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)

3:00

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)

3:00

Portfolio Manager Insights | Weekly Investor Commentary – 8.25.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 8.25.21
Investment Committee

Markets are increasingly concerned about tighter monetary policy by the Fed and its impact on valuations, interest rates and more. Recent FOMC meeting minutes confirmed that the Fed could slow its balance sheet expansion within the next few months and this week’s virtual Jackson Hole Economic Symposium could provide more clarity around future rate hikes. How can long-term investors navigate the policy changes and economic uncertainty that lie ahead?

Since at least 2008, the Fed has dominated market conversations across the investment industry, and the recurring discussions around tapering and tightening can often feel like déjà vu. In order to understand the Fed, it’s important to first understand business cycles, no two of which are exactly alike. When the economy is expanding, it’s entirely normal for the Fed to lightly touch the brakes by slowly raising rates and by managing its balance sheet.


The Fed will likely begin reducing its asset purchases soon

KEY TAKEAWAYS:

1. The Fed’s balance sheet has expanded dramatically over the past 18 months – nearly doubling from its post-2008 level.
2. With the economy back to pre-pandemic levels, it’s likely that the Fed will begin slowing its asset purchases soon.

The Fed has done this, to varying degrees of success, across the 15 boom-bust cycles since the Great Depression. There were a variety of causes for each recession, from asset bubbles to debt crises, which resulted in different recoveries and subsequent expansions. For instance, it’s well known that the 2008 global financial crisis was the result of a housing bubble and over-leveraged financial system which required years to sort out. In contrast, the current recovery has been swift since many businesses have been able to reopen following lockdowns and vaccination efforts.

The nature of the pandemic and the speed of the recovery have made economic forecasting challenging to say the least. Many measures of inflation are at their highest levels since the early 1990s. Unemployment is falling sharply as an average of 500,000 jobs have been added each month this year. Manufacturing activity is red hot and while retail spending has slowed, car and home prices remain elevated. It’s difficult to say with accuracy how much of this economic boom will continue.


Investors should always be ready for market volatility

KEY TAKEAWAYS:

1. Despite daily swings, the largest intra-year decline has only been 4% in 2021. This is far below average.
2. With valuations and Fed uncertainty both elevated, investors should stay balanced in order to navigate markets in the months to come.

What is certain is that we are still early in the business cycle and market prices are factoring in a strong expansion. With the economy above pre-pandemic levels and the stock market 32% past its pre-lockdown peak, it’s natural for the Fed to consider returning to its own pre-pandemic policies. At the end of 2019, the Fed was shrinking its balance sheet and the federal funds rate was at 1.5%. To be clear, tapering means that the Fed will continue to grow its balance sheet, just at a slower pace.

Given this backdrop, there are many reasons for investors to be optimistic and stay invested. However, it’s also prudent to be prepared for greater uncertainty. This can occur in a few ways.


Fixed income still plays an important role in portfolios

KEY TAKEAWAY:

1. Although rising rates rattled many parts of the bond market earlier this year, the asset class still plays a substantial role in stabilizing portfolios.

First, there may be larger swings across the stock market on a day-to-day and week-to-week basis. For instance, the most recent market pullback of 1.7% was concerning to some investors, but this proved to be shallow and short-lived. As always, it’s important for investors to remember that short-term pullbacks are both normal and completely expected. What is unusual is that the largest peak-to-trough decline in the S&P 500 this year has only been 4%. Managing larger swings with a diversified portfolio, especially with valuations at multi-decade highs, is more important than ever.

Second, it is likely that interest rates will continue to rise over the coming quarters and years. While the first half of the year showed that rates almost never move in a straight line, the ongoing economic expansion and tighter monetary conditions should push rates higher over time. In general, this is good news for savers who depend on portfolio income. And while it may create tighter conditions for borrowers and mortgage-holders, economic data suggest that the average consumer is in a strong position.

Third, fixed income continues to be an important diversifier when managing portfolios. Although many bond sectors were shaken by the rapid rise in interest rates at the start of the year, some parts of the market have since recovered. Bonds will likely still help to stabilize portfolios in uncertain times, regardless of the interest rate backdrop.

It’s more important than ever for long-term investors to have a solid financial plan and well-considered 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)

3:00

Portfolio Manager Insights | Weekly Investor Commentary – 8.18.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 8.18.21
Investment Committee

One of the risks that all investors must manage is geopolitical uncertainty. Headlines on regional and global crises are not only alarming but can take investors by surprise since they are often beyond the typical business and market news flow. To make this even more challenging, managing these risks usually has less to do with adjusting one’s portfolio than about managing expectations and staying level-headed. How can long-term investors stay calm in the face of global events today?

There have been many geopolitical crises over the past two decades that have been intertwined with business cycles. These include: the attacks on September 11, the war in Iraq, Russia’s annexation of Crimea in 2014, on-going concerns over the nuclear capabilities of North Korea and Iran, the rising global influence of China, its crackdowns in Hong Kong, refugees in the Mediterranean, and many more. While each of these episodes is impactful in its own right – especially when there are humanitarian consequences – this does not mean there are always implications for long-term portfolios.


In the long run, markets have risen through periods of uncertainty

KEY TAKEAWAYS:

1. Despite recessions, political uncertainty and global wars, the stock market has generated strong returns over the past century.
2. Investors with long time horizons can benefit from a growing economy despite short-term crises..

This is because while markets may react to a variety of short-term news on a daily and weekly basis, what drives portfolios over years and decades is quite different. Over longer periods of time, slow and steady economic growth, corporate performance, and valuations matter much more. This was true during the conflicts in the decades following World War II and during the Cold War, when there were several long bull market expansions.

Of course, markets depend on global stability, the rule of law across regions, and business/consumer confidence. However, history shows that it’s a mistake to make dramatic shifts in portfolios in response to regional crises. Properly diversified portfolios, especially those built around long-term financial plans by a trusted advisor, are designed to handle these periods of uncertainty. After all, markets can fluctuate wildly at any moment, whether it’s due to geopolitics, economic shocks, or as we’ve learned the past 18 months, pandemics.


Global markets also perform well over time, despite ups and downs

KEY TAKEAWAY:

1. Although each region behaves differently, investors have done well across global stock markets over the past two decades.
2. Emerging markets in particular are especially volatile. Still, they have been an important component of diversified portfolios for years.

Recent events in Afghanistan, while troubling and still evolving, will most likely be no different. The Afghan government has been losing its tenuous hold on the hundreds of districts across the country over the past three months. U.S. and NATO troops have been scheduled to be withdrawn for some time now, especially after a so-called peace agreement between the U.S. and Taliban was signed last year. Clearly, mistakes and miscalculations have been made which are more frustrating given the U.S.’s involvement in the conflict for two decades. And while these issues will be debated by pundits for months to come, investors ought to avoid passing judgment with their portfolios.


There are many global opportunities today

KEY TAKEAWAY:

1. Many regions are still catching up to the strong U.S. recovery of the past year and a half.
2. Valuations are still attractive in emerging and developed markets, and uncertainty from geopolitical conflicts may create opportunities for long-term investors.

Ultimately, investors must consider these events in a broader economic and market context. Despite the strong bull market, there are still many investment opportunities across regions as valuations recover and earnings grow. A major challenge for long-term investors is to always keep a level head. History shows that doing so is often rewarded and improves the odds of achieving 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)

3:00

Portfolio Manager Insights | Weekly Investor Commentary – 8.11.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 8.11.21
Investment Committee

Anyone with a driving commute knows to expect unforeseen events such as traffic, construction and detours. Even when the destination is certain and you arrive on-time, it’s never clear what may happen along the way. Similarly, most investors know that while markets and the economy tend to rise over long periods of time, they can fluctuate wildly over days, weeks and months. New data and events cause them to zig and zag as they adjust, usually without notice.

However, the sharp economic recovery has defied this rule with the S&P 500 gaining 18% year-to-date and the economy growing at the fastest pace in history. This sudden rebound may create unrealistic expectations as the business cycle reaches a steady expansion, even if markets rise for years to come. How can long-term investors maintain perspective over the coming years?


75% of the jobs lost during the pandemic have been regained

KEY TAKEAWAYS:

1. The July jobs report showed that 943,000 jobs were added during the month, pushing the number of jobs recovered to 16.7 million.
2. About 75% of the jobs lost last year have been recovered.

It’s important to acknowledge how robust the recovery continues to be despite a variety of concerns. Last week’s strong payrolls report showed that the economy added 943,000 jobs in July and the unemployment rate fell to 5.4%. This is a significant decline from last April when the jobless rate hit 14.8%. With these gains, which are consistent with those seen over the past year, nearly 75% of the jobs lost during the pandemic have been recovered.

The fine print is that these data are based on surveys taken before rising delta variant concern. However, it’s still the case that there were over 10 million job openings across the country, eclipsing the 8.7 million people counted as unemployed (not including those who have dropped out of the labor force). This may be due to worker skills, geography, and expanded unemployment benefits.


There are many more job openings than unemployed

KEY TAKEAWAY:

1. There are many more job openings today than unemployed individuals. Over time, this gap could shrink as companies find qualified workers, individuals move to new cities for opportunities, and those who had given up re-enter the workforce.
2. Expanded unemployment benefits may also be playing a role in keeping jobs vacant.

Despite the strong data, some investor expectations have already been called into question. Interest rates, for instance, spiked during the first quarter of the year as many expected interest rates to rise steadily until the 10-year Treasury yield reached 2%. As is usually the case, this straight-line increase failed to materialize and interest rates fell throughout the second quarter. Since then, many rates have stabilized and have resumed rising again following positive economic news.

There are other areas in which investors expect sharp increases month-after-month and quarter-after-quarter, across GDP, inflation, corporate earnings, and market returns. Investors should expect economic data, including monthly payroll numbers, to decelerate over time. Not only is this natural during this phase of the business cycle, but many investor and economist expectations may be too lofty after a string of historic numbers.


Interest rates have stabilized and have begun to rise again

KEY TAKEAWAY:

1. Interest rates, which declined throughout the second quarter, stabilized after last week’s jobs report.
2. It’s possible that rates continue to rise over the coming quarters as we enter the later stages of the recovery and the Fed discusses tighter monetary policy.

Similarly, it’s unrealistic to expect market prices to accelerate indefinitely. Markets have been exceptionally calm this year, despite a variety of concerns and the feeling of uncertainty. Investors should always be prepared for volatility, especially when few are anticipating it.

To be clear, this doesn’t mean that investors should be fearful of the market – far from it. Instead, they should continue to hold balanced portfolios that can help steer them through all phases of the cycle. In doing so, investors can increase the likelihood of reaching their destination without worrying about the bumps along the way. While investors should be grateful for the strong economic recovery, they should also maintain reasonable expectations while staying properly diversified.

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)(2021)

3:00

Portfolio Manager Insights | Weekly Investor Commentary – 8.4.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 8.4.21
Investment Committee

The economy has officially surpassed pre-pandemic levels after the sharpest recession and recovery in history. That this took place in less than a year and a half is not only remarkable but has also created opportunities for investors. Unfortunately, this same swiftness also left some investors unprepared as markets recovered last year and scratching their heads as markets reach new all-time highs this year. More than ever, it’s important that long-term investors focus on the entire business cycle as they manage their portfolios.

It is natural that, in normal times, investors tend to base their expectations on smooth patterns. This is especially important because forecasts often are projected from what has recently occurred or are based on historical examples. It’s in this way that the unprecedented nature of the pandemic and recovery have been challenging, such as when anticipating the direction of interest rates and inflation. This is especially true for those who based their expectations on the 2008 financial crisis which involved a long decline followed by a slow multi-year recovery.


The economy has exceeded pre-pandemic levels

KEY TAKEAWAYS:

1. The economy surpassed its early-2020 level after growing 6.5% in the second quarter.
2. It’s expected that growth rates will decelerate over the next several quarters and the initial economic reopening and government stimulus fade.

Instead, last week’s GDP report showed that the economy grew at an annualized pace of 6.5% in the second quarter, pushing the economy above its pre-2020 level. This is the fourth fastest quarterly growth rate since 2000 and is more than three times faster than the 2.1% average over the past two decades. This surge in growth should not be surprising as the economy reopens from the economic lockdown. This is because the recession was caused by a pause in economic output – not the destruction of productivity that would be expected during a financial crisis, an asset bubble, misallocation of resources, or even a geopolitical crisis. 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 even thrived during the pandemic.

Because of this, the National Bureau of Economic Research – the official arbiter of business cycle dates – has determined that the COVID-19 recession lasted only two months between February and April 2020, the shortest on record. This means that the current expansion is now nearly a year and a half old which, in hindsight, validates the market’s immediate recovery.


Growth has been robust since the recession

KEY TAKEAWAY:

1. The second quarter’s performance follows growth rates of 33.8%, 4.5% and 6.3% – all spectacular numbers as the economy has reopened. The NBER has determined that the recession only lasted two months which is officially the shortest on record.

The question facing investors today is what to expect as the economy transitions from initial recovery to sustained expansion. As this shift occurs and the cycle resembles a more traditional one, it’s possible that historical patterns may become more relevant. This would suggest that, while the business cycle is still young, the pace will certainly decelerate. After all, the economic reopening and COVID-19 stimulus are one-time events which should fade over the coming quarters and in 2022. However, this doesn’t mean that growth cannot remain strong, especially if business and consumer spending keep pace.

Of course, the economy and markets are not the same thing. Instead, they are related since robust economic growth, even if not at the pace of 6.5%, can drive corporate sales and profitability. Over longer timeframes, this can support market returns and bring valuations down to more reasonable levels. This can happen across sectors and asset classes which benefits diversified portfolios.


Slow and steady growth can support markets

KEY TAKEAWAY:

1. History shows that recessions and market crashes are short while economic and bull market expansions are long. While bear markets can be scary, focusing on the right timeframe is important.

Thus, investors ought to stay balanced as the economy enters a new phase and hold portfolios built around all phases of the business cycle. While the rapid pace of the past 18 months may decelerate, even slow and steady growth can be enough to support long-term financial goals. Investors ought to stay invested across the full business cycle despite slower growth.

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)

3:00

Portfolio Manager Insights | Weekly Investor Commentary – 7.28.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 7.28.21
Investment Committee

As the economy shifts from recovery to expansion, one challenge for investors continues to be the high level of valuations. In the long run, valuations are investors’ best North Star since they don’t just tell us how much something costs, but also what we get for our money. They are correlated with portfolio returns for this reason – i.e., buying when the market is cheap improves the odds of success, and vice versa. After a spectacular recovery, what can investors expect in the years to come?

The most important thing for investors to remember is that valuations are a much better indicator of whether investments are attractive than prices alone. Prices can rise over long periods of time, just as they have for the U.S. stock market over the past century, despite bear markets and short-term corrections. Comparing prices today to previous peaks and troughs doesn’t consider differences between these time periods. Valuations, on the other hand, “normalize” prices by some important measure such as sales, earnings or cash flow. This adjustment makes prices more comparable over time to determine whether an asset class, sector or individual investment is attractive.


Long-run valuations are near historic peaks

KEY TAKEAWAYS:

1. Measures such as the Shiller P/E ratio, which uses ten years of inflation-adjusted earnings in the denominator, are near historic levels. This and similar valuation measures are correlated with long-run portfolio returns.
2. However, it’s possible for these measures to improve (i.e. decline) as earnings and other fundamentals catch up to prices.

Today, various measures of value are at or near all-time highs not just for publicly traded stocks, but across a variety of asset classes. This is because the bull market has boosted prices faster than fundamentals over the past year. The closely watched price-to-earnings ratio using next-twelve-month earnings estimates is hovering around 21.6x, not far from the tech bubble peak of 24.5x. The Shiller P/E ratio, also known as the cyclically-adjusted P/E since it uses ten years of inflation-adjusted earnings, is also elevated at 38x.

This same pattern can be found across a wide variety of valuations measures, from price-to-sales to dividend yields. Across asset classes, especially public equities, there are very few areas that are “cheap” in absolute terms today.


This is true across measures as fundamentals improve

KEY TAKEAWAY:

1. There are few valuation measures that are cheap across publicly traded stocks and other asset classes. Many measures are near historic levels going back to the early 2000’s.

While investors should be aware of these facts and may find it prudent to make some portfolio adjustments, there are a few reasons investors shouldn’t completely overhaul their plans. First, while valuations are helpful tools for evaluating the attractiveness of investments, they do not predict market behavior in the short run. Markets can continue to rise or fall regardless of valuations for long periods of time, especially during the earlier stages of a bull market when the underlying trends are positive.

Second, why valuations are high matters. While prices have certainly risen, valuations such as P/Es are elevated because fundamentals are still catching up. As earnings accelerate, P/E’s can moderate to more reasonable levels. On their own, P/E ratios don’t tell us whether it’s prices that will fall or earnings that will rise. In reality, the latter is already occurring as companies and consumers spend more.


Diversified portfolios can benefit from more attractive regions and asset classes

KEY TAKEAWAY:

1. It’s important for investors to stay diversified in this environment since other regions and asset classes may provide more value than U.S. stocks alone.

Third, in an environment in which all asset classes are increasingly expensive and the value of cash is eroding due to inflation, staying diversified is still the best approach for long-term investors. Other asset classes including fixed income and international stocks can still help improve returns and lower portfolio volatility even if their valuations are also above average.

Where valuations go from here will be important for the direction of long run returns. However, investors should continue to stay invested and diversified as the cycle shifts from a recovery phase to an expansionary one. As portfolios benefit from the ongoing bull market, it’s also important for investors to stay invested and diversified to manage elevated valuations.

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, an SEC Registered Investment Adviser.

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Portfolio Manager Insights | Weekly Investor Commentary – 7.14.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 7.14.21
Investment Committee

The housing market continues to heat up alongside the post-pandemic boom. The limited supply of homes, historically low interest rates, rising financial asset prices and other factors have created a sense of urgency among many to buy new homes and list their existing ones. As the market further eclipses pre-2008 levels, how does this affect investors?

The housing market is both an income-generating asset class as well as a macro-economic indicator. Housing prices at all-time highs can bolster financial confidence and spur consumer spending in other areas, a fact often referred to as the “wealth effect.” That this is occurring while all financial assets are rising should not be a surprise, since the housing market is highly correlated with the stock market and other liquid sources of wealth.


Housing prices continue to break records

KEY TAKEAWAYS:

1. Housing prices, as measured by broad indices such as the Case-Shiller index, continue to reach new all-time highs.
2. This should be no surprise as financial liquidity searches for income-generating and inflation-protected returns. However, rising home prices can also feed back into financial markets due to the wealth effect.

The fact that interest rates have fallen in recent weeks may continue to support prices too, whether or not the market needs the support. The 30-year Treasury yield, which peaked at nearly 2.45% in March, is now under 2%. The average 30-year fixed rate mortgage is still below 3% as a result. While both rates are well above their 2020 levels, they are still extremely low by historical standards. The Fed’s guidance that it may keep its policy rate at zero percent until 2023 only supports housing affordability further.


Homebuilding activity is attempting to keep up

KEY TAKEAWAY:

1. With a limited supply of available homes for purchase, housing starts and new building permits have jumped. Over time, supply and demand may reach a better balance.

The risk of inflation may also be bolstering the market. As a traditional inflation hedge, real estate investment prices have soared this year. The S&P 500 Real Estate sector has generated a total return of 28%, beating the overall market during the recovery and ongoing rotation in sector leadership. It is currently the second-best performing sector year-to-date behind energy.


Mortgage rates are still near historic lows

KEY TAKEAWAY:

1. Despite higher interest rates this year, mortgage rates are still near historic lows.
2. This increases the affordability of housing and can motivate buyers to jump into the market. The Fed’s guidance that it will seek to keep rates low until at least 2023 only fuels the market further.

Of course, where real estate and related stock prices go from here will depend on several factors including the supply/demand of homes, interest rates, stock market valuations and more. To date, not all assets related to real estate have benefitted equally. Lumber prices for instance, jumped to historic highs earlier this year but have since plummeted. And while the market is still hot in most parts of the country, this could also cool a bit after this initial phase of the recovery.

As always, this is a key reason investors should stay diversified and take a holistic view of their portfolios. The housing market has been a positive sign for the economic recovery and has likely increased the wealth of many on paper. The housing market is running hot due to a variety of factors. While this is a positive sign for the recovery and economic expansion, investors should continue to stay diversified.

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)

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Portfolio Manager Insights | Weekly Investor Commentary – 7.7.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 7.7.21
Investment Committee

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 7.7.21
Investment Committee

As the earnings season for the second quarter begins, investors will be looking for new signs of growth in corporate revenues and profits. In countries like the U.S., the conversation continues to shift from recovery to expansion as the economic impact of the pandemic fades and inflation heats up. Whether the bull market can continue and lofty valuations can be justified will depend largely on whether the economy can find a new gear to sustainably grow. What can investors expect from company profits in the quarters ahead?

Current Wall Street estimates suggest that S&P 500 profits returned to pre-pandemic levels of $164 per share during the second quarter, mirroring the expected recovery in GDP across the broader economy. This is faster than expected and would represent a 38% growth rate in 2021 and 21% over the next twelve months. As recently as the beginning of the year, the market did not expect a full recovery until the fourth quarter. A full recovery during the second quarter means that the recession in earnings only lasted four full quarters, rather than nearly two years.


Corporate earnings have likely staged a full recovery ?

KEY TAKEAWAY:

1. U.S. large cap earnings are believed to have regained pre-pandemic levels during the second quarter. This is a significant milestone and, if true, means that the recovery took place two quarters faster than expected. Earnings are expected to grow at a rapid pace as the economy continues to expand.

This is especially important since the recovery, driven in no small part by pent-up demand, is most likely already incorporated into stock prices. The ongoing bull rally, which has generated double-digit percentage gains across major indices this year, has kept valuations such as the price-to-earnings ratio high even as earnings growth has accelerated. The economy may need to reach a new gear of organic growth in order to propel markets further. Growth expectations can become self-fulfilling prophecies if businesses invest to meet new demand and consumers spend because they feel more financially confident.

Of course, investors do not invest in the economy directly. Instead, when the economy grows, investors benefit as companies earn more which supports stock prices over time. Some sectors saw immediate earnings boosts one year ago due to the acceleration of digital transformation, the spending of stimulus checks, buying goods online, and more. This growth has broadened as commodity prices and interest rates have risen, benefiting sectors such as energy, materials, financials and more.


Many sectors are benefiting from economic growth

KEY TAKEAWAY:

1. While sector leadership was narrow at the start of the recovery, many parts of the market are now benefiting. This is especially true among sectors such as energy and financials which have outperformed this year.

This pattern of recovery is not unique to the U.S. but can be seen across major regions, albeit with a lag. Developed and emerging markets are expected to grow their earnings by 13% and 36%, respectively, over the next year. Whether this comes to fruition will depend on many factors that have already played out in the U.S. including boosts to company hiring, consumer spending and COVID-19 vaccinations. Despite delayed recoveries, these other regions are still more attractively valued than the U.S.


Other regions are catching up

KEY TAKEAWAY:

1. Although their recoveries still lag behind the U.S., other regions are catching up.
2. Developed market earnings, for instance, are expected to regain pre-pandemic levels over the next twelve months. This could help to support long run valuations and returns.

Ultimately, investors should continue to focus on earnings and valuations since, in the long run, they are what drive stock market returns. Although there are always uncertainties, history shows that those who can stay invested throughout the business cycle can improve their odds of financial success. Upcoming earnings reports will be followed closely for signs of continued growth. Long-term investors ought to stay diversified across sectors and regions as the market shifts from recovery to expansion.

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, an SEC Registered Investment Adviser.

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Portfolio Manager Insights | Weekly Investor Commentary – 6.30.21

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PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 6.30.21
Investment Committee

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 6.30.21
Investment Committee

2021 has been a historic year for the economy and stock market. Economic activity is recovering at a once-in-a-lifetime pace as businesses expand and consumers spend. Financial markets are grinding higher with many major indices generating double-digit returns year-to-date, despite shifts in sector leadership. Inflation, which has been subdued for decades, is heating up. The pandemic rages on in parts of the world but signs of recovery are spreading too. What can long-term investors learn from the past several months as they prepare for the second half of the year?

If the best guidance for long-term investors last year was to focus on the light at the end of the tunnel, today the economy has already cleared the tunnel. In fact, it is likely that, in the second quarter, U.S. GDP broke through previous peaks reached in 2019. Many economic indicators, from manufacturing PMIs to retail spending, are at levels not seen in a generation.


Has the economy fully recovered?

KEY TAKEAWAYS:

1. The U.S. economy, measured by GDP, had already recovered to within 1% of its pre-pandemic peak at the end of the first quarter.
2. All signs point to an economy that achieved new highs in the second. From industrial production to retail sales, nearly all gauges of economic activity show signs of strong growth.
3. Of course, this is expected during the early stages of a recovery and reasonable investors should expect the pace to slow somewhat.

This is even more true of the stock market which has been anticipating a full recovery since last year. S&P 500 earnings-per-share have returned to pre-pandemic peaks and are expected to grow at a breakneck pace over the next year. While valuations have been stretched to almost dot-com era levels, growing earnings could continue to keep the bull market healthy. Rising interest rates and commodity prices, while tricky for bonds and inflation, have helped a variety of sectors including financials, energy, and materials. This adds to gains (and volatility) in areas such as technology and communication services.


Are stocks still attractive?

KEY TAKEAWAYS:

1. The economic recovery has directly translated into a recovery in corporate profits. S&P 500 earnings-per-share are also back to pre-pandemic levels which helps to make valuations levels more attractive.
2. Like GDP, consensus estimates are for earnings to grow at a healthy pace over the next 12-24 months.

While the comparison to pre-pandemic levels is natural, the market is already looking further down the road. Consensus expectations are that the economy will hit a new gear as the cycle continues. The pent-up demand in spending on both goods and services could be met by a further ramp up in new hiring activity by businesses large and small. Today, there are as many job openings in the U.S. as there are unemployed individuals.


Will inflation overheat?

KEY TAKEAWAY:

1. One red flag has been rising inflation which is often a sign of an overheating economy. The fact that price pressures have generally been subdued since the early 1980s has made it all the more important for investors to understand the risks to their portfolios.

One of the biggest investor concerns could continue to be inflation as new data periodically emerges. By some measures such as the core consumer price index, inflation is already the highest in three decades. And while price increases for consumers this year have been driven by the recovery and supply/demand disruptions, the Fed continues to keep monetary policy loose. What is more, the government continues to increase spending, adding to the over $5 trillion in pandemic relief with new economic and infrastructure bills.


How big is the government deficit?

KEY TAKEAWAY:

1. Government emergency spending over the past 18 months pushed the federal deficit to levels not seen since the Great Depression. However, this is typically what happens during economic crises and times of war.
2. As the economy recovers and emergency stimulus is no longer needed, the deficit should improve as a percentage of GDP. While many investors would prefer that the government run balanced budgets or generate surpluses for a rainy day, this seems unlikely.

Naturally, it is these concerns and others that will occupy investors’ minds during the next phase of the business cycle. While the recession and recovery have been unusual by historical standards, there are reasons to believe that diversified portfolios can do well, even with the uncertainty of inflation and rising interest rates. While the first half of the year was historic by many measures, investors should stay balanced and diversified as we enter the next phase of the business cycle.


Will the Fed end the party?

KEY TAKEAWAY:

1. With the economy fully recovered and inflation rising, many are expecting the Fed to begin “tapering” its balance sheet expansion and then raise rates. The Fed’s latest projections show that they expect rates to begin rising in 2023 – at least a year and a half away.
2. Of course, this could begin sooner if the data heat up more. Even when the Fed does begin to slow its bond purchases, it will likely do so gradually. All told, the Fed will probably be cautious and keep monetary policy loose for quite some time.

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)

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