Market Movement Archives | Page 17 of 21

What is a SPAC? A popular investment trend explained

Investors often get excited when they learn that a private company they’re following is planning an initial public offering, and last year’s IPO momentum carried over into 2021. Nasdaq saw 91 IPOs in January alone, and more than two-thirds were special-purpose acquisition companies (SPACs), one of Wall Street’s hottest trends.

What exactly is a SPAC — and how does it work? A SPAC is set up with no commercial operations of its own; it is formed only to raise capital for the purpose of acquiring an existing private company. SPACs have been around for decades, as seen in the chart below, but they have recently gained popularity as a medium for smaller, private companies to go public. Examples of companies recently going through a SPAC merger are DraftKings, Virgin Galactic, Opendoor and Nikola, to name a few.

SPACs make no products and do not sell anything. The only asset a SPAC has is the money it raises through an IPO. Institutional investors (or very wealthy investors) typically create SPACs, which often are referred to as “blank check companies” because when they raise money, investors do not know what the eventual acquisition target will be. By design, SPACs have a specific period of time — normally two years — to identify a suitable company to acquire.

SPACs are not allowed to prescreen investments or sign letters of intent prior to going public or raising monies. The money raised in the IPO is placed in an interest-bearing trust account, and funds cannot be dispersed except to complete an acquisition or to be returned to investors if the SPAC is liquidated because it could not close a deal quickly enough.

If a company agrees to be acquired by a SPAC, it will forgo the IPO process during the two-year open period. Investors, therefore, receive immediate liquidity and equity exposure via the SPAC. Assuming SPAC shareholders approve the merger, the SPAC’s name changes to the name of the acquired company when the purchase is complete.

What can go wrong with investing in a SPAC? Not every SPAC completes all the phases in the chart above within the two-year window. Target companies run the risk of having their acquisition rejected by SPAC shareholders. SPAC investors are putting money blindly into an investment vehicle, not knowing what company may be acquired with their investment. The due diligence process of the SPAC is not as thorough as that of the IPO process, and therefore, can be riskier.

There are no guarantees that SPAC returns will not fall short of the average post-market return. Most SPAC investors are not buying at the SPAC’s IPO price, usually $10 per share. Instead, they often buy shares on the open market, with a considerable premium added. If the SPAC is unable to close a merger, it returns $10 per share to the investor, possibly far less than what the investor paid.

So, what can we learn from all this? SPACs can be a good investment vehicle. However, investors need to understand the risks involved and the hidden danger of paying a premium price while not knowing what company they may end up acquiring. Investors should invest only as much as they are willing to lose, and if one does invest, it should be part of a well-diversified portfolio.

From an investment perspective, we use the above insights to help with the strategic and tactical asset allocation based on where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way. We are not trying to time the market, but we will try to take advantage when we see where the market is heading. Having a well-balanced, diversified, liquid portfolio and a financial plan are keys to successful investing. 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, Wealthmanagement.com, Credit Suisse

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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 MSCI Europe Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI AC (All Country) Asia ex Japan Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of Asia, excluding Japan. The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy.

S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. It is not possible to invest directly in an index.

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.

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A beginner’s guide to bitcoin

You may have seen recent headlines about bitcoin and other cryptocurrencies getting a boost. Just last week, Tesla said it had purchased $1.5 billion worth of bitcoin and would accept it as payment, and Mastercard said it would open up its network to support certain cryptocurrencies. On Tuesday, the price of bitcoin — the original and best-known cryptocurrency — rose above $50,000 for the first time.

Cryptocurrencies are digital assets that work as a medium of exchange. Ownership records for an individual token (or coin) are stored on an exchange, known as blockchain; this ledger is a shared computer database that reflects who owns these tokens — and in what amounts. There is no single person or organization in charge of the record, so any two people, anywhere in the world, can send bitcoin to each other without the involvement of a bank, government or other institution. Every transaction involving bitcoin is tracked on the blockchain (ledger), which is distributed across the entire network.

Cryptocurrency provides a global method of payment through a computer network, available any time of day or night, anywhere in the world. Fractions of bitcoins may be used as payment, and each transaction is tracked on the blockchain ledger, which is open for all bitcoin holders to see.

One of the allures of cryptocurrencies such as bitcoin is that these digital monies are said to be safe from manipulation or inflation. Bitcoins are produced through “mining,” a process in which very powerful computers solve complex math problems on the bitcoin network, verifying transaction information to ensure the payment network is trustworthy. About 18 million bitcoins have been mined so far, and the supply will be capped at 21 million. As the remaining 3 million bitcoins are mined, the process will move more slowly, and the last blocks may not be mined until 2140.

Of the approximately 18 million bitcoins in existence, an estimated 4 million may have already been lost forever and another 2 million may have been stolen — meaning one-third of the existing supply could be gone already. Some bitcoins have been lost when people lose or forget the encrypted passcode that accompanies the currency as part of the blockchain, which can prove to be a very painful mistake. In fact, one man in England accidentally threw out his hard drive that was loaded with bitcoin and offered to donate more than $70 million to his home city if the council would let him scour the landfill to find it.

There are several ways to invest in cryptocurrency, such as bitcoin. Two more common mediums are through either the Grayscale Bitcoin Trust exchange traded fund (GBTC) or an online exchange, such as Coinbase. Coinbase allows individuals to buy, sell, send and receive bitcoin. The publicly traded option, GBTC, trades at a premium to the actual price of bitcoin and has higher costs than using Coinbase. The price of bitcoin varies substantially on a daily basis and remains unpredictable as an asset class.

Bitcoin is a new kind of money because of its global nature and its constant availability — even on weekends, when banks are closed. Bitcoin transactions are private and secure, as the network has yet to be hacked. Bitcoin remains a relatively immature, volatile asset whose price fluctuates wildly from day to day.

So, what can we learn from all this? Cryptocurrencies like bitcoin are still in their infant stages, as they have only been around for a little more than 10 years. They are still a risky investment that may or not pay off. Investors should invest only as much as they are willing to lose, and if one does invest, it should be part of a well-diversified portfolio.

Sources: Blockgeeks.com, Coinbase, Motley Fool

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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.

Click Here for Additional Investor Disclosures

Unemployment down, markets up: What happens next?

The GameStop mania appears to be fading as quickly as it appeared, with shares down roughly 70% last week. As the chart below shows, the stocks that are the most heavily shorted (or bet against) have the worst performance over time — and stocks that are shorted the least have much better results. The reason this is true? Company fundamentals. The recent spike in the most heavily shorted stocks is an aberration, not a common occurrence.

*Quintile 1 represents the most heavily shorted stocks; Quintile 5 represents the least.*

The markets now are able to focus again on the positive macro-economic backdrop: liquidity in the economy, vaccines in arms and low interest rates. The S&P 500 and NASDAQ both hit record highs last week, as investors are focusing on what the future holds rather than where the economy is today. Speaking of the economy, the U.S. unemployment rate fell from 6.7% in December to a lower-than-expected 6.3% in January, the lowest level since the pandemic started. Some people found new jobs, while others left the workforce entirely. Gains were seen in professional and business services, as well as in government employment, while retail, leisure and hospitality jobs continue to suffer.

Treasury bond yields also rose last week, reaching levels not seen since March. If inflation remains in check, the Fed can keep monetary policy easy, which helps bonds and provides diversification from stocks. The services sector, the largest piece of the Consumer Price Index, continues to fall, contributing to the lower level of inflation — whereas commodity prices (especially oil) are seeing a resurgence in price as supplies are starting to decrease. This also affects the Manufacturing Prices Paid Index, which also is trading at nearly a 10-year high, as higher commodity prices flow through to the cost of producing goods.

We do expect to see some inflation volatility in the near to medium term as economic activity resumes and price comparisons with weaker numbers from last year push inflation higher. We do not expect these effects to result in sustained inflationary pressure, and we anticipate that the trend will reverse in the second half of the year, after the economy reopens further.

So, what can we learn from all this? The vaccination rollout, U.S. monetary policy with regard to inflation and an additional stimulus all play an important role in direction of the market in 2021, with potential for further upside growth. We will continue to stay the course, and while we know there will be bumps in the road in 2021, the public markets will continue to look forward, anticipating what is ahead.

From an investment perspective, we use the above insights to help with the strategic and tactical asset allocation based on where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way. We are not trying to time the market, but we will try to take advantage when we see where the market is heading. Having a well-balanced, diversified, liquid portfolio and a financial plan are keys to successful investing. 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: Horizon Investments, Bureau of Labor Statistics, Charles Schwab}

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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.

Click Here for Additional Investor Disclosures

What caused the GameStop bubble?

Following a three-month rally that coincided with the election and the vaccine rollout, stocks took a rest last week, and the end of January brought a slightly negative start to the year. Some market pundits believe the performance of the S&P 500 in January predicts the performance for the rest of the year, but this theory hasn’t played out often over the last two decades, as the chart shows below. Since 2003, the average return was over 11% during the 11 months following a negative January — and that number is skewed by the financial crisis of 2008.

Last week, the news consuming the markets was all about GameStop. The video game retailer started the year trading around $17 per share, and on Thursday of last week, the stock hit a high of $483, for a gain of more than 1,625%. This story is not about a retailer undergoing a fundamental shift in business philosophy and changing its outlook; it’s about a group of people on Reddit, called WallStreetBets, who are buying the most heavily shorted stocks on Wall Street en masse.

Shorting occurs when investors attempt to make money on a stock that falls in price. Instead of buying low and selling high, investors who short stocks borrow shares and sell them immediately. If the stock drops in price, they buy the shares back at the lower price before delivering them back to the lender — effectively making money by selling high and buying low. But if the stock price goes up instead of down, the investor may have to buy the stock at the higher price to deliver the shares that they borrowed, taking a potentially sizable loss.

If the price of the stock moves up very quickly, as GameStop did, then the lender can ask for additional collateral to cover the loan. This becomes a cycle: The investor then has to sell other holdings, raise cash and buy back the stock they are shorting, forcing the price up even higher and creating a “short squeeze.” Part of the phenomenon we are seeing with Reddit is a desire to cause institutions such as hedge funds, which are betting against this group of stocks, to lose as much money as possible. The traders following the advice on Reddit do not fully understand the market fundamentals and are attempting to make a quick dollar.

These bubbles do not end well historically — markets always return to fundamentals — and this fad, too, shall pass.

So, what can we learn from all this? Markets do not move up in a straight line. Bubbles like GameStop come and go, leaving volatile markets in their wake. We view these movements as opportunities, never as a time to panic or gamble unnecessarily. We will continue to stay the course, and while we know this will not be the only bump in the road in 2021, the public markets will continue to look forward, anticipating what’s ahead. From an investment perspective, we use the above insights to help with the strategic and tactical asset allocation based on where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way.

We are not trying to time the market, but we will try to take advantage when we see where the market is heading. Having a well-balanced, diversified, liquid portfolio and a financial plan is the key to successful investing. 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: FactSet, CNBC, LPL}

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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.

Click Here for Additional Investor Disclosures

The importance of liquidity

The stock market’s positive momentum at the start of 2021 looked similar to its movement at the end of 2020, and through the first three weeks of January, the S&P 500 is up 2.4%, led by energy stocks. Among the reasons for the market’s recent performance: the potential for additional stimulus, low interest rates, an inflation target of 2% driven by the Federal Reserve and a tremendous amount of cash on the sidelines, waiting to be invested.

The S&P 500 has recovered over 70% from its March 2000 low. While investors may be concerned about the markets following this strong rally, history suggests there is more room to run. During past U.S. economic expansions, investors have enjoyed positive one-year returns 87% of the time. Drawdowns of greater than 10% occurred far less often — only 4% of the time.

We understand why investors might look for reasons for the market to fall or correct itself; it can be tough to avoid the negative messages that constantly bombard us in today’s world. In all of our weekly newsletters, we discuss the importance of staying the course and sticking to your financial plan. With money market rates close to zero for an extended period of time, cash may not be a viable long-term investment, even with inflation below 2%.

Understanding what liquidity is and how it can impact portfolio returns can help you make more informed decisions. Liquidity is defined as the ease with which an investment can be bought or sold without significantly impacting the value of the underlying securities. Investments that can be easily bought or sold are said to be liquid. Traditional investments — like stocks (mutual funds, index funds and individual stocks) and bonds — can be bought and sold easily, so they are considered to be highly liquid. Illiquid assets are harder for investors to sell, harder to value and harder to control over how the assets are managed. For example, if you decide to sell your home today, you must go through a process to obtain your money. The house may not sell for months, and then you may have to reduce the asking price. Similarly, if you invest in a hedge fund or private equity investment, you may not have access to your funds on demand. There is a process to cash out, and it may take some time to liquidate — plus, the amount you receive could change based on market conditions.

Our focus in managing our clients’ portfolios is in the publicly traded liquid markets. We provide access to those markets with a combination of individual stocks and bonds, index funds or exchange traded funds and mutual funds. If a crisis occurs and investors begin selling in mass, this can cause assets that are not as liquid to lead to further reduced value, as those investments are forced to sell into a market with a shortage of buyers. Liquidity, like volatility, needs to be managed in a portfolio, and by focusing on holdings that are extremely liquid, we look to reduce value disruption that may occur in market downturns.

So, what can we learn from all this? Having a well-balanced, diversified, liquid portfolio and a financial plan are keys to successful investing. 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. From an investment perspective, we use the above insights to help with the strategic and tactical asset allocation based on where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way. We are not trying to time the market, but we will try to take advantage when we see where the market heading.

Sources: FS Investments, GSAM

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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.

Click Here for Additional Investor Disclosures

With a new president, what lies ahead?

A new administration took office this week with a renewed focus on vaccinating millions of Americans and on creating additional stimulus to help those most in need. Last week, President Biden announced a proposed $1.9 trillion economic stimulus package, which would follow the recent $900 billion package passed in December. More Americans are receiving the coronavirus vaccination every day. The successful deployment of vaccines remains the key driver of U.S. economic growth for 2021. If Johnson & Johnson is able to win FDA approval for its vaccine by March, we believe the goal of vaccinating 100 million people by the early fall is attainable. These are positives for the stock market long-term.

The pandemic has forced companies big and small to prioritize and expand their digital footprints. The economy will look very different after the pandemic than it did at the start of 2020. Digital business models are expanding beyond the U.S., as companies in both emerging and developed markets have rapidly expanded their platforms. Small and mid-sized companies, as well as international and emerging markets, can benefit greatly from the technological advancements and the reopening of the economy.

The pandemic also has accelerated shifts in employment, particularly with respect to services sectors that employ low-skilled workers. The share of permanent job losses continues to grow over time, and labor participation rates have yet to recover, as seen in the chart below.

The shock has caused more strain for smaller companies that do not have access to the same capital markets as large companies to raise additional monies to operate their businesses. The Federal Reserve bank and further economic stimulus proposed by the new administration are set to provide an additional bridge of funds for these companies, with the hope of bringing back activity to pre-pandemic levels.

In 2021, much depends on the increase in debt through additional stimulus. Rising debt ratios may put additional pressure on the Federal Reserve Bank to keep debt service payments lower through continued lower rates. The Consumer Price Index, the measure of inflation, increased in December, due to higher gas prices. However, this increase was in line with expectations and was not as high as many were expecting. Investors’ demands for bonds remain high as a source of diversification, and demand for municipal bonds has increased as investors in the highest tax brackets anticipate higher tax rates, making those bonds more attractive.

So, what can we learn from all this? We will continue to stay the course. While we know there will be bumps in the road in 2021, we also know public markets will continue to look forward, anticipating what’s ahead. From an investment perspective, we use the above insights to help with the strategic and tactical asset allocation based on where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way. We are not trying to time the market, but we will try to take advantage when we see where the market is heading. Having a well-balanced, diversified, liquid portfolio and a financial plan are keys to successful investing. 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: Capital Group, Blackrock

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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.

Click Here for Additional Investor Disclosures

Should politics sway your investment strategy?

U.S. stock markets rallied to record highs last week, and bond yields rose after the Democrats won two Senate runoff elections in Georgia, providing a narrow majority in Congress. Even in the face of what we witnessed in Washington last week, the equity markets pushed higher.

As we have written in previous articles, the stock market looks forward, not backward. The market’s climb is based in part on the expectation of additional fiscal stimulus being passed in the first quarter of 2021 to help those most hurt by the pandemic, spending on green initiatives and limited tax increases.

The vaccine rollout has been slower than hoped, and a new, more infectious coronavirus strain is spreading. The pace of the rollout will be a major factor in how quickly the economy can return to pre-pandemic levels. Once the vaccine becomes more widespread, we believe we will see a restart to the economy — and the pent-up demand for goods and services and for travel will bring a return to normalcy.

The prospects of more fiscal spending under a Democrat-led government could further fuel stocks. Many fear that this could push inflation higher over time. We do expect additional spending to drive deficits higher; as we wrote recently, with interest rates close to zero, additional debt can be more easily digested by the economy than when interest rates are higher. The Federal Reserve’s resolve to keep rates low will help fight inflation and make additional debt payments more modest. Corporate and personal tax increases are possible, but large-scale changes appear unlikely in our view.

Regardless of who is president or which party controls Congress, the best course of action is to stay invested. The charts below confirm this strategy in different ways. The first chart shows how a hypothetical investment has increased since 1933, through a series of presidents from both parties. The second chart below shows the average annual returns under six different sets of election results, each reflecting positive returns.

The final chart below shows the average net flows into equities during each presidential election year and each following year. The amount of money on average flowing into equities after an election is significantly greater than the prior year, another positive for equities.

So, what can we learn from all this? No matter what the election outcome was, whether you agree with the political views of the president or the majority of Congress, it is important to stay invested for the long term. We will experience volatility, and the first half of 2021 may be a choppy ride. If you do not stay invested, you will miss the ride — and the long-term growth.

From an investment perspective, we use the above insights to help with strategic and tactical asset allocation based on where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way. We are not trying to time the market, but we will try to take advantage when we see where the market is heading. Having a well-balanced, diversified portfolio and a financial plan are keys to successful investing. 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: Morningstar, RBC Capital

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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.

Click Here for Additional Investor Disclosures

2020 in the rear-view mirror

What a year 2020 was! For investors, 2020 offered good opportunities and returns — if you stayed for the ride. It was the first year since 1938 that the S&P 500 returned more than 15% while volatility was greater than 30%. The COVID-19 pandemic led to rapid losses in February and March, followed by an unprecedented recovery as both monetary and fiscal policy came to the rescue. The initial rebound in the market was led by technology stocks, more specifically, the stay-at-home stocks. At the end of the year, cyclical and small-cap stocks drove the market higher.

The Fed acted quickly and aggressively to address liquidity needs in the fixed income and bond markets, lowering the Federal Funds rates from 1.75% to zero in response to the global pandemic. The bond markets remained resilient with the help of the CARES act and the additional funds provided for state and local governments. Because of the quick action, bond default rates remained low and did not exacerbate the economic problems.

Compared to the stock market, the oil market more accurately reflected the economic reality. Crude oil fell more than 20% on the year as the pandemic caused a decline in global energy demand. Later in the year, production cuts from OPEC helped stabilize the price of oil. Gold, often considered a safe-haven asset, rose more than 20% on the year, as investors sought safety following the market decline and concerns of inflation arising with the level of increased national debt.

The economy experienced a real rollercoaster, with the biggest quarterly contraction on record in Q2, followed by the largest quarterly gain in Q3. After the shutdown in April and May, consumer saving reached the highest levels ever. Consumer spending shifted during the year as spending habits favored online shopping over brick-and-mortar stores. With the resurgence of COVID cases this winter, consumer spending has moderated going into 2021.

For 2021, growth expectations are high. We continue to highlight the following reasons why we feel the market may keep driving higher in 2021:

1. The health of the global economy and the rollout of vaccinations worldwide.

2. Technological acceleration in the world, brought about by the COVID-19 outbreak.

3. The Federal Reserve working on the premise of targeted inflation of 2% with the outlook of low interest rates for several years.

4. The government acting quicker than in past pandemics, leading to faster market recoveries.

5. The amount of cash on the sidelines waiting to be deployed on sizable market retractions.

6. The consumer savings level, which is significantly elevated compared to pre-pandemic levels.

So, what can we learn from all this? A new year almost always brings new surprises. From an investment perspective, we use the above insights to help with the strategic and tactical asset allocation and where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way. We are not trying to time the market, but we will try to take advantage when we see where the market is heading. Having a well-balanced, diversified portfolio and a financial plan are keys to successful investing. 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: FS Investments, FactSet

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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.

Click Here for Additional Investor Disclosures

What will the new year bring?

We are excited for 2021, and we think the same positive momentum that helped us finish the year strong will continue in the weeks and months ahead. Among our reasons for optimism:

1. The improved health of the global economy and the successful worldwide rollout of the COVID-19 vaccine.

2. Rapid technological adoption and the ascension of the digital economy, caused by the pandemic.

3. The Federal Reserve’s commitment to an inflation target of 2% and the outlook of low interest rates for several years.

4. The amount of cash on the sidelines that is waiting to be deployed on sizable market retractions.

5. Consumer savings that are significantly elevated, compared to pre-pandemic levels.

6. The swift market recovery, thanks to the government’s quick actions, compared with previous financial crises (see chart below).

The markets — and the global economy — are not without risks, however. History tells us that the biggest risks in a typical year aren’t usually from out of left field, 2020 notwithstanding. Or as Mark Twain famously said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

If we look to identify the unexpected, we see the following as risks to the global markets in 2021:

1. Problems with the vaccine rollout potentially delaying the economic recovery.

2. Trade tensions with China and other countries as a new administration takes over in the White House.

3. A faster tightening of fiscal or monetary policy than is anticipated.

4. Shock to the interest rate caused by inflation or a surge in bond yields.

5. Overbuying in the stock market and valuations being stretched.

Some have begun to compare 2020 to the tech bubble of 1999-2000, but we believe the two environments are not similar for a number of reasons. The current environment has a more favorable outlook for risk assets, as the 10-year Treasury rate today is less than 1%; in January 2000 it was more than 6.5%. Inflation is low today, and that favors longer-duration assets, such as technology and other innovative companies. Also, the increase in sales of the technology companies is keeping pace with share price increases, while in 2000, share price increases soared well ahead of actual increases in sales.

Most importantly, equity valuations are modestly higher than that of the S&P 500 today, whereas in 2000, technology multiples were more than 2 times the multiple of the S&P 500. The harmonic averages shown in the chart below remove significant outliers — giving a better sense of the value of a company — and the disparity between weighted average and harmonic average points to numerous stocks in 2000 with extreme valuations, compared to today.

The rally in technology stocks today is being driven by stronger earnings and better profitability. Innovation continues to drive the technological revolution, accelerated by the pandemic. There will continue to be winners and losers from this race, as in all races, but we think that pace of technological change will only continue to increase in the future.

So, what can we learn from all this? Whether or not these particular risks occur, a new year almost always brings surprises. From an investment perspective, we use these trends to help with the strategic and tactical asset allocation and to define where we see the portfolio heading over the next five to seven years, with short-term adjustments along the way. We are not trying to time the market, but we will try to take advantage when we see where the market is heading. Having a well-balanced, diversified portfolio and a financial plan are the keys to successful investing. 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: Bloomberg and Capstone Research, Factset}

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S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy. NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The Russell 2000 Index (RTY) measures the performance of the small-cap segment of the U.S. equity universe. The MSCI EAFE Index (MXEA) is an equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the US and Canada. The S&P 500® Value Index (SVX), represents the value companies, as determined by the index sponsor, of the S&P 500 Index. The Index measures the performance of large-capitalization value companies in the United States. The MSCI Emerging Markets Index (MXEF) captures large and mid cap representation across 26 Emerging Markets countries. The NASDAQ-100 Index (NDX) is made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock market. It is a modified capitalization-weighted index. The S&P 500® Growth Index (SGX), represents the growth companies, as determined by the index sponsor, of the S&P 500 Index. The Index measures the performance of large-capitalization growth companies in the United States. It is not possible to invest directly in an index.

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.

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How can the market and the economy look so different?

Ever since stocks began to rebound from the March bottom, there has been a glaring disconnect between the impact of the coronavirus on the economy and the good mood of the stock market. Eight months later, that disconnect is as wide as ever. If one only looked at the markets, it would be difficult to tell that anything was amiss.

Investors remain in a bullish mood while the economy continues to deal with the surging spread of the coronavirus, new lockdowns in California, increased unemployment claims and a lack of stimulus from Congress for those who remain out of work. While economic numbers tell the story of the past, the stock market’s focus is on the future. The markets are not ignoring the news of the day, they simply are looking beyond it —focusing on a low interest rate environment for the next several years, a vaccine rollout that will allow the economy to reopen in 2021, a new political administration and an additional stimulus package.

It is generally understood that day-to-day market swings do not reflect what is going on in the true economy, although it may feel like they should. There are some fundamental differences between the two which can be exacerbated in short time periods, but over the long run, the stock market and the economy do tend to have a stronger correlation.

At the most basic level, the economy is the production and consumption of goods and services. It encompasses all individuals and companies, as well as the government. The stock market, however, is an exchange where the buying and selling of shares of publicly traded companies occur. Stocks trade based on future earnings; they are forward-looking in nature. The earnings expectations for the top large-cap companies are high, and we should expect these companies to face volatility in the near future with growing regulatory pressure, ad-spending boycotts, the upcoming runoff election and potential corporate tax changes.

Small businesses are known to be the lifeblood of the U.S. economy, but they do not represent the stock market. According to the U.S. Small Business Administration, small businesses make up about half of private sector employment and 44% of U.S. economic activity. They represent over 99% of U.S. employer firms and create two-thirds of new jobs.

Less than one third of Americans work for publicly traded companies. That means the U.S. stock market represents only a portion of U.S. employment and does not entirely reflect how economic gains are distributed throughout the economy. The composition of the stock market also is different from the real economy. We see this in the weighting of major indexes, like the S&P 500, in that the largest stocks have the biggest influence. Right now, the largest five companies, all of them growth technology companies, make up 25% of the S&P 500.

So, what can we learn from all this?

Basing investment decisions on the current economy instead of where it is headed can often lead to incorrect assumptions about the direction of the stock market. Trying to time the market is extremely difficult and can cause poor investment performance. As we near the end of 2020, we 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.

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.

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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.

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