Dr. Martin Luther King and his impact

Dr. Martin Luther King Jr. Day is a time to reflect on the civil rights leader’s message of unity, faith and hope. His words are still relevant today.

Marin Luther King encouraged people to use their finances to invest in racial and social justice initiatives. Although we’ve come far in this country as a whole, there is still a long way to go. As we celebrate the life and legacy of Dr. King, let us not lose sight of his vision for this country, a vision of unity and hope.

Here’s a powerful quote from his speech:

“In a sense we’ve come to our nation’s capital to cash a check. When the architects of our Republic wrote the magnificent words of the Constitution and the Declaration of Independence, they were signing a promissory note to which every American was to fall heir … Instead of honoring this sacred obligation, America has given the Negro people a bad check, a check which has come back marked ‘insufficient funds.’ But we refuse to believe that the bank of justice is bankrupt.”

Listen to his speech here.

Client Note December 2021

January 5, 2021

2021 was a year of two halves.  The first half characterized by extremely rapid growth, rebounding from year-ago stagnation; followed by significant slowing into year end.  Financial markets ran parallel to this, seeing interest rates and growth stocks climb dramatically in the first few months, followed by a levelling off and slight decline while small and emerging market stocks went sideways and down. While at the same time, the largest companies which dominate passive investment strategies (led by technology of course) grew throughout the year.

There may be a reason, or simply coincidence that the first half of 2021 saw a dramatic decline in daily US Covid-19 cases through the end of June, then a dramatic increase in August/September and then further upswing (after a mild decline into Halloween) the last two months of the year and is increasing right now. As cases have come up, people get sick and miss work, some employers close their doors or go to reduced hours, some people stay in and other reactions will cause growth in the US to grow, less smoothly shall we say. The Omicron variant spreads far more rapidly. However, many more people are vaccinated, or have already contracted Covid and there are better treatments. We could expect the impact of more infections to be less than in previous surges. However, if the sheer number of people infected is greater and more concentrated in a shorter period of time, we could see similar hospitalizations and deaths as we did in the summer. I see a silver lining in that the rapid spread, alongside a large number of vaccinated people, a scenario where we get to an 80%+ herd immunity for a long enough period and Covid will die out.  So far, hospitalizations vs. new cases is smaller than in the summer during the Delta surge.

The dichotomy of the two halves of 2021 can be seen in stock markets too. The small-cap index etf, IWM, climbed 16% in the first 42 days of 2021, then took the remainder of the year to gain two additional percent. Emerging market stocks climbed initially, gaining 12% then falling 15% to end the year down 3.62%.  Most of that decline occurred after June 30th. While the S&P500 had a banner year (+28%), counterintuitively, more aggressive investors who often have greater exposure to small stocks and emerging markets likely saw their portfolios underperform the Dow and more moderate-risk investors. Other developed markets saw gains of 11%- 17%, as the SP500 was buoyed by the energy and tech sectors (up 53% and 28% respectively). Fortunately, we were overweight these sectors all year, which helped mitigate the lagging bond and metals markets.

The dramatic economic growth numbers posted in the first half are due in large part to ‘base effects. This means we started from such a low number, a shrinking GDP in early 2020, that in 2021 when everything came back online, the growth recorded was significant, at over 6% in each of the first two quarters.  These (and the 3rd quarter in 2020 at 31%) were the highest rates since 2003. Given the inflation we have seen result from supply chain constraints while at the same time stimulus checks were sent out, the question remains, how much of this growth is ‘real’?   Employment gains and wage growth will keep upward pressure on inflation, but given our population growth is stagnant, once supply chains get into equilibrium, and lack of further stimulus checks, inflation is likely to recede, perhaps dramatically. If the work is worth more than the price growth, real growth should stabilize around 3%.

GDP

US GDP at the end of September 2019 was $21.51 trillion.  This level was exceeded in the first quarter 2021 and in September grew to $23.2trillion, an increase of 7.86% over two years. A growth rate of almost 4% per year is considered fast in a developed economy. A key component in this calculation is inflation. When measuring ‘real’ growth, we must factor in inflation. Otherwise, higher prices on the same amount of goods and services would look like growth.  

In ‘real’ terms we are only just now exceeding the pre-Covid GDP level. This summer, when growth was flat month to month while prices went up, we experienced just a touch of stagflation.

If wages and employment continue to grow faster than inflation, ‘real’ growth can continue. Growth in wages has subsided, while the number of employed has increased alongside inflation. This has had a flattening effect on real income and a moderation in real consumption. These are the leading numbers that show us real growth will not continue at 4% but will recede to a slower growth rate.

If real wages and consumption slow, only credit expansion (borrowing) will allow us to grow at a faster rate. And if the Fed is reducing liquidity/raising rates, this may not occur.

Markets

Stocks, especially US stocks did very well in 2021, led by energy and technology shares. We know that share prices grow and contract more than the general economy, as markets are a bit more emotional. With government stimulus, near 0% interest rates (for banks), and a turning tide in the battle against Covid a robust year for stocks was not difficult to predict. The extent of the gains, however, is surprising.

Other financial markets did not fare as well. Ex-US stocks were far more muted, while emerging market stocks, precious metals and bonds fared poorly. Europe led, while Asia was negative for 2021.

I expect markets outside the US to catch up a bit with the US. And while Asia and Emerging markets have fared the worst, those are areas that could outperform.

While low rates and a rebounding economy are conducive to a growing stock market, an argument can be made that markets are a bit ahead of themselves.  Long time readers have read my thoughts on valuations in the past. Price is what you pay, value is what you get. A few common metrics are price/$1 of earnings, price/$1 sales or price/$1 worth of assets. We have spent most of the time since 2008 in extremely high valuation levels with no negative consequences. Market historians who study long term valuations often argue that there must be a ‘reversion to the mean.’ That is, at times of stress or recession, stock values should come down to or below long-term averages.  This was only the case briefly in 2008, and in the era of 0% interest rates have only seen extreme values get more extreme.

The point I want to make, is that the past 13 years, in a 0% world, valuations and prices are anything but normal. A mean reversion to long term averages would see greater than 50% market decline.

Realizing that the stock market is more emotion than earnings, prices can continue to climb especially as we all feel good about employment and a decline in Covid cases, I expect a good market to start off 2022. We could see some headwinds as Omicron burns its way through the populace but after the surge declines in several weeks, it will feel good.  Inflation should decline as well as supply chains continue to come back into line. The real wild card is how much the Fed and markets move up interest rates.  A major linchpin in the past 10years of this bullet proof market has been 0% rates.  If rates climb too fast while growth in wages plateaus, it will feel bad and 2023 or 2024 could see some level of “adjustment”.   Market returns for 2022 will likely be more muted with net gains of maybe 5% with variation over the year more like 15%.  

Inflation, Interest Rates and Gold

The combination of broken supply chains and lockdowns around the world, while stimulus checks were sent out has had a major impact on inflation. In my opinion, those stimulus checks were necessary as the entire economy was shut and the people most effected were in tourism and hospitality, which are generally lower wage jobs. 70% of Americans cannot put together $500 in an emergency. Those most effected by the shutdowns fall into this category. The stimulus checks prevented massive mortgage, rent, credit and auto loan defaults which would have had a greater impact on markets. Sending checks to every single person though, was overkill.

While some states ended supplemental unemployment payments in an effort to fill job openings, it appears there was little impact.  Unemployment rates were on the decline already, and the change in policy does not appear noticeable. Oddly, Ohio’s unemployment increased (blue line).

Over the past 10 years immigration has been in decline. During the pandemic immigration came to a halt as borders were closed and travel restrictions in place. Immigrants usually work the lowest skill jobs that Americans will not do. Food production/harvesting, construction/manual labor jobs are more than 25% filled by immigrant labor, legal and illegal. Immigration came to a halt in 2021. In order to fill these jobs today, employers are increasing wages and passing along the costs, as another source of inflation. The chart below shows negative immigration growth, which means a standstill in net growth. In 2021 immigration started up again, but at a slower pace than in the past.

The US needs immigrants for the low wage, low skilled jobs Americans will not do, for the pay rate offered. A moderate amount of immigration keeps inflation low.

As supply chains free up, stimulus checks dry up, and immigration numbers move up, we should see inflation pressures decrease. However, we ARE in a new era of rising interest rates for the next several years at least. It just will not be straight up. I expect to see rates decline and remain essentially stable through 2022.

As inflation pressures subside, market rates will decline, and bond prices should get a decent boost prior to another period of increases.

Gold, which many people will tell you is a hedge against inflation has not been doing that lately. Funny thing about gold is that it is ‘something’ to everyone at a given time. Long term, its an inflation hedge; short term is a ‘flight to safety,’ and in the medium term it’s a risk diversifier.  Gold actually performs best in times of overall growth.  Similar to bonds, I expect gold to do well in the first part of the year but beyond that we could see a very large potential price range.

Outlook

The rebounding economy, healthy job growth, and rising wages will buoy the economy further in 2022. Inflation could derail workers’ real incomes though. Normalized immigration and loosening of supply chains are already underway and should show in the data for January/February (released Feb/March). While Fed policy is set to raise key interest rates in 2022, by an estimated .75%-1.25%, from current target of 0-.25%, lowered inflation pressures may reduce this. Higher interest rates could be a major headwind to stocks however, as the justification for sky-high valuations is reduced. As the Omicron surge passes emotions will turn more ‘risk-on’ and could be a source of demand for stocks. Areas outside the US namely, Asia and emerging markets could be source of outperformance in 2022 and further out. While I am optimistic about the first part of 2022, excessive valuations, extreme leverage in financial markets and an uncertain Covid impact are areas that could be sources of volatility as we enter a new era of rising interest rates.

Adam Waszkowski, CFA

Advisory and Consulting Services offered through NAMCOA® (Naples Asset Management Company®, LLC). NAMCOA is a SEC Registered Investment Adviser. Information presented is for educational purposes only for a broad audience. The information does not intend to make an offer or solicitation f​or the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. NAMCOA® has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. NAMCOA® has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences.  Please refer to our Firm Brochure (ADV2) for material risks disclosures. Performance of any specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. NAMCOA® has presented information in a fair and balanced manner. The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated. NAMCOA® may discuss and display, charts, graphs, formulas, and stock picks which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions. Consultation with a licensed financial professional is strongly suggested. Please remember that securities cannot be purchased, sold, or traded via e-mail or voice message system. For more information, please visit www.namcoa.com.

A day to Honor Our Veterans

While WWI was called “the war to end all wars,” it failed to do just that. By the early 1950s, millions of Americans had served in WWII in the Korean War. So, in an attempt to be more inclusive and honor this younger generation of veterans service, Armistice Day was changed to Veterans Day June 1, 1954.

In November 1919, President Wilson proclaimed November 11 as the first commemoration of Armistice Day with the following words:

To us in America, the reflections of Armistice Day will be filled with solemn pride in the heroism of those who died in the country’s service and with gratitude for the victory, both because of the thing from which it has freed us and because of the opportunity it has given America to show her sympathy with peace and justice in the councils of the nations

Today we honor all those who have fought valiantly so that we may continue to live free.  Please take a moment to reflect on the extraordinary freedoms we enjoy as Americans and the brave men and women who have fought and continue to fight to protect them.

Client Note September 2021

September 30, 2021

Stock markets ended the 3rd quarter of 2021 with a thud as we find ourselves in the middle of a correction. Markets saw the end of a 7-month streak of positive monthly gains.  The SP500 has been up 14 of the last 18 months, and 7 of the last 8.  Looking across asset classes, the SP500 is down 5% for September, and essentially flat on the quarter.  Gold is down 3% on the month, and down almost 1% for the quarter.  The 20yr Treasury bond is down 3.6% on the month and 0% on the quarter.  Small cap US stocks fell less, at -2.9% for September, and -4.3% on the quarter.  Emerging markets lost 3.8% on the month, and -8.6% on the quarter.   This generally flat to negative quarter was anticipated this Spring as economic indicators began to roll over before Q2 was over.  A 7-10% correction should set up a good buying opportunity going into year end.  Year to date gains remain solid.   After this correction completes, I am optimistic for a solid end to the year.

Growth in the economy is still with us, however, at a slower pace than had been hoped for earlier in the year.  Economic data points to a levelling out of growth.  Current GDP, for Q2 2021 is 6.5%, and current expectations for Q3 are just under 5%.  Our real GDP is still a few percent below 2019 levels.  Employment has gained over 2020, but growth in employment has flattened, compared to 2020, as wages rose.  New orders for manufacturing have been level all year after the huge rebound in 2020. 

The levelling off growth, and perhaps the Covid surge in the South this summer, has reduced Consumer Expectations.   The elevated growth compared to 2019 is purely backfilling the Covid recession.  I expect the US to work through the supply chain issues and to add workers at a modest pace over the next year.  Counterintuitively, that may mark the end of this growth cycle as wage pressures and prices decrease, which are dis-inflationary.  That period would be characterized by slowing growth but increasing profits.  That’s still a couple years out though.

Wages were growing at 1% month over month in January 2021, slowed to a negative .43% in March, and picked back up in June at +.43%, and September at +.56%.  Wages are rising at about 5.5% annual rate.  Number of hours worked at 34.7/wk, is the same as it was in January.  2021 is seeing slightly higher hours worked than 2020 (34.6), but much higher than 2019 (34.4).  Finally, the number of employed persons in the US is at 153.15 million.  This is down from 2019 average of 157.62million.  While our population has grown over the past 2 years, there are 4.5 million fewer people working.  What we have is fewer people working a similar number of hours throughout 2021 for higher wages.

If employment and wages continue to gain, we could see persistent inflation.  The core of the current inflation is supply chain issues, simply a lack of goods pushing prices higher.   In addition, the nature of the past recession had a much smaller impact on higher income earners.  There was little displacement of white-collar workers, and thusly, demand for homes and other big-ticket items never receded while factories were idled across the globe.  Prices are higher while less ‘stuff’ is out there, stagflation. Regardless, interest rates have risen and should remain elevated, but may not rise too much further, especially if we see these supply chains get back in line.  The reversal of a trend, like the amount of supply chain chatter in the press, often comes when everyone fully expects the trend to endure.  Don’t be surprised if factories suddenly come back to life early 2022.

How will solid, but slowing growth and tempered interest rates affect the stock market?  Probably in a positive manner.  As long as expectations or hope of increased profits and backfilling the GDP gap from the recession persist, investors will take on risk, and stock prices should climb.   Its when we have ‘fixed’ the last problem AND investors are highly optimistic that actual market risk is around the corner.

Finally, a couple thoughts on the status of Covid 19.  The summer surge we saw in the South and Florida is ending.  Cases and hospitalizations are down dramatically from this recent super peak.  The concern now is for the rest of the country.   Fortunately, a by-product of a Covid surge is that more people get vaccinated and take precautions.  Also, the rest of the country already has a higher level of vaccinations.  While there will be a lot of cases as the weather cools, hospitalizations and deaths should be much lower than we saw in Florida.   As we enter the ‘living with Covid’ era this topic should fade from the headlines.  Schools back in session should allow for more people to go back to work since they wont need childcare as much.  On the other hand, the level of influenza, given we saw almost none last year has scientists concerned that there is lessened resistance to this year’s strains.  Since there is no appetite for large scale closures, anticipate a heightened awareness of flu/covid symptoms and continued efforts to wear masks and social distancing.  If we can have an idea on what to expect, when it happens, it won’t be that much of a disturbance.

Adam Waszkowski, CFA

Advisory and Consulting Services offered through NAMCOA® (Naples Asset Management Company®, LLC). NAMCOA is a SEC Registered Investment Adviser. Information presented is for educational purposes only for a broad audience.  The information does not intend to make an offer or solicitation f​or the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. NAMCOA® has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. NAMCOA® has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments or client experiences.  Please refer to our Firm Brochure (ADV2) for material risks disclosures. Performance of any specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. NAMCOA® has presented information in a fair and balanced manner. The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass.  Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.  NAMCOA® may discuss and display, charts, graphs, formulas and stock picks which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions. Consultation with a licensed financial professional is strongly suggested. Please remember that securities cannot be purchased, sold or traded via e-mail or voice message system.  For more information, please visit www.namcoa.com

SEI Campus

NAMCOA works with SEI Trust Company to assist our investors manage wealth and provide trust services.

Since 1968, SEI has been a leader in the investment services industry, recognized for its history of innovation. Many of SEI solutions are unique, combining advice, investments, technology, and operations into comprehensive solutions designed to help us help our clients make better financial decisions, achieve their life and wealth goals.

SEI serves a broad range of clients, including banks, trust institutions, wealth management organizations, independent investment advisors, retirement plan sponsors, corporations, not-for-profit organizations, investment managers, hedge fund managers, and high-net-worth families.

SEI manages or administers approximately $1.3 trillion in hedge, private equity, mutual fund and pooled or separately managed assets, including approximately $399 billion in assets under management and $880 billion in client assets under administration, as of June 30, 2021.

SEI is a public company and is listed on the NASDAQ exchange under the symbol SEIC. Their main office and corporate headquarters is in Oaks, Pennsylvania, USA, near Philadelphia. They also operate from offices in Canada, Hong Kong, Ireland, South Africa, and the United Kingdom. Below is a nice video virtual tour of their Pennsylvania campus.