Portfolio Manager Insights | Weekly Investor Commentary – 6.9.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 6.9.21
Investment Committee

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 6.9.21
Investment Committee

Just as it has across history, the Federal Reserve played a central role in the crisis and recovery of the past 18 months. At the onset of the pandemic, even before many cities and states went on lockdown, the Fed had already slashed its policy rate to zero percent. As the economy and financial markets worsened, the Fed began expanding its balance sheet by buying Treasuries, mortgage-backed securities and – for the first time – corporate bonds. With the Fed announcement last week that it would begin to unwind its corporate bond holdings, some investors may wonder how this and future Fed actions could affect their portfolios.

The Fed’s objective is to keep the economy and financial markets running smoothly. On the economic front, they do so by examining a wide variety of data and targeting a dual mandate of inflation and unemployment. However, long-term economic trends matter little if the financial system seizes up in the short run, as it did during the 2008 financial crisis. This is why, as credit markets began to falter in early 2020, the Fed pulled out all the stops. Buying corporate bonds was one way to directly contain a spike in borrowing costs (i.e. by providing a floor under bond prices).

At this point, the financial system has not only calmed, but many argue that it is overextended in many areas. This includes high-flying tech stocks, which have been volatile in recent months, “meme stocks” with significant retail investor interest, SPACs, and more. Thus, it is not surprising for the Fed to begin to reduce its corporate bond holdings.

For investors, this hints at the bigger question: when will the Fed will begin to reduce the pace of Treasury and MBS purchases, which currently stands at $120 billion per month, and eventually raise rates? As is always the case, next week’s Fed announcement and press conference will be scrutinized for any hints on the timing and magnitude of these events. Expectations vary, but many believe the Fed will begin unwinding its balance sheet at the start of 2022 and raise rates in early 2023.

This timing may change if inflation continues to heat up and the economy makes significant progress. Last week’s jobs report showed that the unemployment rate has already fallen to 5.8%. Moreover, when the Fed does begin to discuss these topics, many investors worry about another “taper tantrum” – a period in 2013 when the mere mention of reducing asset purchases rocked the bond market. Although there is certainly the risk of another such event, there are a few reasons for long-term investors to stay calm.

First, as disruptive as the taper tantrum was to fixed income holdings, the typical diversified investor finished the year with strong gains. This is because the S&P 500 generated a 32% return in 2013, offsetting the challenges faced by bonds. Bonds recovered soon after the following year.


FED ACTION HELPED TO CALM THE BOND MARKET LAST YEAR

KEY TAKEAWAY:

1. Credit markets began facing stress during the initial months of the pandemic. Actions by the Fed and Congress, and a quick recovery in the market helped bond yields to calm.

Second, the Fed has (presumably) learned from that episode and will continue to bend over backwards to avoid a repeat. This means that they will either keep monetary policy loose for longer, or be extremely gradual in their approach. Of course, it can be argued that it may be better to rip off the band-aid, especially if there are excesses in the financial system


THE FED BALANCE SHEET IS APPROACHING $8 TRILLION

KEY TAKEAWAY:

1. The Fed has expanded its balance sheet to nearly $8 trillion.
2. This eclipses the $4.5 trillion reached after the financial crisis as well as the growth in the balance sheets of other major central banks.

Third, there is an old debate on whether “tapering is tightening.” In other words, is reducing the pace of bond purchases equivalent to selling bonds from its balance sheet? That is, is it the level or the direction that matters? While this is a theoretical debate, it’s clear in reality that the Fed will continue to be a significant buyer of bonds for quite some time. There are few reasons for long-term investors to worry about a sudden change in Fed policy.


MARKETS EXPECT FED TIGHTENING OVER THE NEXT TWO YEARS

KEY TAKEAWAYS:

1. At the moment, markets expect the Fed to begin raising rates in early 2023, and to possibly begin unwinding its balance sheet in early 2022. Of course, investors will watch for hints that these events could occur sooner.

Regardless of how the Fed approaches tapering and tightening, long-term investors are better off staying focused on their financial goals rather than reacting to every Fed announcement. The bottom line? Investors ought to focus on their long-term financial goals rather than short-term Fed moves. Diversified portfolios helped to protect investors during the financial crisis, the taper tantrum and over the past 18 months – regardless of Fed policy.

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. (2021-254)

Portfolio Manager Insights | Weekly Investor Commentary – 5.26.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 5.26.21
Investment Committee

For some investors, it may feel as if financial markets are more uncertain than ever. Day-to-day stock market swings have increased due to concerns over inflation, interest rates, tax policy, the Fed and more. Those who follow financial headlines are met with topics such as cyberattacks, economic uncertainty, and on-going COVID-19 outbreaks in parts of the world. Even cryptocurrencies, which experienced a dramatic bull run this year, have plummeted over the past week. Against this backdrop, how can investors stay focused on their long-term financial plans?

The reality is that stock market swings are not only normal but have been quite calm by historical standards. The VIX index, a popular measure of stock market volatility, is right around the long-term average of 18. Despite some day-to-day swings, there have been no pullbacks as large as 5% this year, even though the typical year experienced several. The biggest peak-to-trough pullback has only been 4%, compared to the annual average of 15%. Thus, there is a disconnect between the rocky waves that many investors perceive and the natural ebbs and flows of the market.


DIVERSIFIED PORTFOLIOS HELD UP AGAINST THE COVID-19 MARKET CRASH

KEY TAKEAWAY:

1. This chart shows the hypothetical performance of various asset allocation portfolios during the first eight months of 2020. A proper mix of stocks and bonds not only performed better during the market crash but recovered more quickly and held its value longer.
2. Most importantly, investors who experience less volatility in their portfolios are also less likely to overreact.

Of course, the calm of the broader market may not apply to those with concentrated positions in hard-hit areas. It’s also undeniable that stock market valuations are above-average, begging the question of whether they are too optimistic. So, for some investors, there may be a fear that there is a market-disruption lurking around the corner.

For everyday investors, there are three broad ways to manage these concerns. The first is to simply retreat to cash and forego the wild swings of the stock and bond markets. On paper, cash can appear to be the most stable asset since account balances don’t change on their own. However, this can be misleading since the true purchasing power of cash can erode over time, especially if inflation is accelerating. Moreover, this doesn’t consider the opportunity cost of missing market gains. Together, these unseen “losses” can be significant over long periods of time.


DESPITE UNCERTAINTY, THE STOCK MARKET HAS BEEN CALM

KEY TAKEAWAY:

1. By historical standards, the stock market has been quite calm in 2021. This may be surprising to many investors who experience large day-to-day swings and see alarming headlines regularly.
2. The largest peak-to-trough decline in the S&P 500 this year has only been 4%. Investors should not be surprised by greater levels of volatility.

The second way to respond to market swings is to trade in and out of the market. Trying to time the market is alluring since the benefits seem large, especially in hindsight. Those who could have foreseen both the pandemic market crash and the market rebound shortly thereafter would have profited handsomely.

Of course, the problem is that decades of research have shown that it is very difficult – and perhaps impossible – to predict short-term market movements accurately and consistently. Events that are expected to move markets often do not, and events ignored by investors often do. Perhaps more important is the fact that investors often suffer from behavioral biases. After a market crash, when stocks are objectively the most attractive, is when investors are often the most fearful. After the market has recovered, and stocks are no longer cheap, is often when investors are the most optimistic.

Thus, history shows that the third and best way to respond to volatility is to stay invested in a well-diversified portfolio. Rather than swerving about to avoid a few potholes, the objective is to maintain a portfolio that can withstand the bumps.


SIMPLY STAYING INVESTED HAS PAID OFF HISTORICALLY

KEY TAKEAWAYS:

1. History shows that those who can stay invested in properly diversified portfolios, and avoid the temptation of swerving in and out of markets, are in a better position to achieve long-term goals.

The benefits are numerous. Well-constructed portfolios take advantage of diverse asset classes to help smooth returns and risk over time in order to achieve financial goals. They can be optimized for taxes, income, growth and other important factors. Tactical asset allocation and portfolio tilts are still possible but can be done in the context of a broader plan. Perhaps most importantly, a diversified portfolio can help investors to sleep better at night without worrying about every market hiccup.

Long-term investors ought to keep these lessons in mind as market uncertainty grows. This is especially the case when volatility truly does pick up.

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. (2021-236)

Portfolio Manager Insights | Weekly Investor Commentary – 5.19.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 5.19.21
Investment Committee

The central issue for many investors continues to be inflation. Prices are rising for some everyday goods and services as well as for important commodities. The fastest increases in decades could threaten growth in certain sectors, impact household spending, and affect the value of savings and investments. These concerns will only grow as the economy returns to pre-pandemic levels. What perspective should long-term investors have on inflation as business activity accelerates?

In everyday language, we often talk about any price increase as “inflation.” However, it is important to distinguish between three factors at play during this post-pandemic recovery. Understanding the differences can help investors to stay balanced and be properly positioned in the years to come.


MANY MEASURES OF INFLATION ARE ACCELERATING

KEY TAKEAWAY:

1. Many measures of inflation including CPI and PPI have increased in recent months. In some cases, prices are simply jumping off last year’s pandemic lows. These base effects should be expected to fade over time.

First, some prices are simply bouncing-back from historically low levels. Oil, for instance, plummeted at the onset of the nationwide lockdown last year, with the front-month contract falling into negative territory for the first time in history. Even with no changes to the oil industry, it would be expected for prices to rebound as the economy reopens. The fact that these price increases are large on a percentage basis is due to the low starting points last year. Economists often refer to this phenomenon as “base effects” – i.e., prices coming off a low base.

Second, there are supply and demand imbalances in certain industries that are causing prices to soar. This is true in semiconductors, housing construction, agriculture, gasoline and many more areas. In most cases, this is what captures the attention of news headlines and the general public.

Each industry has its own supply and demand story. For instance, semiconductors are facing shortages due to strong demand for work-from-home technology, graphics cards for cryptocurrency mining, increased car-buying, and more. There are also supply factors such as disruptions to the global supply chain and droughts that threaten water-intensive chip manufacturing.


MANY COMMODITY PRICES ARE RISING TOO

KEY TAKEAWAY:

1. In certain industries, significant demand coupled with constrained supply have resulted in price spikes.
2. Lumber, for instance, is at record levels due to strong demand for new homes and limited capacity at sawmills.

In most of these cases, the supply and demand imbalances should resolve themselves over time. And while this may be “inflationary” if it affects a wide variety of goods at the same time, this is not usually what investors worry about when they think of that term, even if it does affect consumers in the short run. After all, the skyrocketing price of toilet paper during the pandemic was not referred to as inflation, since it was understood to be temporary.

Thus, the third factor is a broad rise in prices across the economy due to monetary and fiscal stimulus. This is textbook inflation caused by increases in the money supply and/or the velocity of money – i.e., the pace at which money is spent. Unlike an energy pipeline disruption, the effects of this type of inflation are theoretical and can be harder to see.

Monetary inflation is not a universal concern among economists today. Although loose monetary policy was one reason for the inflation of the 1970s and early 1980s, Fed stimulus after the 2008 financial crisis did not result in the inflationary pressures many expected. Additionally, there have been strong deflationary forces over the past several decades as prices fall due to globalization, technology and other trends.


ASSET CLASSES THAT PROTECT PURCHASING POWER ARE INCREASINGLY IMPORTANT

KEY TAKEAWAYS:

1. Rising inflation has already eaten into the purchasing-power of investor cash savings.
2. This is one reason that investments such as stocks, which can benefit from higher prices, are preferred in rising-inflation environments.

For investors, these factors can affect portfolios in very different ways. Base effects are by their very nature temporary and should generally not cause investors to drift from their long-term plans. In contrast, supply and demand shocks can lend themselves to sector positioning and tilts within portfolios. This depends on the nature of the shocks, whether supply will recover quickly, and whether high prices are tolerated by customers.

Finally, monetary inflation is often what investors worry about when they seek inflation protection. TIPS, for instance, can help protect investors from broad and steady increases in prices as measured by the Consumer Price Index. Persistent, steady inflation is often what drives interest rates higher and impacts stock market valuations. This is one reason that staying invested in inflation-resistant asset classes, including stocks, is often better than holding cash whose purchasing power is slowly and quietly eroded.

How investors deal with “inflation” depends on what is truly driving prices higher. Effects that are more temporary should not cause investors to lose sight of their financial plans. Even in cases where there may be persistent inflation, portfolio adjustments may be enough to maintain purchasing power. Although inflation is rising, having the right perspective is important for investors to not overreact. Investors ought to protect their portfolios without deviating from their long-term financial plans.

Historical references do not assume that any prior market behavior will be duplicated. Past performance does not indicate future results. This material has been prepared by Kingsview Wealth Management, LLC. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate their ability to invest for the long term. Investment advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser. (2021-214)

Portfolio Manager Insights | Weekly Investor Commentary – 5.12.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 5.12.21
Investment Committee

As with many things in life, investing is often about managing expectations on the economy, markets and portfolio returns. Doing so can be challenging since strong market gains and solid economic growth can fuel even greater and eventually unrealistic expectations. At the same time, long-term investors understand that temporary market pullbacks and economic slowdowns are unavoidable. Preventing disappointment is often a matter of maintaining discipline and perspective as market expectations continue to rise.

Today, after a red-hot economic rebound and stock market rally, there are certainly high expectations across the entire investment landscape. For instance, last week’s jobs report severely missed economist projections. It showed that 266,000 jobs were created in April when consensus forecasts were for one million, while the unemployment rate ticked up slightly to 6.1% when many expected it to fall to 5.8%.


THERE ARE MILLIONS OF JOB OPENINGS DESPITE HIGH UNEMPLOYMENT

KEY TAKEAWAYS:

1. At the moment, there are over 9.8 million Americans unemployed even though job openings are close to historic highs. Not only does it take time to vet and hire workers, but there may be a mismatch between the skills and backgrounds that businesses need and available candidates.

2. This is not just in sectors such as tech but is true across the board from truckers to warehouse workers. Naturally, this places a speed limit on hiring activity that is separate from the natural economic recovery.

The glass-half-empty view is that the economy is not nearly as robust as many had hoped. After months of stellar economic reports – some showing the fastest growth in decades – investors have come to expect business activity and the stock market to grow at a feverish pace. If growth is weaker than anticipated, this could mean that corporate earnings expectations are too lofty and stock valuations are even more expensive than they already appear to be.

All of this is certainly possible after an extended bull run. However, there is also a simple glass-half-full view: over one million new jobs were created in just two months. During the
last economic cycle this would have taken nearly six months to achieve.

Just a year ago, during the depths of the economic lockdown, it was unclear whether jobs would return at all – or if there would be irreparable damage to the economy. And while there will certainly be scars left from this experience, especially for individuals
and households whose financial and job security were directly impacted, the pace of the recovery has helped to minimize the damage. This is true even if one month’s jobs report failed to meet expectations.


ECONOMISTS EXPECT RECORD GROWTH THROUGH THE REST OF THE YEAR

KEY TAKEAWAYS:

1. Consensus forecasts are for growth to remain well above average through the rest of the year and into 2022.

2. Inflation could rise above 3% for some time and unemployment could fall below 5% by the end of 2021.

3. Of course, these projections are speculative given the historic nature of the economic environment, especially with record levels of government and central bank stimulus.

Of course, this does not mean valuations close to dot-com era levels are justified or that investors should expect a straight-line recovery. While jobs should continue to return as business activity accelerates, there are also long-term structural challenges. For instance, with 9.8 million unemployed Americans and at least 7.4 million job openings, there is clearly a mismatch between hiring needs and the skills of available workers. This was also the case prior to the pandemic when job openings exceeded the number of unemployed workers for years.

At the moment, economists expect that growth will accelerate this quarter and remain hot in the second half of the year. This includes inflation running above 3% for some time and unemployment falling below 5% before the end of the year. This could be more than enough to restore corporate earnings to pre-pandemic levels, justifying some of the market rebound over the past year.


VALUATIONS REMAIN NEAR HISTORIC PEAKS

KEY TAKEAWAY:

1. Investors continue to price-in lofty growth. Valuations remain near their historic dot-com era peaks even as corporate earnings have surged.

However, long-term investors understand that there may be short-term disappointments that call these projections into question. So while it’s fine to hope for the best, diversified portfolios are meant to also prepare for the worst. After all, the point of investing is not to succeed over months or quarters, but to achieve financial goals over years and decades. Long-term investors should remain balanced and keep a clear perspective on their own expectations and that of the broader market..

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. (2021-212)

Portfolio Manager Insights | Weekly Investor Commentary – 5.5.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 5.5.21
Investment Committee

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

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


THE ECONOMY HAS NEARLY RETURNED TO PRE-PANDEMIC LEVELS

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

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

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

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

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


CONSUMPTION SPENDING IS EVEN MORE IMPORTANT TODAY

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

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


INFLATION FEARS LINGER AS THE LABOR MARKET IMPROVES

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

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

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

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

Portfolio Manager Insights | Weekly Investor Commentary – 4.28.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 4.28.21
Investment Committee

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

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

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

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


HOME PRICES ARE CLIMBING TO NEW HISTORIC HIGHS

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

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

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

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

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


THE INVENTORY OF HOMES IS NEAR HISTORIC LOWS

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


THE PRICES OF LUMBER AND OTHER COMMODITIES HAVE SURGED

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

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

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

Portfolio Manager Insights | Weekly Investor Commentary – 4.21.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 4.21.21
Investment Committee

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

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


MANY MEASURES OF ECONOMIC ACTIVITY ARE AT MULTI-DECADE HIGHS

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

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

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

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


CONSUMER SPENDING IS AT HISTORIC LEVELS

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

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

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


INFLATION HAS RISEN BUT IS STILL TAME

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

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

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

Portfolio Manager Insights | Weekly Investor Commentary – 4.14.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS

WEEKLY INVESTOR COMMENTARY | 4.14.21
Investment Committee

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

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

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

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

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

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

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


INVESTOR BULLISHNESS IS NEAR RECORD LEVELS

KEY TAKEAWAYS:

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


THE OVERALL MARKET CONTINUES TO REACH NEW ALL-TIME HIGHS

KEY TAKEAWAY:

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


THE AREAS DRIVING THIS OUTPERFORMANCE HAVE SHIFTED THIS YEAR

KEY TAKEAWAYS:

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

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

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

Portfolio Manager Insights | Weekly Investor Commentary – 4.7.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS

WEEKLY INVESTOR COMMENTARY | 4.7.21
Investment Committee

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

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

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

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

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

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

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

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


CORPORATE BOND YIELDS REMAIN LOW EVEN AS INTEREST RATES RISE

KEY TAKEAWAYS:

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


YIELDS ARE MUCH LOWER TODAY THAN OVER THE PAST CYCLE

KEY TAKEAWAYS:

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


A MORE DIVERSIFIED APPROACH MAY BE NEEDED

KEY TAKEAWAYS:

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

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

Portfolio Manager Insights | Weekly Investor Commentary – 3.31.21

Click here for the full commentary.

PORTFOLIO MANAGER INSIGHTS

WEEKLY INVESTOR COMMENTARY | 3.31.21
Investment Committee

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

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

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

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

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

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

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

KEY TAKEAWAYS:

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

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

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

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

THE LARGEST PULL BACK THIS YEAR HAS ONLY BEEN 4%

KEY TAKEAWAYS:

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

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

THE MARKET AND CERTAIN SECTORS ARE NOT CHEAP

KEY TAKEAWAYS:

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

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

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

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

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