Client Note May 2021

June 8, 2021

After a brief pullback in early May, the S&P500 continued is upward grind, managing to eke out a slight gain, .66%, for the month.  Foreign shares did much better with Europe up more than 4% on the month.  Precious metals were the big winners with gold up 7.6% and silver gaining 7.8%   Precious metals outpaced other commodities, which generally fell during May.  Lumber is almost 25% below its peak in early May.  After an initial rise, bond prices were flat as interest rates stabilized. 

We may be seeing the initial switch back to technology and small-cap stock outperformance after a few months of underperformance.  Technology shares fell sharply early in the month and despite a solid rebound ended down 1.2% on the month.  However, since mid-May, the value-over-growth meme that we have seen the past few months has begun to reverse.  Small stocks and tech have begun outpacing cyclicals/value.   I expect this to continue through the summer.   Stocks remain in an uptrend.  Technology and small companies are seeing prices revived; gold has caught back up to equities and interest rates have been easing.   Sentiment indicators have moved from short term negative to neutral.  For me, this means the market has room to move up as it climbs a ‘wall of worry’ regarding inflation.  Once no one is worried, and everyone has ‘bought in’, THEN we need to be concerned as there will be fewer buyers left to buy.

The main, seemingly only topic, in the news is inflation and the employment situation.  The current narrative is that inflation is being caused not only by supply chain issues, but also by wage pressures.  The idea behind wage pressures is that, if wages continue to climb, prices for goods and services will increase as well, resulting in inflation. 

There is littlereason to think that the pace of wage increases coming out of the recession will continue to climb at the current pace after this summer.   We still have more than 7 million fewer people working than at the end of 2020.   During the recession low wage areas like food service and hospitality bore the brunt of the layoffs.  As people leave unemployment benefits, their new wages will be very similar to the benefits they have been receiving.  Some may earn less.  We are now seeing the peak of wage gains and expectations.  Upward pressure will ease over the summer hiring season ends and bottlenecks dissipate.

The key idea is that wages and prices dropped dramatically and have now rebounded.  This base effect, comparing last year to this year is very substantial.  The error is assuming this pace of gain will continue. The rate of increase in employment, wages, inflation and possibly, earnings will likely level off and slow.  How stock prices react in that environment will be interesting.  Sustained higher stock prices due to low inflation/low interest rates, or will slower growth be seen as a risk to earnings and thus stock prices.

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

Client Note June 2020

As we close June and the first half of 2020, financial markets continue their rebound from the first quarter’s corona-crash.  In very volatile markets there will be many “best/worst X since Y”.  The close at 3100 on the SP500 reflects the best quarter in the sp500 since 1987, with a gain of 19.9%.  After a 36% decline off the all-time high and subsequent 40% gain, puts the SP500 at -4% year to date and -9% below the all-time highs.  Our average moderate portfolio gained almost 15% for the quarter and is up 4% on the year.  While further upside is possible but in the short term, US equity markets are in a downtrend since June 23.  On a larger time, frame, we have downtrends since June 8 and off the highs on February 19thGetting over 3200 should open the door towards 3400+, but if we lose the 3000 level, my medium-term outlook will change.  Our individual stocks continue to do very well.

International equities continue to sorely lag US equities.  European shares gained 2.5% on the month, and currently sit at -14% year to date.  Japan gained 1% and China ebbed 1.6% on the month and both fall well short of the SP500 at -7% and -9%, respectively, year to date.  Emerging markets were the winner on the month at +6% but also have made far less progress recovering post-crash, coming in at     -11% year to date. We sold the last bits of emerging and international equities towards the end of the month.

In credit markets, treasuries have dominated over all other areas of the bond markets.  The long bond/20-yr treasury ebbed by 2.25% during the month, is flat for the quarter and up a massive 20% for 2020.  Even with equivalent maturities, treasuries are outpacing investment grade and junk bonds by 5% and 17%(!) respectively.  The investment grade corporate bond etf, LQD is up 5.1% ytd, while junk bond etf, JNK is -7.7% ytd.   This disparity is due to the rapid credit deterioration seen during this severe recession.  Given this, and spike in covid19 cases, its unlikely rates will rise appreciably in the near term.  Our long treasury position was reduced late March at slightly higher prices.

Economic data released in June continue to show improvement over the April/May shutdown (naturally).    The pace at which the economy would rebound after reopening is a hot topic.  We are seeing rapid improvement in some areas but the estimates versus data are showing extremely poor forecasting ability by economists in the short term.  I am watching year over year data to see how much rebound we are getting.  If July and August data show similar growth as May and June, we could see 90% of more of the economy back by Labor Day.  The trend of economic recovery is far more important than the level.  Ideally, we will trend higher and higher until full recovery.   At the end of July, we will get the first read on GDP for the second quarter.  The Atlanta Fed current estimate has risen to   -36%. 

Looking forward, the recent spike in virus cases has opened the door to the risk that the re-opening of the economy will be slowed, as we are more likely to see county or regional shutdowns.  Continued support from the Fed and continuation of stimulus programs are critical.  A bit higher in equities may provide some momentum to get to 3400 and Fed intervention can keep rates low.

Adam Waszkowski, CFA