Client Note July 2021

August 5, 2021

July saw another positive month for most US equities.  The S&P500 gained 2.3%, led by growth stocks.  Top sectors were technology, healthcare, and utilities.  A return to growth stocks by investors aided technology shares, while a decline in interest rates gave a lift to utilities.   Energy and value stocks were down on the month, alongside emerging market equities.  And finally, large cap stocks dramatically outperformed small cap stocks. Essentially, it’s a moderate investors market.  The riskiest areas, like small cap and emerging markets, after a stellar start to the year, have been very much sideways the past few months, while the broad indexes continue to grind upward.   Energy is similar in having had a dramatic beginning of the year and now, since early June has been consolidating.   I am optimistic that the areas that have been languishing the past few months are near the end of this consolidation and should see higher prices into the third quarter.

Bond prices have generally risen as interest rates have fallen.  Junk bonds were flat while higher quality bonds saw price gains.  Given the weaker small cap performance and junk bonds underperformance, markets appear in a slightly risk-off mode, even as the major stock indexes continue to climb.  This is generally reflective of the doubt regarding the continued rapid economic growth experienced over the past 12 months.  Riskier stock price stopped going up in March, bond yields peaked in May, and only recently we have gotten worse than expected economic data in a lower revision of Q2 GDP growth and a few misses in employment data.  PMI and ISM indicators are meeting and beating slightly, almost exclusively due to ‘prices paid’ factors.  Higher prices are a positive, even if selling a similar amount of product.

Inflation, on a year over year basis is running “hot”, posting a 5.4% (CPI June). CPI for May was 5%. July is expected to be 5.3%.  There are two key items to remember when looking at inflation data.  The US was only starting to come out of lockdowns last summer (case effects) and the federal government was sending checks to all households (direct stimulus), working and non-working.  This glut of cash has caused serious anomalies in the CPI figures.  Used car prices up almost 100%.  New cars up 7% and travel costs up substantially, from depressed levels.  Today, supply chains and businesses have re-opened to a large extent and there are no more checks forthcoming.  I expect inflation numbers to come down substantially for the remainder of the year, which should support bonds, dividend paying stocks and to a lesser extent, precious metals.

Looking ahead, I maintain my upward bias towards stock prices, with the caveat that we will likely see more volatility, 2-4% weekly variations perhaps.   Interest rates could ease further as economic data comes in slower and slower, as we have now passed the peak growth period.  The US economy will continue to expand, albeit more slowly.   If we could see mid- and small- cap stocks do some catching up, it would give me more confidence that financial markets have more room to the upside, but this has yet to take hold.

Adam Waszkowski, CFA

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Client Note April 2021

May 10, 2021

The close of April brings us 1/3 of the way through 2021.  After a very rapid start in January and subsequent pullback, April was a strong month across all asset classes.  For the month, the S&P500 gained 5.8%, gold gained 3.8%, corporate bonds gained 1% and long-term Treasuries gained 2.4%. Stocks in Asia have weakened while European shares have been catching up to the US.  Portfolios gained in April and the average Moderate portfolio is up 6% year to date.

We are still in a “value over growth” market, where traditional industries like materials, industrials, financials, utilities are outpacing the growth areas like technology and biotech.  We had been in a market were large-cap growth” (aka technology, aka FAANG) and small-cap stocks had been dominating, but since mid-February markets have been driven by dividend paying stocks and other cyclical areas.  This will likely continue until evidence that we are not going to grow as rapidly as investors currently believe.   Friday’s massive miss in unemployment (1million new jobs expected; 266,000 actual) may be the first data point that could show a much more moderate pace of growth going forward.

The still high expectations of rapid growth see inflation data as evidence that the economy is about to run red-hot.   If we read below the headlines, we can see that commodity prices like lumber are being driven by more than US housing demand.  A years-ago beetle infestation in Canada has limited US lumber imports; sawmill shutdowns due to Covid, AND housing have been sources of supply disruption.  The combination has pushed prices to extreme levels.  China is the world’s largest consumer of raw materials.  China’s early control of Covid-19 and truly massive stimulus spending (approximately 10% of GDP in 2020) has underpinned demand for such commodities and agricultural products.    This makes much more sense than inflation driven by US aspirations to get back to pre-Covid levels, which saw sub-2% growth for several years.  In addition, supply chain disruption due to a varied array of local shutdown conditions across the US has made year over year comparisons and identifying specific bottlenecks a challenge.   Currently, China’s credit impulse is on the wane, while US stimulus takes the reins in 2021.  US stimulus usually takes longer to impact the economy, however.  In the longer run, the US needs to maintain our reserve currency status—by creating enough US dollars for the rest of the world to use—but that is a topic for another day.

I expect forward-looking estimates of growth in the US to decline to more normal levels and at the same time, interest rates and inflation expectations to decline moderately.  Interest rates have been sideways now for almost 10 weeks. I will be looking for further confirmation of this in economic data into the end of the quarter.

 

Adam Waszkowski, CFA

 This commentary is not intended as investment advice or an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not guaranteed by NAMCO and may not be a complete summary or statement of all available data necessary for making an investment decision. Liquid securities, such as those held within managed portfolios, can fall in value. Naples Asset Management Company, LLC is an SEC Registered Investment Adviser. For more information, please contact us at awaszkowski@namcoa.com.

Client Note March 2021

April 13, 2021

The first quarter was marked by two distinct phases. The first phase was a continuation of markets climb from the late October early November lows which peaked in mid-February. The second phase was characterized by a distinct outperformance in value or cyclical areas of the market. This is the third instance in the past 16 months where we have seen value outperform growth.  Generally, this does not persist for more than a month or two.

The S&P 500 gained 5.5% during the first quarter while the aggregate bond index fell 3.7%.  Oil gained 26%, aiding the energy sector’s gains of 31% and gold fell by 10%    Corporate bond prices fell by 5.4%. Junk bond prices were unchanged.  This is a slightly odd relationship, but indicative of ‘risk-on’ alongside a rise in interest rates.   The gain in the general stock market and decline in bonds (and gold) left most balanced and multi-asset portfolios flat or in the low single digits.  With energy up, bonds and gold down, and seemingly only the largest companies are carrying the general stock indices higher.

Most recently, gold appears to have formed a “double bottom” in late March and has made slight gains. Stocks continue to grind up, but with the largest names leading.  This contrasts with the period from April 2020 to February where micro- and small-cap stocks dramatically outperformed large stocks.  If we do not see a re-rotation into smaller stocks and those outside the major indices may be the prelude to a larger market pause in the coming months.

Bonds too may have realized a bottom in mid-March as prices have been net sideways.  A bit more improvement in prices (rates lower) should begin a nice rally, giving a reprieve to the general investor who have gained in stock prices, but lost some on bonds, especially for the more conservative.

How could or would interest rates actually decline?  Again, we see in the media how ‘everyone’ knows rates are going higher and inflation is at the door due to either ‘cash on the sidelines’ (doesn’t exist), or bank savings, or ‘pent up demand’.  Once ‘everyone’ knows something its more likely the near-term trend is over or soon will be.  We may already see this in gold and bonds, as interest in these areas is low, while SPACSs and cryptocurrency are all the rage currently.

Inflation concerns are due to the recent and quick rise in rates that have its roots in price increases due to supply-chain problems and the Asian/China resurgence and stimulus.  Supply chains issues will be resolved on their own in short order.  High prices attract businesses to produce more/fix problems which lead to lower prices, the essence of a free market.   Very recent news tells us that China’s credit impulse/stimulus has begun to wane.  The past 10 years we have seen two previous large credit cycles in China.  China is a massive buyer of raw materials and we have seen prices in commodities rise the past year driven by easy money from China.  There is about a 3–6-month lag time until we see the impact of a change   in China’s rate of credit creation.   Given that this China credit data is already 4 months old should mean, as recent price action alludes, a decline in interest rates and commodity prices and thusly, inflation expectations.

While stocks look to have another 5-7% upside momentum, the asset classes that have faired worse recently should see gains alongside stocks.  As mentioned in the past Notes, its post July 4 that concerns me the most when we may see a flattening of economic growth and decline in expectations of rapid growth which can weigh on risk assets.

The reason I am concerned about the second half of the year comes from a few places.  Valuations are exceptionally high right now.  Many metrics are above 1999 levels.  This is commonly discounted due to the low interest rates.  If we are elevated over 1999 levels, how much more elevated should we accept? Another element to today’s market is the ever-present Fed liquidity.  Yes, the Fed could continue as long as there is dollar-denominated debt to liquify.   And finally, there is the current expectations that we are entering a new era of high growth.   Its this last item that is most sensitive to changes in short term economic and Covid data.

The high growth thesis stems from stimulus in the pipeline and the observations that inflation is occurring.   Stimulus, or government infrastructure spending will take years to filter through the economy.  Inflation as measured by the CPI varies greatly, while the PCE is smoother (and what the Fed watches).  One can clearly see the past overshoots of the CPI vs. the PCE, and PCE is trending down.  Once supply chain issues are resolved/lessened and Chinas credit impulse fade, its likely CPI will catch down to PCE.

If inflation expectations come down, while job growth and spending data come in cool, beginning in the next few months, we could see forward expectations and valuations come down, pulling ‘risk assets’ with it.  Add in any kind of Covid 4th wave or failure at herd immunity via vaccinations, we could see the most powerful driver of asset prices, optimism, take a hit; and along with it create a more volatile period for stocks.

Adam Waszkowski, CFA

 This commentary is not intended as investment advice or an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not guaranteed by NAMCO and may not be a complete summary or statement of all available data necessary for making an investment decision. Liquid securities, such as those held within managed portfolios, can fall in value. Naples Asset Management Company, LLC is an SEC Registered Investment Adviser. For more information, please contact us at awaszkowski@namcoa.com.

Client Note February 2021

March 2, 2021

February was a bit of a roller coaster, as the S&P 500 gained 6.5% into mid-month, then fell back 3.5% to end with a monthly gain of 2.7%, and year to date at 1.6%.   Gold continued its drawdown, losing almost 10% year to date.   Interest rates have been rising for over a year now.  The rise in rates, news of commodity gains (rising for year as well), and thus inflation concerns are in the headlines which likely means we are likely to see a reversal in these trends of some degree soon.

With our current and recent equity exposure overweight energy and technology we have been able to offset the negative impacts of bonds and precious metals, providing year to date gains for moderate and aggressive portfolios.  Conservative portfolios will likely get in the game as interest rates pull back.

Inflation, ‘reflation-trade’, and the rise in interest rates lately is very much in the news.  All have been rising since the market crash in Spring of 2020.  Recent readings remain below pre-covid levels.  In September 2019, the CPI index was rising at 1.75% annual rate and the 10-year Treasury bond yielded 1.7%.  Today we see 1.4% inflation and 1.41% on the 10year Treasury.  CPI has been at 1.2%-1.4% since August.    While the inflation rate has remained relatively flat, market interest rates after initially lagging inflation have caught up recently.  This recent surge in rates catching up, is what is in the news.  

What drives market rates are expectations of inflation.  Vaccine roll-out and a dramatic decline in deaths and hospitalizations is allowing for predictions of robust growth to gain traction.  The assumption is that mass vaccinations will allow people to return to work, earn and spend money, growing the economy to pre-covid levels (2007-2019 GDP averaged 2.3% annually).  I have doubts as to how quickly we will get back to pre-covid employment levels.    Here in Florida, we have had in-school teaching since August and bars and restaurants fully open back in September.  Since then, the Florida unemployment rate dropped from 7.3% to 6.1% in December.  The US unemployment rate went from 8.4% to 6.7%.   There may not be significant improvement in employment nationally for quite some time.  But in the very near term, a new round of stimulus will go out in March and impact short term spending and income statistics just as the first stimulus did, potentially giving us a false read on how strong incomes and spending are, and thus an ‘overshoot’ on inflation and interest rates.

Inflation is a slow moving, long term phenomenon.  Over the long term, stocks and gold hold their value against inflation.  For income investors the days of the bond mutual fund are over.  Buying short term bonds to hold to maturity then reinvesting the principle into another bond as rates rise is a short to medium term strategy.   The rise in rates has overshot inflation, and longer term were likely to remain range bound between 1.5% and .9% on the 10-year treasury. Right now, I am not seeing any scenario of rapid uncontrolled increase in inflation or interest rates.

Adam Waszkowski, CFA

 This commentary is not intended as investment advice or an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not guaranteed by NAMCO and may not be a complete summary or statement of all available data necessary for making an investment decision. Liquid securities, such as those held within managed portfolios, can fall in value. Naples Asset Management Company, LLC is an SEC Registered Investment Adviser. For more information, please contact us at awaszkowski@namcoa.com.

Client Note January 2021

February 4, 2021

January 2021 was certainly an intense month.  Not because the markets were wild, but the environment we find ourselves in.   COVID-19 super-spike, insurrection in the Capitol, impeachment, and debate on whether to pass additional relief to our most economically vulnerable filled the news every day.   Despite all this, the S&P, Dow, and Nasdaq all made new all-time highs—and at the same time, I had several people ask me if the market was about to crash.  There’s a lot of cognitive dissonance out there.

After hitting new all-time highs, the S&P500 pulled back into month end to end the month down 1%. Energy was the best performing sector, followed by Telecommunications which just edged out Healthcare, all with positive gains on the month while all other sectors were negative.  My moderate to aggressive portfolios saw just shy of 1% gains while conservative portfolios pulled back by about 1%, weighed down by bonds while gold was flat on the month.

GDP fell almost 4% in 2020 and the hope is that as COVID-19 gets under control with fewer hospitalizations, the economy will rebound strongly.  Longer term interest rates have risen over the past several months with this as the primary driver.   Vaccine doses are being produced at 10.5 million per week and almost 30 million have already been administered.  Very recent data shows cases and hospitalizations beginning to come down from super-peak levels.   If this trend persists, we should see more talk of re-openings and less talk of additional stimulus.  Half the US should be vaccinated by May as production and distribution continue to increase.   The economic activity will increase, stocks may see most of their climb prior to this trend is seen.

Governments and committees make decisions very slowly.   Expect to see a relief package passed by Congress even as COVID-19 numbers decrease, as Congress is reacting to data seen over the past couple of months.   If there is no further stimulus from Congress, and interest rates continue to rise, the Fed will be forced to reduce the $150B+/month its currently injecting into financial markets.  This brings us to a counterintuitive situation come late Spring:  rebounding economy and jobs, but less market intervention/support by the Fed and Congress, which may lead to a weak stock market by mid-year.

In the immediate term, as long as the S&P 500 stays over 3750, this uptrend is intact, and I expect to see a continuance of the trend that started late October.

Adam Waszkowski, CFA

 This commentary is not intended as investment advice or an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not guaranteed by NAMCO and may not be a complete summary or statement of all available data necessary for making an investment decision. Liquid securities, such as those held within managed portfolios, can fall in value. Naples Asset Management Company, LLC is an SEC Registered Investment Adviser. For more information, please contact us at awaszkowski@namcoa.com.

Client Note December 2020

January 12, 2021

2020, despite a massive pandemic and a severe global recession, central banks, with some fiscal assistance from governments, have managed to keep financial asset prices elevated.  Significant declines in revenues, profits and employment arguably the worst since the 1930’s alongside surging stock index price levels, have conspired to give us the most overvalued market since 1929 or 2000 (some argue “ever”).    How long can this endure?  Depends on when central banks begin to whisper about ‘normalization’.

For 2020, the SP500 gained 18.4%, the aggregate bond index gained 7.5%, and gold gained 26%.  European shares eked out a positive year while the Asian indexes fared very well.  My conservative portfolios gained mid to upper single digits while the average moderate portfolio gained a bit more than 13% on the year.   The pullback in Moderna and precious metals provided a weak end and lackluster start to the year.    The energy sector was the worst sector in the SP500, losing 28% and the tech sector fared the best gaining 48%.  Healthcare and energy are likely to be strong outperformers in 2021.  The addition of TSLA to the SP500 has increased the risk of market volatility. Past observances of new additions to the index show they generally perform worse than prior to their addition.  TSLAs outrageous market value (valued more than the 9 largest global auto makers combined; selling at 28x sales) and the 7th largest company in the index, put the index and any sector it is in at risk of increased volatility.

Gold and gold miners are at risk of starting another correction.  Recent lows at Thanksgiving are being approached.  The rally from late November to January 6 was the largest run up since gold’s consolidation began in August.  However, IF we can hold the longer-term uptrend, upside potential is significant.   Bonds too, are seeing prices under pressure as metals/lumber/agriculture/oil prices’ surge is generating calls of “Inflation!”.   It’s quite early to claim prices are going up due to renewed growth.

Asia came out of the COVID-19 lockdowns much quicker and effectively than western nations.  This re-opening (as a result of very stringent testing/tracing/ and effective lockdowns) allowed those economies to re-stock and re-open driving up demand and prices for raw commodities.   From 2015 to late 2017 base metal prices and oil were moving up quickly.  Cries of inflation were heard then as well.  Inflation never showed up (unless you count 2.1% as INFLATION).  This is due directly to US consumer spending growth, or lack thereof.

Aggregate consumer spending is significantly below trend.    Dig a little deeper and you can see many economic indicators picked up in 2015 through 2017, then rolled over during summer 2018, after the brief impact of tax reform (most of the benefits went to the top where additional money isn’t spent). Current total annual spending was $14.8trillion and growing at 4.2% for the past few years (income at almost the exact same rate).  MOST recently spending has declined the past few months while aggregate income also is declining.  Today we can see the next few months will likely show a spending gap of $1trillion.  A $1trillion gap is almost 7% of total spending and reflects the concurrent GDP output gap and an outright decline in GDP of around 4% year over year.  Looking ahead, the real problem may lie in the US inability to deal with the virus effectively.  Yesterday, an article stated that in Ohio, 50% of nursing home workers are refusing the vaccine.   Layer in low compliance with mask mandates (>70% compliance in order to be effective), and I truly wonder if an end to the virus is, in fact, in the offing.

As a consumer driven economy, the point is, while one can find prices of products higher (or packaging smaller at the same price), we spent a lot less in 2020 and will continue into 2021.  And unless personal spending increases, we should not see a difference in the economy or inflation going forward.  This may bode well for bonds.  TLT the 20-yr treasury bond elf, gained more than 15% in 2020, but has fallen a similar amount off its highs this summer.  Expectations for higher rates may have gotten ahead of itself and we could be near a low in prices.  Layer in the fact that bets against prices are near extremes may indicate the decline in bond prices is nearing an end.

In addition, or perhaps running parallel to the decline in spending is the truly massive amount of people on unemployment insurance.  In 2006, Continuing Claims for unemployment insurance hit a low of 2.35 million.  This began to increase in early 2007 and hit a high of 6.62million in June 2009, after the Great Financial Crisis. By June 2010, this fell to below 4.5million, and continued to decline into October 2018 to 1.65million. Claims remained flat until February 2020.  May 9, 2020 claims hit 24.91million.  And over the past 8 months has receded to only 5.1million.  It was only in November that our current Continuing Claims for Unemployment Insurance fell below the GFR Peak in 2010.  The number and duration of unemployment today has not been seen in the post WWII era.  Fortunately, today, we have unemployment insurance and a Federal Reserve acting to support financial markets (almost perpetually since 2009).

We should not expect any kind of normalization in the economy or improving numbers at least until employment, and thusly spending, improve rapidly.  This is completely dependent upon containing the spread of covid-19.

Due to the length and depth of the declines in spending and employment, the longer-term collateral damage will not be seen until things begin to normalize. Once all the rent and loan deferments, PPP loans, random stimulus checks, and enhanced unemployment benefits disappear we will be able to see the extent of the long -term damage.   Ironically, that knowledge will come at the same time we declare victory over this virus-recession and may be concurrent with a market decline.

In the meantime, let us hope the Fed does not mention ANYthing about tapering the current $120billion per month they are pumping into the financial markets, hoping that the Wealth Effect is more than theory.  So, while prices continue to climb, we will participate and listen intently for any signs the Fed is “confident” enough to reduce the variety of market interventions currently underway.

 

Adam Waszkowski, CFA

This commentary is not intended as investment advice or an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not guaranteed by NAMCO and may not be a complete summary or statement of all available data necessary for making an investment decision. Liquid securities, such as those held within managed portfolios, can fall in value. Naples Asset Management Company, LLC is an SEC Registered Investment Adviser. For more information, please contact us at awaszkowski@namcoa.com.

Client Note November 2020

December 2, 2020

The headlines are touting how November was the best month in 30 years.  It was a very strong month that also had the benefit of October closing at its low on October 30th.  The September and October lows are the bottom of the sideways range we have seen since early August.  The post-election rally has broken out above that range and we are likely to see higher highs in the near term.  I do not expect to see more than a 5% decline in the coming weeksThe SP500 gained 11% on the month, bringing it up to 12.1% year to date. The first four days of the month saw the SP500 gain 7.4% and since then has been a slow grind up. Woe unto those who were out of the markets for whatever reason in early November.

While the S&P 500 gained 11% in November, our average moderate portfolio gained 7% on the month.  Bonds (TLT) gained slightly, and gold went from 1880/oz. to 1780/oz, a decline of 5.6%.  Gold has given up 15% from its all-time high in early August through November’s close. If one looks very closely at GLD’s price movement, there are two approximately equal declines of 11% since August.  This may indicate the end of the decline.  Gold has gained more than 3.5% the past 2 days. Over 1850 should be the all-clear.  The only changes I have made in the precious metals area is to have sold gold miners in August and then buying that portion back recently. Gold has dramatically outperformed stocks over the past 2 years through August, but stocks have been catching up during gold’s respite. I remain bullish on gold and stocks.   Bonds and interest rates continue to vacillate, with prices continuing to ebb as expectations of economic growth assume a higher demand for and ability to obtain new credit.

Over the past few months, the number of individual stock holdings has waned as markets have fluctuated.   Expect to see several names added soon with our usual starting allocation.  One name that we have held for several months finally came to life in November as its vaccine was approved.  I plan to continue to hold MRNA and look to reduce it gradually into higher prices.  Its weight in portfolios has grown so much that its weight amongst other holdings is too high, which could lead to too much portfolio volatility.

On the sector level, energy has come up strongly, outpacing all other sectors the past month.  This may seem counter intuitive, given that there is a Democrat coming into the White House.  The energy sector was so undervalued/oversold/hated that it has no where to go but up.  Since the recent low October 28th, the sector had climbed some 45%(!!) through November 24th.   More recently it gave up almost 30% of the initial climb.  Ideally, another 10% decline would make for a great long-term entry.  Energy has been exceptionally strong the past month and is still substantially below where it was early this year.

Overall, we are on track for a very solid year and I am optimistic going into first quarter of 2021.  Sentiment has been and likely will remain the primary driver of asset prices near term.  Fundamentals have a long way to catch up and traditional metrics remain at ‘all time most expensive’ range.  While sentiment can carry prices further, we really need to see earnings catch up substantially in Q1 and Q2 to avoid any large “air pockets” for prices.   Sometimes prices climb much faster during the anticipation of good things (back to normal life for example) and then progress slows.  The grind in prices since the first week of November might be an indicator of such.

Adam Waszkowski, CFA

 This commentary is not intended as investment advice or an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not guaranteed by NAMCO and may not be a complete summary or statement of all available data necessary for making an investment decision. Liquid securities, such as those held within managed portfolios, can fall in value. Naples Asset Management Company, LLC is an SEC Registered Investment Adviser. For more information, please contact us at awaszkowski@namcoa.com.

Post Election Outlook

Client Note                                                                                                                                                      

November 4, 2020

Pre-election volatility continued in October, with the S&P500 climbing 5%, then dropping some 7% for a net change of about 2.5%.  Gold was a little less volatile and ended the month just slightly lower.  Bond prices trended down all month, with the Aggregate Bond index down less than 1%, while the long bond fell about 3.5%.  Our average moderate portfolio declined by 1.2% on the month, bringing year to date returns to approximately 8.5% for the average portfolio.

The pre-election volatility this year is similar to previous elections.  For the 3 months preceding the election, there have been two increases of about 8% and two declines of 8%.  2016 saw a steadier decline of almost 5% in the 90 days prior to election. 2012 saw a climb of 7% followed by an equal decline.  2020 is not unlike any other year from a market behavior perspective.

Most recently markets have jumped back up (stocks and gold) into the very middle of the past 3 months’ range.  Gold and gold miners also are moving and, as I type, moving up through their respective down channels.   Markets do not like uncertainty and in the immediate term, the longer the count takes the greater the risk of rapid swings in prices.

Looking ahead, the technology sector has been lagging the general market while ‘value’ and dividend paying stocks have performed better over the past week.  The price of oil had a recent bottom on October 29, and since climbed more than 10%.  The energy sector ETF bottomed the next day and has climbed a similar amount.  While not out of the woods yet, as additional stimulus and vaccine data comes out, energy has the most room to make gains as we gain vision to further economic growth in 2021.

However, the gulf between earnings and stock prices remains at historic levels.  Market value of the SP500 vs Total GDP remains higher than in 2000.   As I have stated a few times over the past several months, I still do expect 10-20% swings in stock prices, as we have seen over the past 2 years.  As such, buying relatively ‘low’, after a decline and locking in gains after run-ups is the prescription for continued portfolio growth.

The Federal Reserve has stated quite clearly that its own monetary stimulus is needing the complimentary fiscal stimulus that can only come from Congress.  Given the current state of the Senate, any stimulus is not likely until after the New Year.  The timing of further fiscal stimulus and a widely available vaccine appear to both be pointing to a late first quarter, perhaps mid-year 2021-time frame.  At that time we should be able then to make progress filling in the substantial (greater than 2008 recession) GDP output gap and have better vision as to the rate at which corporate earnings can exceed the 2019 high water mark.

Adam Waszkowski, CFA

 This commentary is not intended as investment advice or an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not guaranteed by NAMCO and may not be a complete summary or statement of all available data necessary for making an investment decision. Liquid securities, such as those held within managed portfolios, can fall in value. Naples Asset Management Company, LLC is an SEC Registered Investment Adviser. For more information, please contact us at awaszkowski@namcoa.com

Client Note September 2020

Client Note                                                                                                                                                      

October 8, 2020

September saw the S&P500 slip approximately 3.8%, ending a streak of 5 positive months in a row.  While equity markets and precious metals (oddly) are moving together, our cash and bond holdings kept average portfolio declines to approximately 1.5% on the month. Year to date through September 30, the S&P 500 is up 5.6%, while our average Moderate Portfolio is up almost 10% year to date.  The fact that financial markets are up this year, despite 2020 being on track for the worst GDP contraction since 1946, is remarkable.

Estimates for 2020 GDP growth will come in around -4%, while the 2007/2008 era saw only a 2.7% contraction.  But this time markets are faring far better.  The key difference between today and 2008 is the emergency actions of the Fed.  The Fed acted far faster and far more substantially than it did in 2008.  The labor market bottomed out in February 2010 with total losses of 8.8 million jobs.  Not until May 2014 did the US recover all the jobs lost.  Currently, we have recovered half of the 22 million jobs lost.  IF, the now-slowing recovery is similar to post 2008, it could be 5 years before all jobs are recovered.  Fortunately, the S&P500 mirrors the Fed’s balance sheet growth more than the economic data.   

History shows us that markets recover more quickly than jobs or the economy.  As such, it appears equity markets have priced in a full profit recovery in the coming year.   In 2008, corporate profits bottomed almost the same time markets did.   Profits and markets grew alongside each other for several years. This time, markets have already recovered and are waiting on profits to back fill the massive valuation gap that now exists.  Because of this mis-match in timing, we could see a few more bouts of 20% gains and declines, as data/news shows economic activity slowing or increasing; as governments decide to add fiscal support or skip it; and as hot spots of the Covid virus spike and recede over the next year or longer.

Some analysts see rising inflation and higher rates coming because of economic growth.  In order to create the ‘good’ inflation (demand-pull), consumers need to spend.  They spend wages, new credit (loans/credit cards) and transfer payments (social security/welfare/stimulus checks).  Banks’ lending standards are increasing; lending is decreasing.  Aggregate wages have declined each month since May. Finally, in August the Cares Act $600/week stimulus ran out while 10 million remain unemployed, keeping pressure on consumer spending.  The Chairman of the Federal Reserve has asked Congress for fiscal stimulus to lift the economy.  As it stands now, there is no real impetus for market rates to rise, and may bode well for bond prices, as rates stay low or perhaps decline again.

My outlook for markets and rates remains the same as during the Summer.  Rates remain low and there is a good likelihood of large swings in market prices.  That outlook will remain until either a large stimulus package with money going right to consumers or control of the spread of the virus occur, maybe both.  I am expecting a post-election rally that may start mid to late October, simply because regardless of the winner, markets like certainty.  Precious metals appear to have completed their correction and a nascent rally may have started.

Adam Waszkowski, CFA

 This commentary is not intended as investment advice or an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not guaranteed by NAMCO and may not be a complete summary or statement of all available data necessary for making an investment decision. Liquid securities, such as those held within managed portfolios, can fall in value. Naples Asset Management Company, LLC is an SEC Registered Investment Adviser. For more information, please contact us at awaszkowski@namcoa.com.

Client Note July 2020

After a brief pause in June, financial markets continued their climb, trying to get to even on the year.  Of the major indexes, only the tech-heavy NASDAQ has managed to make new all-time highs.  The discrepancy across indexes is significant.

Off its all-time high             year to date price return

The Dow:                              -10% (Feb 2020)                                  -7%

S&P 500                                 -4% (Feb 2020)                                 +1%

Russell 2000 (small cap)    -12%   (Jan 2020)                               -10%

NASDAQ                                  -3% (July 2020)                                 +20%

EAFE (Eur/Afr/Far East)      -15%  (Jan 2018)                                 -8%

 

Inside the NASDAQ, the top “6” holdings are Apple, Microsoft, Amazon, Facebook, Alphabet A shares and Alphabet B shares.  These 5 stocks make up 44% of the index.  What this means is that only a handful of stocks, in one sector, are keeping the overall indexes up.  One can say, “so goes tech, so goes the markets”.    US mega cap growth/tech has been the only game in town.   More recently tech has weakened against the rest of the market.   If tech loses it dominance without another sector or two to take the reins, equity markets will have a bumpy second half 2020.

Portfolios I manage continue to do very well.  Gold is in the news a lot recently.  Over the past 15 months, gold has dramatically outperformed equity markets, and climbed 65% since November 2018.  The last 15% of that has come in the past two weeks.  Trimming and taking profits is on the schedule for August.   The individual stocks I choose from time to time have become a mixed bag.  IRBT and APRN recently reported significant upside earnings surprises, only to be sold off hard.  I am seeing this in several areasIts feeling like a ‘sell the news’ kind of market.  After a 50% climb since the March lows, its not inconceivable that stocks will take a breather.  Perhaps even give back some as we adapt to living with Covid19.     Clients can probably observe the steps I have taken to reduce exposure and take some profits, so that if/when we get a correction, it should not be too painful.

July 30, 2020 has the potential to be a historic day.   GDP for the second quarter 2020, covering March 30 through June 30 will be released.  Current estimates are to see a contraction in US GDP of -30%.  This would be the worst quarter since Dec 1946 and sets up the worst year since then as well.  While this is widely known to people who follow it, I am sure it will be a shock to some, and widely covered in the financial press.   In addition, all the tech stocks mentioned above will report earnings.  They will all be very profitable, but if this is indeed a ‘sell the news’ market, beware.  Microsoft already reported on July 22, beating estimates, and was sold off by 6%, recovering only a part of that decline this past week.

The economy is not coming back as fast as hoped and is already showing signs of levelling off.  Roughly 10% of our economy has disappeared (hospitality/tourism).   As long as the Fed promises, and CONTINUES to inflate the monetary base, financial markets can remain elevated However, if a small correction gets out of hand, the Fed has little influence in the very short term—and not much new to offer.  .  The real economy however will not come back without greater spending from consumers and businesses—either through earned wages, or stimulus, or loans/credit.

 

Adam Waszkowski, CFA