Market Movement Archives | Page 18 of 20

Do deficits matter anymore?

Among the financial damage from the coronavirus pandemic has been the large increase in the federal budget. The pandemic has caused massive economic disruption, and the U.S. government deficit has soared, as COVID-related fiscal stimulus is still being required.

However, Americans appear to be less concerned about the deficit than in recent years. A recent Pew study reflects that in June 2020, only 47% of Americans viewed the deficit as a large problem, compared with 55% just two years ago. In fact, clients often ask us, “What should we do about the growing deficit — and with interest rates so low, do deficits really matter anymore?”

Federal Reserve policies, including low interest rates and quantitative easing (QE), have enabled the government to increase stimulus spending with little risk for now. With all of the challenges facing the economy, the Fed has allowed the government to issue new debt with interest rates at historically low levels. This is very similar to homeowners continually refinancing their home mortgages as rates continue moving lower. Often, homeowners will take equity out of their house when they refinance, increasing what they owe to the bank but lowering their overall payments since their new interest rate has decreased.

With interest rates having been on the decline for many years, and with the Fed’s recent statements pointing toward keeping them lower for years to come, servicing a higher deficit seems to cost relatively little. As seen in the chart below, the federal deficit has risen to almost 15% of GDP as fiscal stimulus was needed along with a plunge in GDP growth due to the economic shutdown. Congress is negotiating how much more stimulus will be needed to help businesses that are still affected by the global pandemic.

But with rates low, servicing a higher deficit level costs much less. In 1996, interest payments accounted for 15.4% of total federal spending. In 2019, the federal government paid out $375 billion of interest on its debt, accounting for 8.4% of total federal spending.

The bigger question remains with state and local government deficits, which have increased as well during the crisis. Tax revenues have decreased and unemployment insurance costs have risen as the unemployment rate currently sits at 7.9%. City and state spending have accounted for more of GDP spending than the federal government; local governments employ more workers than the federal government.

However, state and local governments must balance their operating budgets every year and can’t borrow to finance large deficits. To date, federal aid has exceeded projected revenue losses, but unless the federal government continues to support local economies, projected shortfalls are forecasted for years to come. If aid to the states and local governments is not in the upcoming stimulus package, states will cut back their spending and in turn will restrain the vigor of economic recovery.

Tax policy in the next four years remains uncertain with the looming election. Regardless of who occupies the White House, state and local taxes could rise in the coming years to fill the budget shortfalls created by the pandemic. These shortfalls could hinder economic recovery in the near term, just as after the great recession of 2007-2009, local governments’ spending didn’t support their economies for five years after the recession.

Today’s borrowing is largely appropriate and necessary in order to reduce the economic pain caused by the COVID-19 pandemic. Once the pandemic ends and the economy is on its way to recovery, policymakers will turn their focus to long-term debt and deficit reduction to get the country on solid fiscal ground. Even as the level of debts rise, the cost of carrying the debt, reflected with low interest rates, has tumbled. Financial markets have maintained confidence in the ability for the U.S. to carry the financial burdens. As The New York Times put it, “The economy has not drowned in the flood of red ink – and there’s a growing sense that the country could take on even more without any serious consequence.”¹

What does this mean for you?

Follow your financial plan and ignore the noise. Remember that market downturns offer the chance to buy stocks at lower prices, which could position a portfolio well for future growth. Again, there are no guarantees that stocks will perform to anyone’s expectations, and decisions could result in losses including a possible loss in principal. But it may be helpful to remember that some investors use downturns as opportunities to buy stocks that were previously overvalued relative to their perceived earnings potential.

^{Data Sources:}^{Pew Research Center, UsgovernmentSpending.com, FS Investments}

¹^{New York Times – August 21, 2020 – We have crossed the line Debt Hawks Warned Us about for Decades}

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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. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS. Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

3 reasons pandemic shutdowns seem unlikely

The news last week that President Trump has COVID-19 has shifted the narrative back to the potential risk of a second wave of COVID-19 lockdowns. If this were to occur, we would see a return to recession for the global economy and a bear market for stocks.

Even as virus cases are on the rise around the world, as seen by Israel instituting a second national lockdown, the United Kingdom rolling out new restrictions, and new cases in France and Spain prompting politicians to consider similar measures, we believe that a return to widespread national lockdowns is unlikely for three reasons:

1. Healthcare systems are not overwhelmed.

The outbreak in Europe today is different from the outbreak in March and April, as it has not been accompanied by a spike in hospital admissions. At the same time, the hospitalization rate in the U.S. has fallen sharply, according to the U.S. Centers for Disease Control. The rise in new cases in Europe is not alarming when viewed as a percentage of those being tested, as seen in the chart below. The percentage of positive tests is trending upward mainly in France and Spain.

2. Huge economic costs are a factor.

The high economic and social costs make it more likely that governments will respond to new outbreaks with effective targeted restrictions rather than national lockdowns. Countries that deployed lockdowns earlier this year experienced large declines in economic activity, tens of millions of lost jobs and stock market declines.

3. Localized restrictions are paying off.

The U.S. experienced a spike in COVID-19 cases this summer. However, as seen in the chart below, the return of targeted restrictions in some states did not lead the economy back into a recession. In fact, the labor market continued to improve over the summer months, recovering almost half the jobs lost in March and April.

China also saw surges in cases in parts of its country and used localized and targeted restrictions. The International Monetary Fund now predicts that China will be the only country in the world to grow its economy, even though it experienced the first wave of COVID-19 at the beginning of the year, and then a second wave this summer.

What does this mean for you?

Continuing to focus on the fundamentals can help you weather the potential market response to an uptick in coronavirus cases. Follow your financial plan and ignore the noise. Remember that market downturns offer the chance to buy stocks at lower prices, which could position a portfolio well for future growth. There are no guarantees that stocks will perform to anyone’s expectations, and decisions could result in losses including a possible loss in principal, but it may be helpful to remember that some investors use downturns as opportunities to buy stocks that were previously overvalued relative to their perceived earnings potential.

Moreover, if you typically invest set amounts into your portfolio at regular intervals — a strategy known as dollar-cost averaging (DCA), which is commonly used in workplace retirement plans and college investment plans — you are using a method of investing that helps you behave like the value investors mentioned above. Through DCA, your investment dollars purchase fewer shares when prices are high, and more shares when prices drop. Over extended periods of volatility, DCA can result in a lower average cost for your holdings than the investment’s average price over the same time period. DCA does not assure a profit or protect against a loss in declining markets.

We will continue to stay the course, just like we did during the national lockdown in March and April. We remain hypervigilant going into the 4^th quarter and will make tweaks to the portfolios when necessary.

Sources: Bloomberg, Charles Schwab, European CDC

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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.

Countdown to the election: How will it affect your portfolio?

Now that we are in October and entering the 4^th quarter of 2020, everyone’s focus has turned to the upcoming election and how that may impact their portfolio returns. We continue to focus on our clients’ long-term investment plan and on not letting the outside noise affect prudent investment strategies. Historically, whether the incumbent wins or loses, election volatility has usually been short-lived and has quickly given way to upward-moving markets.

One of the concerns investors have during this investment cycle is a potential sweep by the Democrats leading to a reversal of policies, such as deregulation or tax cuts. Assuming that such an outcome will lead to lower stock prices is over-simplifying the stock markets and their forward-looking abilities. History shows that stocks have done well regardless of which party is in control, as seen in the chart below. The “least good” outcome has been when Congress is controlled by the opposite party of the White House, but even this scenario has provided a 7.4% average return. Voters can take comfort that whether the government is unified under one party or led by a split Congress, all scenarios historically have provided positive equity returns.

Politics can bring out strong emotions, as seen by the debate this week, but investors need to stay focused on the long term. Which party is in power hasn’t made a meaningful difference to stocks. Over the last 85 years, the general direction of the market has been up, whether the president is Republican or Democrat. What should matter more than the results is staying invested to benefit from the markets moving higher. Each election is important and unique in its own way, and the chart below shows that markets continue to be resilient amid uncertainty, so maintaining long-term focus is critical.

We understand that it can be tough to avoid the negative messages and the noise that constantly bombards us in today’s world. History has shown that elections have had an impact on investor behavior; in election years, investors tend to add money to cash, and then immediately following an election, monies flow into equities as seen in the chart below.

This suggests that investors want to minimize risk during election years and wait until uncertainty has subsided to reinvest their monies into stocks. However, market timing is rarely a winning strategy, and staying invested is the key to long-term success. Historically, the best way to invest in election years is to stay invested. Sticking with a long-term financial plan based on individual objectives and avoiding market timing around politics is usually the best course of action.

What can we learn from all this? The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals – regardless of who prevails in next month’s election. The economy, and therefore the market, is bigger than the direction that the political winds are currently blowing. Ultimately, it’s the long-term fundamentals that matter. Now more than ever, it is important to maintain an investment strategy based on your own goals, time horizon and risk tolerance.

^{Data Sources: Capital Group, Strategas, Morningstar, Standard & Poor’s}

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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.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Coping with volatility in the market

As we approach the fourth quarter of 2020 and the upcoming presidential election, many investors are asking about volatility and how to potentially hedge the portfolio against future volatility.

In previous messages, we have discussed the volatility index, VIX, which is a measure of forward-looking volatility for the next 30 days. The VIX is known as the fear gauge, as it reflects the market’s short-term outlook for stock price volatility as derived from option prices on the S&P 500. The challenge with the VIX index is that investors can’t access the VIX index; you can’t purchase it.

In a chart that we recently shared on volatility, higher volatility looks like it will last into next year, regardless of the election outcome or the arrival of a vaccine against COVID-19.

The VIX can remain elevated long after the depths of a crisis. For example, for most of 2009, the index hovered in the mid-20s range. A reading below 20 in the VIX suggests investors perceive market risk to be low, while a reading above 30 indicates more nervousness in the market. The VIX has been trading between 25 and 30 for most of September 2020.

The chart above clearly highlights the large moves to the upside in the VIX index– 1998 Long Term Capital Management blow up, 2000 tech bubble, 2008-2009 financial crisis, 2011 downgrade of US debt, and most recently the COVID-19 pandemic. So the question still remains, how does one protect themselves from increased volatility in their portfolio? If we could, the easy answer would be to buy the VIX index as a hedge in the portfolio to guard against increased market volatility leading to the stock market going down.

However, as we previously stated, investors can’t purchase the VIX index. Some investors purchase complicated index funds that attempt to replicate the volatility index through futures-based pricing or invest in hedge funds or other alternative investments, while others trade options – all in the “hope” of mitigating risk or volatility. All the above, however, have significant risk and investment challenges and none are the panacea for increased market volatility.

We believe that the key is to stay the course and not try to time the market. 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. The economy, and therefore, the market, is bigger than the direction the political winds are blowing. Ultimately, it’s the long-term fundamentals that matter.

We want our clients to continue to focus on the following as we will continue staying the course of their financial plans and being proactive to make specific strategic moves in the portfolios that have proven necessary during these times:

Revisit Your Investment & Financial Planning Objectives: For nearly all investors, longer-term objectives are made possible when taking an appropriate level of risk.

Continue to Maintain a Longer-Term Mindset: Avoid letting recent market volatility convince you to abandon your prudently designed, long-term investment plan. Short-term reactive decisions could significantly impair portfolio returns.

Excess Cash Reserves: Continue to contribute according to your periodic investment plans as investing a portion of your excess cash reserves.

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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.

A deeper look at the stock selloff

Last week was a good reminder that stocks cannot go up all the time. The previous five weeks saw signs of investor exuberance after both Apple and Tesla announced stock splits and market volatility continued to drop at the same time.

The same stocks that led the NASDAQ and S&P 500 higher were the same ones that fell the most last week. As seen in the chart below, Large Cap Growth stocks and the NASDAQ, since the market bottom in March, have significantly outpaced value stocks, and the selloff last week is an effort to reduce the spreads between growth and value stocks.

The reasons for the market pullback were the usual reasons: slowing recovery, tech stock bubble and an upcoming election. We do not think that the selloff last week is the beginning of a correction.

When stock valuations get stretched, as they recently have in the technology sector, they tend to snap back, much like a rubber band. If markets move too far in one direction, either oversold or overbought, they typically need to “reset” before moving higher, what many call profit taking. However, much of the volatility last week is being blamed on offshore funds option trading that led to large amounts of technology stock options being purchased. If this is the case, we expect this to be nothing more than a short-term move down in the markets.

The VIX Index, which is a measure of forward volatility for the next 30 days, is flashing higher volatility than normal. The election is a big reason that the forward curve of the VIX index is steep as seen below. After we know who the next president will be, volatility is expected to level off.

While the market sold off last week, we saw interest rates rise and gold prices fall. This is not typical behavior of a market correction. Employment data continues to improve as the unemployment rate fell to 8.4 percent, well below expectations, and down from the high of 22 percent back in April.

The improvement in the labor market has been an unexpected source of strength for the economy. The expectation is that the pace of the rebound will begin to moderate, however, the pace of recovery remains ahead of forecast.

What to watch next

Now that Labor Day is behind us, the focus for the markets turns to stimulus talks and the election. Last week, Congress passed a resolution on the budget to avoid a government shutdown. It also may mean that stimulus talks may be stalled for the rest of the year. The markets will be watching the political scene closely and will dominate the news well beyond Nov. 3.

So, what can we learn from all this? Staying the course during periods of market volatility is critical for the long-term success of your financial plan. We will continue to closely track the markets, the sector rotation and continue to tweak the portfolios as necessary.

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.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

What’s behind the Fed’s inflation policy change?

Last week, the Federal Reserve bank announced to the market a change that has been a few years in the making. The Fed will no longer be strictly beholden to a 2 percent inflation target or an employment mandate.

As seen by the chart below, inflation has exceeded the 2 percent target only 13 percent of the time in the last five years. In 2018, the Fed raised rates consistently until the market dropped almost 20 percent in the fourth quarter and then reversed course in January 2019.

Going forward, the Federal Reserve will target an average inflation rate of 2 percent over time. Average inflation targeting implies that when inflation is below the 2 percent level for a period of time, the Fed will work to push inflation over the target level for an unknown period of time to compensate for the lower inflation level.

The Fed did not specify over what period of time it will seek to maintain the average inflation above or below 2 percent or what tools it may use to achieve its goals.

The Fed currently relies on three main tools of monetary policy:

1. Adjustments to short-term interest rates

2. Quantitative easing

3. Forward guidance

Adjustments to the Fed Funds rate have long been the standard instrument for tightening or loosening the supply of money in circulation, incentivizing people to either save or spend more. Quantitative easing is when large-scale asset purchases are made by the central bank to put downward pressure on longer-term interest rates, making monetary policy more accommodative. Forward guidance is the path of future short-term rates.

Other central banks also use negative interest rates as a monetary policy tool; however, the Federal Reserve bank does not believe that this is a desirable option. Despite the amount of money that central banks around the world have added to the economy since the global financial crisis, inflation has remained low. The world has witnessed Japan having very aggressive monetary policy for 30 years with no resulting inflation or growth.

The Fed also is embracing the idea that the economy can allow unemployment rates to head much lower without adverse consequences on consumer prices and worrying that if we become fully employed again, as we were pre-pandemic, it will have to raise rates because of fear of inflation.

Given that inflation is below the current 2 percent target and unemployment is still high due to the pandemic, the changes that the Fed made are not likely to have any big, immediate impact on monetary policy decisions. As the economy recovers, the new statement suggests that the Fed will be holding off on tightening the money supply even if unemployment falls back to the pre-pandemic levels and inflation rises above the 2 percent target.

The implication of the policy change is that the Fed will not be hiking interest rates for years. How long exactly is unknown, and only time will tell, but the next policy review is in five years, and many think that is a logical timeline.

What does this mean for equity and fixed income markets? This new policy stance is more supportive for equity and bond markets and negative for the U.S. dollar.

So what can we learn from all this? The investment maxim of “don’t fight the Fed” will take on new meaning as we will watch and see how the Fed will respond with its new policy.

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.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

In the news: Holiday sales predictions, air travel and inflation

With just about nine weeks until the presidential election and global pandemic developments making headlines every day, there is no shortage of news for the conscious investor to study. We are always watching out for the developments that will affect our economic outlook, and here are a few that caught our eye this week, including a change in inflation policy, tough times for nonprofits and predictions for the holiday shopping season.

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The Fed Just Announced a Major Inflation Policy Change – Here’s Why That Matters

From Forbes: Federal Reserve Chairman Jerome Powell announced last week that the central bank would aim to maintain inflation that averages 2 percent over time. It’s a change from the Fed’s earlier policy, under which it raised rates to keep inflation from going higher than 2 percent.

TL;DR: The COVID-19 pandemic cut inflation nearly in half, and by April of this year it had reached its lowest level in a decade. Under the Fed’s new policy, it will tolerate periods of higher inflation in order to balance out periods of lower inflation and to focus on keeping unemployment low.

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United CEO Says Air Travel Demand Will Roar Back Once There’s a Coronavirus Vaccine

From CNBC: Few industries have been hit as hard by the pandemic as air travel, but new United CEO Scott Kirby says he believes his business will rebound, especially when it comes to business travel, after a vaccine is approved and distributed.

TL;DR: The Transportation Safety Administration says passenger levels are down 70 percent over last year. United, which has parked 40 percent of its fleet, could cut as many as 36,000 jobs starting in October; the airline is not planning on seeing 2019 passenger levels again until 2024.

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FDA Chief Promises Transparency for COVID-19 Vaccine Review

From Bloomberg: The head of the U.S. Food and Drug Administration promised that the review of a potential COVID-19 vaccine would be transparent to the public and that data alone would be behind the agency’s decision to approve and distribute it.

TL;DR: A vaccine is considered crucial to end the pandemic and revive the U.S. economy, as well as to President Trump’s re-election campaign. The agency has found itself trapped between accusations of moving too slowly, behind a political agenda, or too quickly, without sufficient data. “I would not participate in any decision that was made on anything other than science,” Commissioner Stephen Hahn said.

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How COVID-19 Will Shape Holiday Retail Shopping in 2020

From Inc.: Businesses that are hoping to recover from a challenging economy in 2020 by capitalizing on holiday sales would do well to understand consumer trends and opportunities based on the pandemic and its ripple effects.

TL;DR: The economy may pose challenges, but experts say consumers are likely to find a way to spend. Stores would do well to optimize their physical spaces and staffs for in-and-out shopping or curbside pickup and to cater to people who are socially distancing. Home entertainment should be a popular category, and food spending could decline this year. Also, there may be far more returns than normal, based on the rise in online shopping and the decline in shopping in person.

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How COVID is Causing Pain at Five of the Nation’s Largest Nonprofits

From The Dallas Morning News: Charities across the U.S. say they are being squeezed by competing realities of COVID-19: a drop in donations that is leading to layoffs or furloughs, and economic effects that are causing their services to be more in demand.

TL;DR: Texas is particularly vulnerable to strain on nonprofits, which account for one of every eight jobs in the state. The nonprofit sector is the third-largest workforce of any U.S. industry, with more than 100,000 more workers than the nation’s manufacturers, and though billions in government aid have poured into small businesses, some say nonprofits have been an afterthought.

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.

Summer doldrums? Not this year

As we near Labor Day weekend, the typical summer doldrum has been anything but typical: NBA and NHL playoffs in August on TV and summer vacations in the backyard instead of the Hamptons for stock and bond traders.

Normally, the markets plod along in August, waiting for Labor Day and the return of vacationers back to work. The summer of 2020 continues to see markets drive higher while the economy plods along, waiting for another stimulus package to help struggling small businesses.

The average S&P 500 return in August over the past 15 years has been -.17 percent. In 2020, the S&P 500 return through Aug. 25 is 5.13 percent. Historically, volatility accompanies the meager market returns during the month of August. The chart below reflects that current one-month realized market volatility is 10.2 percent. With the current economic circumstances and global macro environment, the current level of volatility is historically mild.

S&P rolling one-month realized volatility

We are just a few months removed from volatility being at all-time highs, and as the markets have recovered, volatility has receded. The most widely known measure of implied volatility is the CBOE Volatility Index (VIX).

The VIX is a measure of the market’s expectation of future volatility. Year-to-date volatility remains higher than normal as measured by the VIX Index, however, well off the high set on March 20. Risks remain in the economy and the market with the global pandemic, upcoming presidential election, trade tensions and geopolitical tensions.

The market feels complacent and continues to shake off these risk factors. Oil price and interest rate volatility have disappeared for the time being, largely in part to government intervention. The Federal Reserve stimulus programs will remain in effect through 2020, and we believe that Congress will pass an additional relief package before year’s end. Multiple vaccines are in human trials, and we continue to see additional monies flow into vaccine candidates.

So, what can we learn from all this? Accurately predicting the next market move and timing the market is extremely difficult and can adversely affect the long-term performance of your portfolio. Riding out future market volatility in addition to having a diversified portfolio means staying the course.

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.

Inside the growing buzz about stock splits

After Apple and Tesla announced plans recently to split their shares of stock, there has suddenly become a growing buzz that more companies will follow in their footsteps. Having seen the market response to these announcements, companies like Amazon, Google, Chipotle, Netflix, Costco and Home Depot may come under pressure to split their high-priced stocks in the near future.

Stock splits used to be a common occurrence. If the stock price broke the $100 level to the upside, that was often a signal to the markets that the company would split the shares of stock to make it more affordable to retail investors. As seen in the chart below, stock splits reached their peak in popularity during the dot-com craze. However, today there are 63 companies in the S&P 500 whose share price is above $250 per share, nine companies trading over $750 per share and seven companies greater than $1,000 per share.

After the market collapse in 2000 and then the financial crisis in 2008, many investors were investing only in index funds and mutual funds, and companies were focused more on the institutional investors rather than individual investors.

There appears to be a new group of younger investors that are now buying stocks. These investors care about the actual price of the share, and companies seem to be taking notice. Many brokerage platforms now offer fractional share ownership of stocks, and these younger and new investors may not be concerned about the actual valuation of the company as much as they are focused on the actual price of the stock.

As already mentioned, there are several positives for companies splitting their shares:

* There is wider appeal to more individual investors by reducing the share price.

* Stocks don’t appear as “expensive” when the price of the share of stock is reduced.

* Help investors with portfolio composition. If a stock price isn’t as highly valued in terms of price, i.e. if you have $10,000, it may not be prudent to buy one or two shares of a stock priced at $1,000 per share.

* Doing so shows confidence in the company’s future.

What many investors are missing is the key component of stock splits: that the split itself is simply an accounting issue that brings the stock price down by increasing the number of shares outstanding up. The stock split adds no real financial value to the company.

If you own a pencil, and then break the pencil in half, your pencil is not suddenly more valuable. You still own only one pencil.

It’s the same idea with a stock split. If you own one share of stock at $1,000 per share and then split the stock in half, you now own two shares of stock at $500 per share each. Yes, the actual price is now $500 per share and seemingly more attractive than buying at $1,000. However, from a valuation perspective, or multiple perspective as in the Price-to-Earnings multiple, that valuation has not changed at all.

So, what can we learn from all this? At the end of the day, buying a company solely because of a planned stock split isn’t likely to be a good long-term investment strategy.

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.

Are tech stocks in a bubble?

The ongoing strength in large cap technology stocks has many investors wondering if there is another bubble in the making. The Nasdaq 100, as measured by the ETF, QQQ, is up 27.85 percent year to date, while the S&P 500 is up 4.75 percent for the year.

The top 10 holdings of QQQ, which comprise almost 60 percent of the index, are all part of the so-called FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks. At the same time, the top five holdings of the S&P 500, Apple, Microsoft, Amazon, Facebook and Google, make up more than 22 percent of the current index, and a big reason that the stock market returns are now positive year to date.

Investors have been willing to pay an increasingly higher price for these FAANG stocks as they continue to show massive innovation, whether through 5G, the ever-growing cloud business, or taking advantage of the stay-at-home economy caused by the pandemic.

These stocks have provided shelter from lockdown-sensitive stocks like restaurants, hotels and airlines. Cloud spending and internet streaming are proving to be mostly recession-resistant, and the at-home environment has accelerated these growth trends.

Analysts valuate these companies by looking at a myriad of financial ratios: P/E (price-to-earnings), P/B (price-to-book), P/S (Price to Sales) and PEG (price/earnings to growth), to name a few. Back in the late 1990s and early 2000s, many of the newly public growth technology companies were unprofitable and had zero revenues and earnings. These companies were far from becoming innovators and game-changers.

As seen in the chart below, at the peak of the dot-com bubble, the top 50 companies in the S&P 500 produced a P/E ratio of 40.2x, while the bottom 450 stocks had a P/E ratio of 19x. Today, the top 50 companies are trading at a P/E of 25.7x, while the bottom 450 are trading at a multiple of 20.8x.

Fast-forward to today, the leading companies in the Nasdaq 100 are large revenue and profit generators, with a few exceptions. The price gains we have seen over the last six months in the stock market have been justified by solid earnings growth, and as a result, we have seen valuation spreads widen between these technology companies and the rest of the market.

It is important to keep in mind that stocks trade based on future earnings and 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 election and potential corporate tax changes.

So, what can we learn from all this? The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals and not place all your eggs in one sector basket.

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Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Asset allocation alone cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against a loss. Actual client results will vary based on investment selection, timing, and market conditions. It is not possibly to invest directly in an index.

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.