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The market’s moving: Keeping up with China, Washington and COVID

Global stocks started the week with the worst daily performance since May as investors digested the news over the weekend about the troubled Chinese property market. China Evergrande Group, the world’s most indebted property developer, is at risk of default this week on its debt payments. The potential long-term fallout from Evergrande’s liquidity crisis is unknown — as is any potential spillover to other financial markets. We also do not know how the Chinese government may act to bail out the real estate behemoth. Monday’s sell-off briefly pushed the S&P 500 to 5% below its last record on an intraday basis for the first time since October 2020 (see chart below).

Chart showing stock market performance since July 2020

Several other factors also are affecting the current market environment, and we will address each of them below:

1. Angst in Washington over the upcoming expiration of the borrowing limit (debt ceiling) and a potential government shutdown

2. New proposed tax increases

3. Lingering inflationary worries and when the Fed’s tapering may start

4. The effect of the Delta variant on the economy

Angst in Washington

If Congress fails to raise the borrowing limit, the U.S. government would default for the first time. “The U.S. has never defaulted. Not once,” Treasury Secretary Janet Yellen said. “Doing so would likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency.” The deadline to avoid both a government shutdown and the debt ceiling issue is a moving target. Raising or suspending the debt ceiling does not authorize additional spending, but it increases the spending limit, similar to a credit card.

Proposed Tax Increases

As we wrote about last week, the House Ways & Means committee proposed tax increases on the wealthy to help fund a $3.5 trillion economic package. Remember, these are just proposed tax increases and not law. The main tax increases in the proposal are:

* Raise the top individual tax rate from 37% to 39.6%.

* Apply a 3% surtax on incomes greater than $5 million.

* Raise the long-term capital gains tax rate to 25% for couples making more than $450,000.

Chart showing details of tax rate pproposals

Inflation

Inflation remains on the forefront of consumers’ minds as prices of many goods and services continue to rise due to lack of inventory and empty shelves caused by shipping delay and costs out of China. The Federal Reserve Chairman, Jerome Powell, has stated on numerous occasions that the Fed believes inflation to be transitory – meaning temporary. His reasoning is as follows:

* It’s not broad based. Inflation is concentrated in a few sectors that were hit hardest by the pandemic.

* The biggest price surges already are receding. Lumber and used car prices are now stabilizing or dropping after rocketing higher.

* Wages are rising, but not faster than productivity gains.

* Globally, price pressures are downward with an aging population and advancements in technology.

The Federal Reserve concludes its two-day meeting this week and the focus remains on when the Fed will begin to taper its purchases. As we wrote about recently, “tapering” is a term that describes the process of gradually stopping asset purchases. When the Fed begins to taper, it purchases fewer bonds, which reduces additional money flowing into the economy, in hopes of slowing economic growth. All of this is done with the focus on controlling inflation and the economy. The Federal Reserve Bank tries to signal its intentions and be transparent with the hope that the impact to the financial markets is minimized.

COVID

Due to the Delta variant, COVID cases remain near January levels. As colder weather approaches and flu season ramps up, the fear is that COVID variants could continue to slow economic growth. Future GDP forecast is expected to decline from recent highs — but it’s not expected to be derailed by COVID.

So, what can we learn from all this? The current stock market continues to digest a multitude of economic messages: a potential default by China Evergrande group, inflationary pressures, proposed tax hikes, the Federal Reserve’s plans to start tapering and increase rates, and the ongoing global pandemic. It is important to focus on the long-term goal — and not to focus on only one data point or indicator.

From a portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: CNBC, Reuters, Schwab, BEA Conference Board

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This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with CD Wealth Management. Investor Disclosures: https://bit.ly/KF-Disclosures

There’s a semiconductor shortage, and it affects everything

Semiconductors are critical to all sectors of the market, and they’ve been in short supply around the world this year because of pandemic-related factory closures and limited manufacturing, increased demand for electronics and the U.S.-China trade war. Chips aren’t just used for video games; the chart below shows the broad reliance on semiconductors across all industries. Semiconductor chips are in cars, medical devices, smartphones, datacenters, utilities, airplanes and even devices such as toothbrushes and washing machines. Without semiconductor chips, most businesses’ operations would cease to exist.

Chart showing how semiconductors are used in different sectors

As companies continue to report second-quarter earnings, a common theme in their reports is very strong semiconductor orders, coupled with low inventories, leading to longer lead times and above-average pricing. As we have written before, this is Supply and Demand 101: Strong demand and low supply lead to higher prices. Businesses look to pass these higher costs to consumers in an effort to protect their profits. However, when raising prices on their input costs, they risk undermining demand for their product, thus lowering profits and prices in the long run.

This gap between supply and demand in semiconductor chips is expected to continue widening. It takes time to add supply; a company cannot just build a new semiconductor manufacturing plant overnight. Manufacturing a chip typically takes more than three months, requiring very clean facilities, large factories — and tens of billions of dollars. Existing chip plants already run 24 hours a day, seven days a week. Manufacturers of semiconductors have expressed confidence in their ability to grow capacity, but any such expansion will be incremental and probably will not close the demand gap for one to two years.

Earnings growth remains robust today, with more than 70% of companies in the S&P 500 having already reported second-quarter earnings. Earnings growth is nearly 85% higher than the prior year. Supply chain disruptions, caused by semiconductor shortages, rising input costs and wages may have an impact on profit margins and slower future earnings growth. Equity markets look forward, anticipating what may happen in the future, and semiconductor supply and demand will have an impact on earnings — and therefore, the market — for the near future.

So, what can we learn from all this? We believe investors should not overreact to market headlines by making sudden and significant changes to portfolios. We continue to closely watch economic data and monitor the COVID variant’s effect on the global economy and Federal Reserve policy, as well as China and its increased regulations and restrictions.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and in having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: JP Morgan, CNBC, Bloomberg

Promo for recent article titled How Much Should Investors Worry About Inflation

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

How much should investors worry about inflation?

The S&P 500 recovered quickly last week from the brief pullback on Monday, as the spread of the Delta variant, higher inflation and concerns over China’s growth and policy scared the market. It has now been more than 179 trading days since the last 5% drawdown in the S&P 500. This stretch is almost twice the length of the historical average of 94 days between 5% pullbacks in the market, and it now ranks as the 15th-longest period without a 5% decline in the last century. The longest on record was 404 days, ending in February 2018, as seen in the chart below.

Chart showing time lapsed between 5% drawdowns in the S&P 500

Investors worry that inflation will lead to a market correction, especially after June’s surprise of 5.4% year-over-year inflation. However, if one looks at the underlying causes of the recent run up in inflation, it continues to be driven by a few smaller categories. As seen in the chart below, most of the recent jumps in inflation were due to price increases on new and used autos, car rentals, hotel stays and airfare. Increased prices for car rentals, hotel stays and airfare are in response to the surge in demand for travel after a year of restrictions due to the pandemic. The largest increase was in used cars, which grew at 10.5% over the month, and many economists think that wholesale used car prices have already peaked. Hotel prices are almost above pre-COVID levels. For inflation to remain elevated, however, more widespread price increases will need to factor into Consumer Price Index (CPI) increases. Healthcare and housing are the largest weighted categories within CPI. Healthcare prices were flat month over month, and homeowner rents showed no acceleration in May.

Inflation is not an event; it is a process that has many steps and takes time to unfold. Imbalances in the U.S. economy remain from the global pandemic, leading to significant short-term inflationary pressures. Supply and demand for labor is a perfect example of this imbalance. Demand for labor is strong while supply is limited, thanks in part to early retirement, healthcare concerns and family considerations, along with unemployment insurance payments. This mismatch is creating upward wage pressure. The Federal Reserve does not believe that we are facing a serious threat of long-term inflation, but we are experiencing a temporary period as the economy processes some short-term supply and demand imbalances, such as wage increases.

So, what can we learn from all this? We believe that investors should not overreact to the potential rise in inflation by making sudden and significant changes to portfolios. We continue to closely watch economic reports such as Consumer Price Index (CPI), unemployment and GDP growth. We also continue to monitor the COVID variant’s effect on the global economy and Federal Reserve policy, as well as China and its increased regulations and restrictions.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Goldman Sachs, WSJ, Blackrock, Guggenheim

The Recessions is Long Gone, but the Recovery Continues

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The recession is gone, but the recovery continues

The COVID-19 recession is officially the shortest and one of the deepest recessions on record. February and March of 2020 saw a staggering 31.4% drop in gross domestic product (GDP), followed by a massive snapback of 33.4%. GDP is widely considered the most common indicator used to track the health of an economy. It represents the total dollar value of all goods and services produced by an economy over a specific period. Economists use GDP as one of many factors to determine whether an economy is growing or receding.

The chart below, updated to reflect the most recent recession of 2020, ranks all the U.S. recessions dating back to 1945. The average recession lasts just over 10 months, but on average, the ensuing expansion typically lasts many months longer. We are still in the expansion phase of the economy as we continue to recover from the global pandemic.

Chart showing the length of recessions and recoveries since 1945

Monday’s market selloff is a reminder of the importance of staying the course and not making drastic moves when the market has a large down day. As we wrote last week, the Delta variant has caused COVID-19 cases to jump dramatically in the U.S., primarily affecting unvaccinated people. Investors sold stocks, worried that the variant would lead to further restrictions in the global economy. As we discuss every week, it is of paramount importance to remain focused on the long term and not to panic or sell into a day like Monday. The chart below shows the importance of staying invested and not trying to time the market. Missing just the 10 best days in the market could severely hurt one’s overall portfolio over the long run.

Chart showing the opportunity cost of missing the market's 10 best days

There may be some instances of additional restrictions being reimplemented, but overall, economic restrictions will continue to be lifted, and we should soon see a return to a new, post-pandemic normal. We already are seeing a resurgence for restaurants, airline travel and other service-oriented parts of the economy.

The Federal Reserve continues to watch inflation closely — especially after last week’s CPI report showing that inflation has grown at 5.4% year over year, as shown in the above chart. The response by the Federal Reserve has been that the spike in inflation is temporary and remains a supply-and-demand issue that will abate slowly as the world economy continues to reopen. When prices surge, buyers may pull back their level of purchases, which in turn could cause prices to fall. (This is evident in the recent tumble of lumber prices.) Also, several disinflationary forces are at work, such as increased productivity of the American workforce, globalization of goods and services and an aging population retiring from the workforce. Even with inflation reaching its highest levels since 2008-2009, the Fed remains stalwart in its stance of transitory inflation, and the bond market seems to agree, as we have seen the longer-term Treasury bonds give up much of the gains from earlier in the year.

So, what can we learn from all this? We continue to watch economic reports such as Consumer Price Index (CPI), unemployment and GDP growth closely. We also continue to monitor the COVID variant’s effect on the global economy and Federal Reserve policy, as well as on China and its increased regulations and restrictions. Strong market fundamentals remain intact as the economy continues to reopen. Market volatility has increased over the last week, as we thought may happen nearing the end of summer and heading into the fall.

From a portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and in having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: NBER, Seeking Alpha, CNBC, Horizon Investments

Promo for recent article on the COVID Delta variant and its impact on the recession

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

How will the Delta variant affect your portfolio?

In our client letter last week, we wrote that one of the factors to watch in the second half of the year is the effect of COVID variants. Late last week, the Olympics announced it was banning fan attendance after Tokyo declared its fourth state of emergency. While Japan still has not reached the level of having 50% of its population vaccinated, it is encouraging that many major countries (including China) are beyond that threshold. We may see additional restrictions and lockdowns in other parts of the world with the continuing transmission of the Delta variant. For example, Israel has delayed reopening its borders, and Europe has tightened curbs on U.K. visitors.

The Delta variant, first identified in India, already is a dominant factor in the U.K. and is growing in many other countries. The World Health Organization said the variant has been detected in more than 96 countries, and the U.S. Centers for Disease Control and Prevention said it accounts for 20% of all cases. The pickup in variant cases has renewed some investor concerns about global growth, but high vaccine efficacy and faster-than-expected vaccine rollout should help offset the variant’s economic impact.

Despite recent concerns about the Delta variant and the potential reduction of fiscal and monetary stimulus, stocks have continued to climb to all-time highs. The S&P 500 and Dow Jones Index have gone almost eight months without a pullback of more than 5%. Earlier this year, the NASDAQ had a brief correction of more than 10%, but it recovered quickly and now is trading at an all-time high as well.

The chart above highlights that during past bull markets dating back to 1946, the second year of the bull market’s run — which we are now in — has seen various degrees of market pullbacks. If the S&P 500 has a pullback and/or a correction — whether in 2021 or 2022 — we will continue to stay the course and make necessary adjustments to the portfolios.

So, what can we learn from all this? We are closely watching economic reports such as Consumer Price Index (CPI) and employment data. We also are monitoring the COVID variants’ effect on the global economy and Federal Reserve policy, as well as its effect on China and its increased regulations and restrictions. Strong market fundamentals remain intact as the economy continues to reopen. Market volatility remains at a low level and may pick up as we near the end of the summer, headed into the fall.

From a portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time and downturns present opportunities to purchase stocks at a lower value.

Sources: MarketWatch, Goldman Sachs, Charles Schwab

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

5 factors that will shape our economy in the next 6 months

It is hard to believe we are already more than halfway through 2021. The U.S. equity markets had a strong start to the year — in fact, if the year ended today, the return on the S&P 500 would be higher than the return for seven of the last 10 years.

Fixed income (bonds) has remained negative for this year as longer-term interest rates, such as the 10- and 30-year Treasury bonds, have increased since January. (As interest rates move up, bond prices fall, and vice versa.) In June, we saw a strong reversal in the fixed-income market, and bonds performed well as the 10-year Treasury rates continued their decline.

For the second half of the year, we are closely watching the following major themes:

Inflation and Employment: The bond market recently has been acting as if the inflation threat is already over. We have seen prices of lumber fall back to Earth, while oil prices are near $75 per barrel. Last Friday’s job report showed a 3.6% year-over-year hike in hourly earnings. The labor market showed strength in June, adding 850,000 jobs, and the U.S. economy added 3.3 million jobs in the first half of the year. Meanwhile, the unemployment rate rose to 5.9%, up from 5.8% in June. The good news is that the economic recovery continues, and growth is strong. There is a broad expectation that labor supply will return in the fall as kids go back to school and unemployment benefits cease in most states.

Chart showing payroll employment figures since January 2019; the number is at its high point since a large drop in early 2020

The Federal Reserve Bank: All eyes remain on the Federal Reserve Bank and what it will do with interest rates in the next few years. The inevitable question: When will the Fed begin the tapering of asset purchases? Tapering is the reduction of the rate at which the Federal Reserve or bank accumulates new assets on its balance sheet. When the Fed is purchasing large amounts of bonds and other securities, it is increasing liquidity in the financial markets to maintain stability and promote economic growth. As the Fed begins to taper, it is reducing the pace of its purchase of Treasury bonds, which in turns reduces the amount of money it feeds into the economy. Bond yields rise in reaction to the Fed’s tapering. The common assumption is that the Fed will prepare the markets for tapering by the end of the year.

Uncertainty in Washington: A bipartisan group of Senators has agreed to a $1.2 billion infrastructure bill, and the president has announced support for it. However, the devil will be in the details; if the bill passes, there is no agreement in place on how to pay for it. As we have written before, passing tax reform to pay for the infrastructure bill will be difficult, given the current makeup of Congress.

COVID variants: Concerns over the current Delta variant and rising Gamma variant may give some people pause about returning to work. The economy is booming in the U.S. as progress has been made with regards to vaccinations. In parts of the world where vaccinations lag, economies have not reopened to the same extent as in America.

China: China appears to be cracking down on technology companies and bitcoin mining, as we recently discussed. Newly proposed rules seek to restrict Chinese companies from trading on the U.S. stock exchanges. China wants to restrict foreign governments, such as the U.S., from having access to the data of Chinese companies trading on our exchanges. These attempts to restrict business, break up large technology companies and remove bitcoin mining from mainland China could slow down China’s economic growth.

The biggest second-half theme for the markets remains the health of the overall economy. As long as interest rates stay low, additional stimulus from the Fed continues and more people return to work, the economy will continue to expand. The Fed will have its hands full making sure that the economy remains strong (but not too strong) and the recovery continues both here and abroad.

So, what can we learn from all this? Economic reports for the second half of the year will be closely watched — inflation, wages, commodity prices and employment data, to name a few. How the Federal Reserve Bank reacts may affect how long our economy continues this unprecedented recovery.

Sources: FS Investments, Bureau of Labor Statistics, CNBC

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Reasons for optimism as prices, bond yields rise

As we move closer to summertime, the pace of economic growth remains robust. Much of the strength of the U.S. economy can be attributed to the fiscal aid that has been injected through several rounds of stimulus. The recent boom in spending has stirred up fears of economic overheating and of potential longer-term inflation.

While prices generally have increased, metrics like the Consumer Price Index (CPI) are measured relative to the prior year, and a year ago was when the economy was broadly shut down. As seen in the chart below, the stock market (viewed by the S&P 500) reacts favorably as inflation expectations rise. In the past, sustained inflationary pressure has come from a severe tightening in the labor market. We are nowhere near a labor market crunch, as there are still millions of jobs that have not been recovered from the pandemic.

Europe’s economy finally is turning the corner, leaving its double-dip recession behind. Lockdowns, slow vaccine rollouts and delayed fiscal stimulus have hindered its recovery, but Europe is at an inflection point, and the rollout of its largest-ever stimulus plan should aid economic growth. First-quarter earnings in Europe outpaced those in the U.S. for the first time in years, another positive signal for European markets.

*EM = Emerging Markets; EPS = Earnings per Share*

The global recovery should pick up in the second half of the year as widespread vaccinations allow more economies to reopen. The demand for U.S. Treasury bonds has helped keep a lid on rising Treasury yields, which are higher than those in Japan and Europe. If global growth picks up as expected in the second half of the year, bond yields in other countries may move higher, along with U.S bond yields.

So, what can we learn from all this? Higher bond yields and inflationary pressures are not a reason to panic. Over the last 20 years, the S&P 500 has produced an average annual return of close to 6%. Optimism in the stock market remains elevated, even with the recent sell-off in the market and increased inflation concerns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, not making investment decisions based on where we have been. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. We believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Bloomberg, Schwab, CNBC

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Should you invest when the market is at an all-time high?

The S&P 500 has had an impressive rally since the lows of March 2020, and it already has had 27 new highs this year, outpacing the average number of all-time highs reached per year since 1988. That does not mean that the market will go up in a straight line, and it is reasonable to expect choppiness going forward because of several factors we have recently discussed: equity valuations, new COVID-19 strains and concerns over inflation.

As the market continues to hit new highs, it is likely that it also will experience a pullback. However, history suggests that now may be as good as any time to put cash to work in the market for the long run. As shown in the chart below, if you invested in the S&P 500 on any random day since the start of 1988, your one-year total return was 11.9% on average. If you invested only on days when the S&P 500 closed at all-time highs, your average one-year total return was 14.3%. The three- and five-year returns show similar results: Investing on all-time high days led to strong returns.

As we write about each week, we cannot time the market. The market fundamentals stay supportive for economic expansion, and monetary policy should remain accommodative for the next couple of years. President Biden’s first 100 days in office have seen the highest return of any president in more than 75 years, and the economy still is reopening, while almost 8 million Americans remain unemployed compared to pre-pandemic levels.

The balance in the Senate with a 50/50 split, along with a slim Democratic margin in the House, continues to provide a challenge for the White House to pass major tax legislation or policy changes. It’s possible that even if the administration changes the capital gains tax rate, some future Congress could change it back. There are several strategies investors can use to help reduce the impact from proposed tax law changes. We recommend taking a wait-and-see approach at this point, as it is unclear exactly what, if anything, the tax law would look like.

So, what can we learn from all this? Optimism in the stock market remains elevated. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, not making investment decisions based on where we have been. Making market decisions based on what might happen may be detrimental to long-term performance.

For those concerned about potential tax hikes, it is worth noting that the S&P 500 has performed well in years of previous increases. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

Given the difficulty of timing the market, the most realistic strategy for a majority of investors is to invest and stay invested over time. Procrastination, or not investing, is worse than bad timing. We continue to view more risk being out of the market than in the market. Riding out future market volatility, in addition to having a diversified portfolio, means staying the course. From an investment perspective, we use these trends to help with the strategic and tactical asset allocation and where we see the portfolio heading over the next 5-7 years with short-term adjustments along the way.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. With regards to investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Factset, JP Morgan

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Even with inflation, the global economy’s on a roll

We have now experienced the sharpest “V-shaped” economic recovery in history — a deep global recession and rapid recovery within five quarters. A combination of vaccine rollouts and worldwide fiscal stimulus led to global growth forecast of 6% for 2021, and the U.S. GDP forecast is anywhere between 6% and 8%, which would be the fastest pace of growth since 1983.

We continue to see reacceleration in the job market, as nonfarm payrolls for the month of March grew by 916,000 jobs, and they are being added in nearly every sector, which is a strong positive for the overall economy. The downside is that we are still nearly 8.5 million jobs behind pre-pandemic levels of employment.

Inflation remains the talk of the town (and all the news channels). The consumer price index (CPI) has surged, but given that it is measured year-over-year, we are now comparing the current strong gains to depressed prices and demand from this time last year.

Inflation is rising around the world, lifted by transitory factors and supply-chain bottlenecks. With delays in ports and limited access to supply, prices are bound to rise near term. However, as shortages begin to disappear and supply delivery times shorten, inflation is expected to ease and land within a comfortable zone for world economies.

We are now in earnings season on Wall Street. Last year, we saw a surge in stock prices while earnings plunged as large pockets of the economy were shuttered. The effect of this is a growing Price-to-Earnings multiple (P/E) of the S&P 500. At the end of last year, the P/E multiple hit 27, a valuation in line with the late 1990s. With the growth in earnings in the current and previous quarters, the P/E multiple for the S&P 500 is roughly 23, which remains above average. Regardless of whether the P/E is above or below average — cheap or expensive — it is important to know that valuation based on P/E multiples is not an effective market timing tool. Markets can become expensive and stay expensive for some time without a negative impact on stock prices, especially if momentum and positive investor sentiment, like we are seeing today, are the dominant drivers.

So, what can we learn from all this? The global economy is on a roll. With strong earnings growth, increasing labor force and vaccine rollouts, all signs point toward tremendous GDP growth. Nonetheless, risks remain in the global market. Having a diversified portfolio and a mix of equities provides discipline around risk mitigation. Markets go up and down over time. The key is to stay invested and stick with the financial plan. Market downturns present opportunities to purchase stocks that were previously viewed as overvalued. In a down market, you are “buying low,” one of the fundamental tenets of investing.

Given the difficulty of timing the market, the most realistic strategy for a majority of investors is to invest and stay invested over time. Procrastination, or not investing, is worse than bad timing. We continue to view more risk being out of the market than in the market. Riding out future market volatility, in addition to having a diversified portfolio, means staying the course. From an investment perspective, we use trends to help with the strategic and tactical asset allocation and where we see the portfolio heading over the next 5-7 years with short-term adjustments along the way.

Sources: Bloomberg, Federal Reserve Bank of St. Louis, Schwab

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Economic optimism — and the case for diversification

The economic outlook for the second quarter of 2021 is overwhelmingly optimistic. With stimulus checks, market performance, increasing numbers of vaccinations and even the improving weather, the optimism is real! Bolstered by an unprecedented third round of stimulus payments, consumers appear to be on a spending spree. As the economy continues to reopen around the globe, spending on goods and services is ramping up. The chart below illustrates an increase in consumer usage of credit cards at a physical location. While not quite back to pre-pandemic levels, consumers are using their credit cards at the point of sale at a rapidly rising pace.

Because stocks are a leading indicator of the economy, it typically is the case that economic data lags behind market performance. Market peaks have generally proceeded recessions, and market dips generally have preceded economic recoveries. The table below shows that in the post-WWII era, there has been only one exception to a bear market starting before a recession (2000-2002). In all other cases, the bear market started before the recession, and the bear market ended before the recession ended. It has been an extraordinary run for stocks since the short-lived COVID-19 bear market ended in March 2020.

Equity market fundamentals confirm current optimism in the market. The consensus projection for S&P 500 revenue this year is a 9% increase, and earnings per share is expected to increase by 21%. With the Federal Reserve planning to keep rates low and longer-term interest rates moving up, this has led to value stocks outperforming growth stocks to start the year. The large-cap tech stocks remain near August levels, but we are seeing a broadening out of the market leaders — another positive for the stock market. The periodic table below shows the different sectors of the S&P 500 and their monthly returns over the last year. This chart makes another case for the importance of diversification in equities.

So, what can we learn from all this? Picking the right sector or the right fund is challenging in any market — but having a diversified portfolio and mix of equities provides equity exposure in good times and bad. Markets go up and down over time. The key is to stay invested and stick with the financial plan. Market downturns present opportunities to purchase stocks that were previously viewed as overvalued. In a down market, you are “buying low,” one of the fundamental tenets of investing.

Given the difficulty of timing the market, the most realistic strategy for a majority of investors is to invest and stay invested over time. Procrastination, or not investing, is worse than bad timing. We continue to view more risk being out of the market than in the market. Riding out future market volatility, in addition to having a diversified portfolio, means staying the course. From an investment perspective, we use trends to help with the strategic and tactical asset allocation and where we see the portfolio heading over the next 5-7 years with short-term adjustments along the way.

Sources: JPMorgan, Bloomberg, Schwab

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.