Topic: Portfolio Management

We are excited for 2022 and are looking forward to a great year ahead. It’s hard to believe we are nearly two years into the pandemic. It has been a balancing act on a global scale as governments and central banks gauged how much fiscal and monetary stimulus was needed to boost economies without creating runaway inflation. 

We see many positives for the financial markets heading into 2022:

1. Global growth continues to be positive.
2. Monetary and fiscal policy are still supportive of growth, even in the face of tapering and possible interest rate hikes in 2022.
3. Congress recently passed legislation to raise the debt ceiling for all of 2022.
4. There is potential for peak inflation and lower inflation for the second half of 2022.
5. The easing of supply chain issues should help both emerging and developed international markets.
6. Consumer spending is strong, and balance sheet savings rates are higher.

The S&P 500 has traded above the 200-day moving average for all of 2021. The chart below suggests that when the S&P 500 is above its 200-day moving average, forward returns are often favorable. 

Clearly, inflation and its effect on the stock market are on the top of everyone’s mind. Remember that some inflation can be healthy for companies because it allows them to raise prices and increase profitability. Also, as seen in the chart below, stocks and bonds have generally provided solid returns, even during times of higher inflation. It is during the extremes that the markets often tend to struggle, but as inflation moderates, stocks and bonds can have strong years.

Political uncertainty often has a noticeable short-term effect on the markets. An analysis of more than 90 years of equity returns reveals that stocks tend to have lower average returns and higher volatility for the first several months of midterm election years. The trend often reverses, and markets have tended to return to their normal trajectory. Remember, the numbers below are just averages; it is important not to try to time the market. Elections generally create a lot of noise, so it is important to look past the short-term highs and lows and focus on the long-term picture instead.

S&P 500 Index average returns since 1931

The markets and the global economy are not without risks. History shows us that the biggest risks in a typical year are hiding in plain sight, not suddenly appearing out of nowhere. Risk appears when there is a high degree of confidence among market participants expecting a specific outcome that doesn’t pan out. If we look to identify the unexpected, we see the following as potential risks to the global markets in 2022:

1. Supply chain shortages turn into gluts: Whether it’s semiconductors, used cars or a variety of products, any potential supply glut in 2022 may lead to a fall in inflation. Excess inventory would promote price cuts and pose risks to industries that have thrived on pricing boosts from shortages.
2. Rate hikes slower than expected: Surging inflation has led the Fed to anticipate three rate hikes in 2022. If inflation eases, the expectations for the number of rate hikes may change as well.
3. China: The World Bank cut its forecasts for China’s economy in 2022 after the nation’s continued attempts to restrict business, break up large technology companies and remove bitcoin mining.
4. COVID outbreaks and new strains: Investors may have grown confident in trading rotation in and out of stocks depending on the seasonality and COVID flare-ups. If the current and future waves have less impact on the overall economy, the stocks that have led us out of the economic doldrums may not have the same effect going forward.
5. Geopolitical surprises: The biggest worry could be a military conflict, whether that is China and Taiwan, an invasion of Ukraine by Russia or even a regional conflict in the Middle East. 

History doesn’t always repeat itself, but similarities often exist. While inflation on a year-over-year basis is high, this is not the runaway inflation of the 1970s. Today’s inflation is more akin to the 1920s and 1950s, when we witnessed booms in productivity and innovation and the rebuilding of an economy boosted by a new generation of household spending, along with new infrastructure spending. The markets may experience elevated volatility in the coming year as the above risks test the markets. We will continue to keep you informed and invested through the ups and downs of 2022.

So, what can we learn from all this? We are hopeful that 2022 will be a turning point in the global pandemic and that policymakers will wean economies and markets off fiscal and monetary stimulus. Vaccine manufacturing continues to ramp up, and new therapeutics to fight COVID continue to be available in the U.S. and abroad. Inflationary pressures should ease but still settle at a level higher than the recent past. We believe that diversification and the discipline to stay invested over the long term are more important than ever. We are optimistic for a successful 2022!

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. As we say each week, it is important to stay the course, focusing on the long-term goal and not on one specific data point or indicator.

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: Capital Group, Charles Schwab, BNY Mellon

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

As 2021 comes to an end, let’s reflect on the rollercoaster ride we took together.

In January, while we were still in the midst of the global pandemic, we witnessed an insurrection at the Capitol. Thankfully, our government was able to usher in a smooth presidential transition and we quickly returned to business as usual.

Throughout the year, different market themes arose — and some repeated themselves often. Some of the trends and headlines seemed transformational, but in hindsight, the market continued marching on — so much so that you may not even remember some of the issues that captured our attention. 

• Special-purpose acquisition companies — better known as SPACs — became one of Wall Street’s hottest trends, accounting for more than two-thirds of Nasdaq’s initial public offerings in January.

• “Meme stocks” — including GameStop, AMC Entertainment and Blackberry — made headlines with excessive trading volume from investors who targeted them on social media.

• Cryptocurrency investors saw high volatility with fluctuating valuations and changing regulations.

• COVID continues to weigh heavily on the minds of investors, from the availability and adoption of vaccinations and boosters to the emergence of variants.

• Inflation – from transitory to the highest inflation reading since the early 1980s — caused some investors to worry about a market correction.

• The cost of shipping a container spiked, and supply-chain bottlenecks sent a ripple effect through the economy.

• Commodity prices — such as lumber and used car prices — rose and fell.

• Housing prices reached record-setting levels, thanks to the pandemic and a move toward a remote workforce.

• The pandemic intensified discussions about sustainability and the financial markets, bringing Environmental, Social and Governance (ESG) investing more into the mainstream.

So, what can we learn from all this? COVID is still taking a terrible toll on the U.S. and the world. Even with the new Omicron variant, the U.S. economy looks solid and supply-chain bottlenecks may be easing. We think investors need to be ready to ride the COVID rollercoaster for years to come. 

We gladly welcomed clients back to our office in 2021, and we look forward to seeing you again in our office in 2022. We continue to stay connected with you through Zoom or in person. Our team continues to have our daily internal meetings every morning and night via Zoom to ensure we stay connected and work together.

Our No. 1 priority is to take care of you, our clients, and we are proud of the work we have done this year. We are grateful for you!

————

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

Last week, the stock market pulled back in a very volatile week as investors grappled with the potential impact of the Omicron COVID variant and commentary from Fed Chair Jerome Powell that the risk of inflation has increased. Powell also said the Fed may consider speeding up its bond purchase tapering plans and hinted at potential earlier rate hikes in 2022.

As a refresher, the VIX index is a measure of forward-looking stock market volatility for the next 30 days. The VIX is known as the fear gauge; it reflects the market’s short-term outlook for stock price volatility as derived from option prices on the S&P 500. On Monday, the VIX topped out at 35, after having traded at below 20 for most of October and November — that’s a 75% increase in the volatility index in a very short period. As the chart below shows, we have had many short-lived, volatile market movements over the past 20 months. In hindsight, the spikes in volatility have allowed investors to continue to “buy the dip” in the accompanying market sell-offs. As volatility then wanes, the market recovers.

One of the primary causes of the recent increase in volatility is inflation. The Fed belatedly acknowledged inflation risks, and we expect it to start raising rates next year. What matters is not that they are going to raise rates, but the rate trajectory and where they end up next year and going forward. The chart below shows the Fed estimate as well as the market estimate for interest rates. Both the market and the Fed predict that short-term rates will be around 1.75% in 2024, which would be a slow, steady increase from where they are now: 0-0.25%.

The Fed’s view of the path of rate hikes vs. the market’s view

Note: The 12/15/2027 eurodollar futures rate was used for the Longer-Run market rate. Source: Bloomberg. Fed estimate as of 9/22/2021. The market estimate of the federal funds rate using eurodollar futures (EDSF). As of 11/10/2021.

Also weighing on the markets and causing increased volatility is the work Congress still has to do before the end of the year, with several large issues to resolve: 

* Defense spending bill: Congress is near agreement to authorize $770 billion in military spending.

* Keeping government open: President Biden signed a stopgap spending bill that will keep the Federal Government running through Feb. 18.

* Social spending bill: The Build Back Better Plan could also drag into next year as negotiations on how to fund the bill continue.

* Raising the debt ceiling: The estimated deadline is Dec. 15. Raising the debt ceiling does not allocate new spending; it only authorizes the Treasury to make good on current obligations.

The COVID shock was more like a natural disaster than the economic restart from a global financial crisis. Economic activity surged, and corporate profits rebounded at a rapid pace. 

Demand for goods — rather than services — along with supply-chain bottlenecks have driven prices higher. We expect that prices eventually will be higher than pre-COVID levels, but supply and demand ultimately will determine where they settle. As supply-chain bottlenecks open and more goods are available to the public, prices will come down as demand decreases. At the same time, the service industry also will begin to see increased demand, which may reduce the demand for goods, in turn reducing prices as well. 

So, what can we learn from all this? COVID is still taking a terrible toll on the U.S. and the world. Even with the new Omicron variant, the U.S. economy looks solid and supply-chain bottlenecks may be easing. We think investors need to be ready to ride the COVID rollercoaster for years to come. Panic is not a strategy when dips occur. When the market falls and volatility rises, the plan is to stay the course and consider those opportunities as buying chances, not as a time to panic and sell. 

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. As we say each week, it is important to stay the course and focus on the long-term goal, not on one specific data point or indicator.

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: Bloomberg, Blackstone, Fidelity

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

Last Friday, news of a COVID-19 variant identified in South Africa and new travel restrictions sent markets tumbling and injected volatility into the markets. The Dow Jones Index slid 900 points to suffer its worst day since October 2020. The news was exacerbated in the stock markets, as the Friday after Thanksgiving is typically a low-volume trading day and a shorter trading day due to the holiday. Oil prices fell more than 12% in one day, with news of potential lockdowns across the globe, though President Biden reiterated that the U.S. will not initiate economic lockdowns or new travel restrictions.

The market has continued its sell-off this week as Moderna and Regeneron separately commented on the effectiveness of the current vaccines against the new variant. At the same time, Fed Chairman Jerome Powell told the Senate that he expects tapering could wrap up a few months sooner than anticipated and that it is time to stop describing inflation as “transitory,” opening the possibility for the Fed to raise rates in early 2022.

The chart below reflects the overall market returns through Nov. 26. While the markets have had a strong year, most underlying holdings are trading in a correction mode. This further supports that the underlying market may not be as expensive as many people fear.

It hasn’t been the smoothest of sailing for fixed income investors in 2021. Bond yields have ridden waves of optimism and pessimism about the economic outlook for most of the year. The chart below reflects the year’s big swings in the 10-year Treasury. As we near the end of the year, short-term yields have moved up in anticipation of tightening monetary policy — while the 10-year Treasury has fallen back from the levels seen in October, despite inflation.

With more discussion of inflation — and more economists predicting that rates will rise next year — we recently made a portfolio reallocation within our fixed income portion of the portfolio:

1. We are shortening the duration of the fixed income portion of the portfolio. As a refresher, duration is a measure of how long it takes for a bond to repay the principal using both income and principal. In an environment of rising interest rates, we are hopeful that a shorter duration will protect against falling principal compared to longer-duration bonds. 

2. We are maintaining similar credit quality within fixed income but adding a short-duration position to hedge against rising rates. We removed our longer-duration investment grade corporate bond position. 

3. We also increased the weighting in our strategic income holding to produce additional income in a low interest rate environment. 

We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy. We strategically have new cash on the sidelines and buy in for those clients on down days or dips in the market, as one does in a 401(k) every other week. We speak with our clients regularly about staying the course, not listening to the economic noise and trading memo stocks.

So, what can we learn from all this? Hoping that an outcome will or will not occur is not a strategy. In light of new COVID variants, we think investors need to continue to be ready to ride the rollercoaster for years to come. With the most recent quarter’s record earnings, the overall valuation of the market has come down. That does not mean we won’t experience dips and corrections, but when they happen, the plan is to stay the course and consider those opportunities as buying chances — not a time to panic and sell. 

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. As we say each week, it is important to stay the course and focus on the long-term goal, not on one specific data point or indicator.

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: CNBC, Schwab

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