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.

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

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

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 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 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

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

Client Note May 2020

June 1, 2020

Like April, equity markets started the month of May off slowly, but over the past 10 days, the S&P500 has gained roughly 4.5% on the month putting it at -5.7% year to date.    International equity indices gained a bit more for the month but continue to lag the U.S. by a wide margin.     Bonds were generally flat, with junk bonds moving up alongside stocks, while a small move up in interest rates pushed the long bond (TLT) down slightly on the month.   Gold moved up almost 3% on the month, after being up almost 4% mid-month.  And our individual stocks continue to do well, enabling our average moderate portfolio to add just over 3.5% for May and for year to date returns approaching 4%.

Looking ahead, it appears investors are pricing the market in expectation of a solid second half recovery and near full economic recovery into 2021.  While investors have bid up prices in anticipation, there is a loooong way to go to recover from the sinkhole we are in.   Current earnings estimates for second quarter are expected to drop 35%, reflecting a full year estimate of around $100/share of the SP500. If that occurs and the expected earnings bounce in Q3 and Q4, we have a forward Price to Earnings ratio of 30x, which is extremely expensive.  We will see earnings in mid-July; first read on GDP at the end of July; and all the while we will see employment numbers each week.   On going jobless claims have now exceeded 20 million, reflecting an unemployment rate a bit under 15%.   Economic data will remain dire.  The hope is that employment and spending figures rebound rapidly in the coming weeks. 

As mentioned last month, the expectations and sentiment that direct short term prices are well ahead of actual improvements in employment or spending (declining).  We have made significant progress in flattening the curve with the virus.  We have seen stock prices climb dramatically alongside the hope of a rapid economic recovery. However, we are seeing an even more stretched disparity between current prices and reality on the ground.  This does keep markets at risk of wide price vacillations.

Attaining and holding 3000 on the SP500 does allow for further upside in the markets and while I rotate out of individual stocks that have lost their ‘mojo’ (or take profits), there is another handful I am tracking and may show up in portfolios in the coming days.  In my April Observations and Outlook, with tongue firmly in cheek, I outlined a path for stocks to 4000 if the Fed continues to add liquidity/monetize debt. Since that writing, the Fed has covered a quarter of that quantity.  The rise in the Fed balance sheet has paralleled a rise in equity prices. The Fed continues to plan for and express willingness to continue its balance sheet expansion in pursuit of its stated mandates: full employment and stable prices.

Prices across virtually all asset classes remain constructive considering Fed actions and optimism towards renewed economic vigor.  State re-openings have occurred, and the expectations are for rapid improvement in employment and spending.  There is a nascent uptick in the outperformance of equal-weighted and value indexes versus the general market.  This market characteristic often shows up at the beginning of economic expansions and longer bull markets.  June’s economic data and market price action should give us a great deal of insight into the remainder of the year.

Adam Waszkowski, CFA