdrop. Government scrutiny and rules on education companies, tech, and even video game limits, have hobbled Chinese stocks which in turn has hurt the performance of emerging markets.

So, the second related point is that, while investors may be concerned about these issues and their repercussions across markets, these risks are exactly why investors are rewarded over long time horizons. Despite recent market volatility, emerging markets have contributed significantly to diversified portfolios over the past twenty years. Investing in China and EM requires accepting a large degree of uncertainty.


Market corrections are normal – and impossible to predict

KEY TAKEAWAY:

1. Despite those who will always believe a market crash is right around the corner throughout bull market cycles, the largest decline for the S&P 500 this year is still less than 5%.es.

These uncertainties may be due to systemic risks, debt “bubbles,” regulations, market efficiency, the rule of law, and many other issues that are less common in developed markets. This may lead to market swings, but investors have historically been rewarded.

Third, some are calling for a market correction as a result of this episode, combined with uncertainty from the Fed and tax proposals. Investors should remember that market corrections are both normal and unpredictable. There are always those who believe a market crash is right around the corner throughout bull market cycles. As we near the end of the third quarter of the year, the largest decline for the S&P 500 this year is still less than 5%. Even if this changes in the coming days and weeks, the average year experiences much larger drawdowns.

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. The possible debt default situation in China could worsen but this has been on investor and government officials’ minds for over a decade. Resisting the urge to overreact to every new development is the best way for investors to achieve their financial goals. Investors ought to maintain perspective and stay diversified through periods of market uncertainty, whether due to China, the Fed or other concerns.

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))

Portfolio Manager Insights | Weekly Investor Commentary – 9.15.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 9.15.21
Investment Committee

There are perhaps no two topics as controversial as deficits and taxes. Differences in political and social opinions on these issues are almost guaranteed to lead to heated discussions, even among otherwise calm individuals. This has certainly been the case in Washington over the past two administrations. With the pandemic still affecting individuals and businesses, and with new spending and tax proposals being released, it’s important for investors to distinguish their personal views from how taxes affect markets as they manage their portfolios.

Fiscal policy directly impacts many parts of our lives and is often driven by deeply-rooted political beliefs. While most individuals and businesses would prefer the lowest tax rates possible while maintaining their social agendas, this is difficult if not impossible to achieve. Not only are many spending programs difficult to scale back once enacted, emergency measures such as COVID-19 relief and military spending also worsen the national debt. It’s no surprise that the federal government has persistently run deficits – i.e., spending has outpaced tax collection – over the past century, across both political parties.


Corporate tax rates are expected to rise

KEY TAKEAWAYS:

1. U.S. corporate tax rates were the highest in the world prior to the 2017 tax reform. Today, at 21%, they are in the middle of the pack.
2. The current proposal to increase this rate to 26.5% would almost split the difference between the old and new rates.

The latest Democratic proposals call for increases in the corporate tax rate to 26.5%, the capital gains rate from 20 to 25%, a 3% surtax for high-earners, and more. This is primarily to pay for a spending agenda of up to $3.5 trillion over the next decade and partly, it’s argued, to shift the tax burden within society. While these changes are far from certain, even within the Democratic party, they will likely be a focus of investor attention over the next several months.

Despite this, history shows that investors often worry too much about the effects of deficits and taxes on financial markets. The reality is that the stock market and economy have both done extraordinarily well under a variety of tax regimes. This was true even when the highest marginal income tax rate was above 90% through the mid-1960’s and when the corporate tax rate was the highest in the world, at 35%, prior to the 2017 tax reform. What matters more than specific tax rates is that the economy continues to grow in a way that benefits individuals and businesses. Fiscal policy, alongside monetary policy, can certainly be a tool to spur growth if done appropriately.


The deficit and debt have ballooned

KEY TAKEAWAYS:

1. The federal deficit and debt have both ballooned due to COVID-19 stimulus measures. However, these were one-time spending measures designed to prevent even worse outcomes for the economy.
2. Current spending proposals of up to $3.5 trillion would need sources of funding via higher tax rates or a different tax structure.

This is not to say that taxes can’t distort economic incentives or affect profitability. At a company or industry level, specific tax laws can make a big difference, especially when they are driven by broad objectives such as combating climate change. At an individual level, fiscal policy can change incentives to work and invest, at least in theory. There is evidence that stimulus checks created disincentives to work over the past 18 months.

The point is that for everyday investors who are planning for retirement and life goals, basing asset allocation decisions on changes to tax rates, or trying to time the market based on tax policy changes, would have backfired over the long history of financial markets. This is because both individuals and corporations find a way to maximize their incomes and profits over time by adjusting to new economic incentives and rules. For those investors who have long time horizons and hold broadly diversified portfolios, it’s been better to simply stay invested in a well-designed portfolio..


Stock markets have done very well across tax regimes

KEY TAKEAWAYS:

1. Despite concerns over taxes, history shows that financial markets can perform well under a variety of tax regimes.
2. This was true both before and after the Reagan tax reforms. What matters is that the economy continues to grow in a way that benefits individuals and businesses.

This is not to say that taxes can’t distort economic incentives or affect profitability. At a company or industry level, specific tax laws can make a big difference, especially when they are driven by broad objectives such as combating climate change. At an individual level, fiscal policy can change incentives to work and invest, at least in theory. There is evidence that stimulus checks created disincentives to work over the past 18 months.

The point is that for everyday investors who are planning for retirement and life goals, basing asset allocation decisions on changes to tax rates, or trying to time the market based on tax policy changes, would have backfired over the long history of financial markets. This is because both individuals and corporations find a way to maximize their incomes and profits over time by adjusting to new economic incentives and rules. For those investors who have long time horizons and hold broadly diversified portfolios, it’s been better to simply stay invested in a well-designed portfolio.

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)

Portfolio Manager Insights | Weekly Investor Commentary – 9.1.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 9.1.21
Investment Committee

A common adage in boxing is to watch your opponent’s shoulders and not their hands. Focusing on where the motion of a punch begins, rather than where it ends, allows you to react appropriately and accurately. The same is true when investing – it’s better to focus on the economy and long-term trends that drive markets and policy, rather than solely on outcomes such as Fed decisions and past returns. In other words, the best way for investors to position their portfolios today is to better understand where we are in the business and market cycles.

The path to normal monetary policy by the Fed and other central banks is a long one. During the last cycle, the Fed officially announced plans to taper its asset purchases at the end of 2013, began raising rates at the end of 2015, and did so until the second half of 2019. The Fed was just as measured in its approach after the dot-com bust when it raised rates slowly but steadily across 17 consecutive meetings from 2004 to 2007. The onset of tapering, and even the first rate hike in a cycle, is just the first step.


It is still early in the bull market and expansion

KEY TAKEAWAYS:

1. The average market cycle has lasted between 5 and 12 years over the past 40 years.
2. Although the recovery has been swift, growth trends suggest that the market cycle can still go a long way..

Today, market participants widely expect a change in policy, especially after Fed Chair Powell’s recent Jackson Hole speech. This is because economic conditions are favorable and although the pace of growth may slow a bit, the expansion is still robust. As a result, corporate profits are accelerating further. Consensus estimates are for S&P 500 earnings-per-share to reach almost $198 in 2021. This would represent a staggering 46% annual growth rate and help to support markets by bringing valuation levels back down to earth.

In broader terms, investors are accustomed to distinguishing between cyclical and “secular” (financial industry jargon for “long-term”) trends. Cyclical trends are those related to the natural ups and downs of the business cycle, such as those stocks and sectors that benefit from initial recoveries versus the later stages of an expansion. Secular trends are those that cut across cycles, such as trends in technology and global trade.


Economic growth is expected to be strong

KEY TAKEAWAYS:

1. Last week’s upward revision to Q2 GDP showed that the economy grew by 6.6% during that quarter.
2. The economy is expected to grow at a robust pace before it inevitably decelerates to more historically normal levels.

What’s made this distinction challenging has been the sharp initial recovery that boosted inflation and growth measures well beyond recent norms. There is a great deal of debate over whether these data are a result of cyclical or secular trends. The best answer today seems to be neither: these may simply be one-time events due to the nature of the crisis and rebound. While some effects, such as supply and demand disruptions in semiconductors or building materials, may linger for months, this is different from arguing that there are cyclical forces that will boost inflation for years to come.

In the end, it’s important for long-term investors to remember that crises are swift and abrupt while expansions are slow and steady. The National Bureau of Economic Research has officially declared that the COVID-19 recession lasted only 2 months. The markets bottomed out over the course of one month and recovered about 5 months later. In contrast, this bull market has now lasted almost a year and a half, and bull markets since the 1980s have lasted between 5 and 12 years.


Valuations are not cheap but may come down over time

KEY TAKEAWAY:

1. Valuations across the broad market have been high due to the fast market recovery. However, strong and accelerating earnings are helping to deflate these lofty valuations.

It’s natural for investors to want to know exactly what’s around the bend, and to react to every event. But like the boxer who bobs and weaves too much in response to their opponent’s gloves, investors may only tire themselves out. Focusing on the underlying economic trends helps investors avoid having a short-sighted view of their portfolios. Investors should focus on the overall business cycle and long-term trends rather than day-to-day events.

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)