Nolte Notes 7.12.21

July 12, 2021

“We’re all mad here, I’m mad. You’re mad.” And so down the rabbit hole we go! Just when you think you have it all figured out, the economy and/or the markets throw you a curveball. Maddening, sometimes. But we are in a deranged time where everyone is a bit crazy. We celebrate huge employment gains, yet at the recent pace, it will take another seven months to regain the old employment peak. Job openings continue to grow as companies of all stripes can not find willing workers. Many “consumer-facing” businesses have shortened hours due to a lack of employees. The Federal Reserve believes easy money can solve this problem, so they keep rates at historically low levels while pumping over $100B into the markets every month. “When you have a hammer…”Goods are having a tough time getting to market and prices for nearly everything are rising. Many believe this will work itself out over the next year as companies fully staff up and supply chains are working properly again. Some wonder if the economy is permanently damaged. The coming week will have inflation, retail sales and sentiment indices released. The madness is not likely to get resolved this week!

Worries about the Fed “starting to think about thinking about” cutting back their bond purchases knocked down stocks for a day, but the “buy the dip” crowd piled back in on Friday, pushing stocks to yet another record and 14th weekly gain in the last 19 weeks. Yes, there are some chinks in the armor, but the easy monetary policy is what rules the day. Over those 19 weeks, 90% of the stocks within the SP500 remain above their long-term average price, however the last few weeks, barely 50% are above their short-term average price. Meaning stocks have rallied so strongly that any short-term pullback has done little to dent the long-term picture. Within the S&P500 industry groups, all but telecom are above their long-term average, so until the market “technical” begin to break down in a more meaningful way, the path of least resistance looks to be higher. Growth has been the big winner over the past few weeks as interest rates have declined. Could the rate decline be warning the markets that the best/fastest economic growth has passed? Potentially, however, we would like to see a few more indicators pointing that way before beginning to worry about the next downturn.

The yield curve flattening is a warning sign of slower economic growth. However, without a signification push higher in the yield differential between junk and treasury bonds, long-term worries are not yet heightened. Earnings season gets started this week, and there will be plenty of commentary about what companies are seeing in their “end markets” and their capacity to fill demand. Finally, comments regarding pricing and inflationary pressures could also impact bond yields, pushing them back up if investors believe those pressures are more than just “transitory” as the Fed currently believes.

The quick rotation between “growth” and “value” has been driven by changes in interest rates. As interest rates rise, value does well. As rates fall, growth does well. Both are tied to the re-opening of the economy. If investors believe that the re-opening is going well and pricing pressures are building, value does well. If investors believe the best of the economic growth is now behind us and we are heading back to the recent average growth of 2%ish, then growth will do well. From a long-term perspective, growth is very overvalued, with various companies selling at their highest price to earnings multiples going back to 2000. While value is also expensive in absolute terms, relative to growth, it is about as cheap as it has been going back to the late 1990s. We believe that over the next few years, the overall market will struggle to provide meaningful gains, but that value should shine relative to growth as the economy slowly works its way back to “normal”.

Interest rates have been driving the markets as well as various parts of the markets for the past nine months and that is not likely to change. Hence, we will be watching yield differences between various asset classes for clues as to when markets are likely to make a significant shift. Not yet in the cards but watching closely!

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.

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SVP Paul Nolte Interviewed By Reuters 7.7.21

Reuters interviews Paul Nolte, SVP & Sr. Portfolio Manager

Kingsview SVP Paul Nolte discusses recent bond market signals and what that might mean for technology.

Click here for the full article

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Nolte Notes 6.2.21

June 1, 2021

What was Hollywood’s six-million-dollar man is now Washington’s six-billion-dollar man. Inflation impacts everything! The new budget rollout late on Friday will be the starting point for wrangling about deficits (do they matter?), spending programs (remember shovel ready?) and initiatives the current administration would like to put forward. An interesting provision is an increase in capital gains tax rates that would be retroactive to April. While many are wringing their hands about the proposals, what gets passed, should make for some interesting beach reading this summer. Back at the economy, the inflationary figures continue to run “hot” as the economy continues to lurch toward a full re-opening. Supplies channels are still not operating correctly and are unlikely to get back to normal before year end. Employment is getting better as the weekly jobless claims’ numbers fell again last week. The coming data dump for the first week of June will include the “official” jobs report that should see some improvement over last month’s disappointing figures.

The markets continue to chug along, even in the face of data that historically would have had the markets falling. Higher inflation and large job gains are generally a recipe for hiking interest rates. However, looking at the bond market, you would have to shake a few traders to get them to move. Ten-year treasury rates remain below their March peak, and “risky” high yield bonds have traded well. Investors are amazingly comfortable with a Federal Reserve that has been buying large quantities of Treasury securities every week. Along with a commitment to keep interest rates lower for longer, investors have little choice but to buy equities to get any kind of return. That has pushed valuations of the equity markets to extremely high levels, rivaling those of 1929 and 2000. What is currently missing is a reason to sell. Until the Fed begins to discuss withdrawing from their purchase program, or we begin to see investors move out of risky portions of the markets, the momentum is still on the bull’s side and stocks can get pricier still. The warm sun calls and living is easy…for now.

After a very rough first quarter, bond investors have been rewarded with “staying the course” as returns have been positive in each of the last two months. Bonds have even given stocks a run for their money since late April, providing essentially the same return without the daily swings. If there are concerns in the bond market, it is that the bond model has swung negative, indicating the direction for interest rates may be higher in the coming weeks. The model has been negative much of this year and even as rates have moderated, they really have not dropped too far from their March peaks. Commodity prices are likely to be the key driver for interest rates going forward.

The markets have been swinging back and forth between growth and value for much of the past six months, however value has been the “winner” overall, as it has been two steps forward, one step back for value stocks. These are the parts of the markets that will benefit from the continued opening of the economy as we go from virtual meetings to in person, from FaceTime to face-to-face. There have been and will be plenty of bumps along the way, however the differences in valuations between these two asset classes tends to favor value ahead of growth. Comparing technology’s performance vs. nearly every other S&P500 sector shows technology’s performance peaking in the third quarter of last year and underperforming since. Even comparing technology to international, shows a similar relationship. The rotation away from technology is hard for investors to do, as the allure of high growth keeps them from moving. However, the valuation on technology stocks in general is well ahead of their historical norms, while valuations of other sectors and asset classes remain near or below historical norms.

“Sell in May and go away” is a Wall Street adage that historically shows the markets doing poorly in the summer. However, the last few years it would be better to hold the stocks and just go away. Will this year be any different? Or will the Fed keep the good times rolling with as easy monetary policy? Stay tuned.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.

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Nolte Notes 3.15.21

May 15, 2021

As we “celebrate” the first anniversary of the “just two-week lockdown” to bend the curve, the economy remains a mess even though Wall Street is doing fine. Another $1.9 trillion will be doled out over the coming weeks and months to help the economy and those impacted by job loss recover. Until the economy opens fully, it will be hard to restore jobs, especially in the service sector. Market psychology has shifted from benefiting companies helped by working/staying at home to a hopeful reopening of the economy. The bond market is sniffing inflationary pressures and concerns about the time when the population is unleashed from a restricted lifestyle. Interest rates have increased significantly and this week we will hear from Fed Chair Powell regarding their position on keeping rates low for longer and when it will begin to shift. As the weather warms and vaccines find arms, the summer is expected to be “more normal”. Anything less will be a huge disappointment after the past year.

The economic damage of the past year is still very evident in the weekly jobless claims figures. The average of the past year is roughly 50% higher than the average during the financial crisis. The response from the government has been multiples more than during 2008-’09. Unlike that period, this one is completely health related and will take broader vaccination and local governments to relax restrictions on the service economy to realize a stronger recovery. The inflationary worries have not yet shown up in the “official” data, as both consumer and producer prices were as expected and are still well below the Fed’s 2% target. That will change in the coming months as commodity prices have jumped by over 20% since the end of last March. Even pulling out the usually volatile food and energy, prices are expected to soon be above that 2% level. If consumers have money to pay the higher prices, inflation can linger. The extension of various programs into fall may allow many to have money in their pockets and keep the pressure on prices. Once the economy fully recovers, wage growth will be the key driver for “durable” inflation. This dynamic will be under the microscope at the Fed meeting and the press conference that will follow. The markets are sure to react.

The bond market has been at the center of investor’s focus as longer-term bond yields have been rising in response to expectations for higher economic growth and inflation. The impact has been felt more in the treasury market and to a lesser extent the corporate bond. Corporate bond (and to a lesser extent) municipal bonds are dependent upon the health of the specific issuer. Better economic growth and higher local tax revenue will benefit these parts of the bond market. The huge issuance of treasury bonds to pay for the various pandemic programs will have a tougher time to be absorbed within the market, pushing rates up on government bonds.

After being neglected for the better part of 10 years, other parts of the markets are indeed waking up. Small stocks are up better than 20% just this year. Energy, the black gold variety, is up over 40%. While much of the attention has gone toward technology, this shift toward “everything else” has been picking up steam over the past six months. Some of this is due to expectations for better economic growth. Energy has been pushed down so far that it was impossible to find storage a year ago and you could get paid to hold it (assuming you had a few tankers in the backyard!). Today, pump prices are at or over $3/gal. Smaller stocks tend to be more domestic and do not have as much international exposure as their larger cousins. Many of these companies suffered in the early days of the pandemic and for those surviving, they are likely to thrive as growth picks up.

Interest rates and investor ebullience may be the only things to derail the markets over the long-term. Over the short-term, stocks may take a rest especially in front of the Fed meeting this week. Volatility has not subsided, but few notice it when stocks rise!

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions

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