How We Monitor Your Money

How We Monitor Your Money

This week Tim covers some common questions from clients, and complaints he hears about others in the industry, around the care of client’s money – addressing how we monitor holdings, build portfolios, and make sure no clients get left behind.

Five Things You Should Know

1. Equity Markets – were down in this shortened trading week with U.S. stocks (S&P 500) -2.18% while international stocks (EAFE) fell -1.19%.
   
2. Fixed Income Markets – were also lower this week with investment grade bonds (AGG) -0.73% while high yield bonds (JNK) were down -0.06%.
   
3. U.S. Provides Additional Assistance – the U.S. announced an additional $800 million of support for Ukrainian-defense needs, bringing total support since the war began to $2.5 billion. This round of assistance is geared towards fortifying Ukraine’s military firepower, including artillery, helicopters, ammunition and other hardware.
   
4. Inflation Yet to Slow – U.S. consumer prices rose in March by the sharpest rate since 1981 (although core numbers were more muted), while U.K. inflation hit 7% last month for a new 30-year high. Many Federal Reserve governors were quick to comment on the news, with some members like James Bullard suggesting the Fed needs to raise rates quicker or risk losing its ability to fight inflation.
   
5. Key Insight – [VIDEO & ARTICLE] This week Tim covers some common questions from clients, and complaints he hears about others in the industry, around the care of client’s money – addressing how we monitor holdings, build portfolios, and make sure no clients get left behind.

Insights for Investors

Intro

Being an investor is tough. You work hard to save to protect and provide, both of which connect to numerous specific hopes and dreams, only to have the world and markets test you continually with various scares that give the appearance of threatening those personal goals.

On top of that I realized early in my career that another unspoken fear of many investors is feeling trapped between realizing their own limitations as an investor (whether time, knowledge or discipline), and having to trust yet another broker that seemed to have little vested in them as clients and/or the client’s success. I would hear things like “I’m not sure they remember I’m still a client” or “I called, and they had no explanation for what was happening to my positions/portfolio with them.”

It's no wonder that so many investors are left skeptical at best, and demoralized at worst.

In the video above I address some of these industry concerns we hear with some general explanations on how to build portfolios in such a way that ensures a) that we know and monitor each position a client is in closely, b) build portfolios in a way that allows customization but also personalized monitoring across the firm and c) that no client will get left behind in a position regardless of their account size.

As to the broader fears that continue to encircle markets here in the U.S., namely inflation and interest rates, we’ll address those below.

Investors and Inflation

After all the transitory talk about inflation last year, now investors seem to believe runaway inflation will never end. Consequently, investors lack of optimism around markets is quite literally near very long all-time lows as you can see in the chart below. While sentiment isn’t a timing tool for markets near-term, it historically is a good indicator of a good long-term entry point as sentiment and markets often bottom in similar timeframes.

Similarly, the most recent small business confidence reading showed the third straight month of declines coming in at 93.2 vs. a historical average of 98. As Bespoke noted, “The NFIB's small business survey questions business owners on what they consider to be their most important problem. Inflation as the biggest issue has soared from only 1% of businesses in the summer of 2020 to a record of 31% per the latest data as of March.”

Right on cue, this week’s inflation data seemed to give some signs of potential relief on the horizon, as many top analysts continue to call for, with Core CPI rising just 0.3% vs. expectations for a gain of 0.5%. While general inflation readings are still high, this week’s data was what we’ve hoped to see about now and will be looking to continue over the months ahead.

Interest Rates and Corresponding Concerns

The other related concern are interest rates continuing to rise at a very strong pace and their impact, both on bond and housing values.

For anyone that has been following our commentaries for any length of time, we’ve been ringing the alarm bell on traditional taxable fixed income for some time – most notably and timely on August 7^th of 2020 (see here). Over the last two years the Barclay’s aggregate bond index has declined over 6%, putting a big hole in the classic 60/40 allocation and most notably provided no buffer against volatility here in 2022 with steeper losses than many equity markets.

The set up for this weakness, given the rock bottom level of interest rates in the Spring/Summer of 2020, was pretty obvious to see for anyone willing to not be captive to past performance, but the recent ascent in yields has caught just about everyone by surprise. As Bespoke summarized, “In the last five weeks, though, we've witnessed an 80 bps increase in the yield on the 10-year US Treasury which ranks as the largest increase during that span in more than 10 years!” The result is many investors trying to be too conservative in their holdings have been rocked in their supposedly safe positions (see below).

For investors, like those at TEN, who have taken a more truly diversified approach and embraced the important role of alternative strategies and asset classes, this pain has been largely avoided and other opportunities seized.

The last related concern to interest rates surrounds housing and the fear that higher rates could lead problems in this key part of the economy. The article below from Brian Wesbury does a very nice job detailing why many fears are premature, but where there could be some high winds in the sector.

Have a wonderful and blessed holiday weekend with your families!

Tim and the team at TEN Capital

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Housing: Heartburn, Not a Heart Attack

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 4/11/2022

When interest rates go up, many analysts start to worry about recessions. That's not wrong to do, after all Federal Reserve rate cycles are important. Lately, the market has settled on expectations for a total of about 2.25% or more of interest rate hikes this year. The result is a jump in many longer-term yields. The 10-year Treasury yield is 2.77%, while the typical 30-year mortgage has climbed from 3.2% in December, according to Bankrate.com, to 5.1% recently.

So, some analysts think that a housing bust is likely, which would drag down the entire economy. We certainly agree that higher mortgage rates will be a headwind for the housing market in the year ahead. But what we see is some heartburn, not a heart attack.

While 5% mortgage rates are high relative to where they were, home prices should still rise 5 - 10% this year, meaning home prices either keep up with or exceed borrowing costs. Real mortgage rates (the rate minus inflation) are still negative.

Negative real rates are also why we are not yet worried about an inverted yield curve from the 2-year Treasury to the 10-year. In the past, when inverted yield curves preceded recessions, real interest rates were positive, not negative.

Now, back to housing...It is true that national home prices have soared in the past couple of years. However, so have construction costs. The Census Bureau's price-index for single-family homes under construction, which does not include the rising cost of land, is up around 25% from two years ago. For 2022, we expect mortgage rates to help slow national average home price increases versus 2020-21, but for prices to still go up in the 5 - 10% range.

By contrast, rents should accelerate for several reasons: (1) general price inflation, (2) the end of the eviction moratorium, (3) higher mortgage rates shifting demand toward renting, and (4) the fact that home prices are already high relative to rents.

Home sales are a different story. Higher mortgage rates make it likely that fewer existing homes should sell in 2022 than in 2021. But this is not the end of the world. Existing homes don't reflect new construction and add only slightly to GDP (via brokers' commissions, for example). Existing home sales slowed in 2018 and 2019 and the economy did fine. New home sales should be roughly flat to slightly down this year, but new home sales also fell in 2021 and real GDP grew 5.5%. Again, not the end of the world.

What really matters for the economy is how higher mortgage rates affect the pace of home construction. There, again, we see some heartburn, but no calamity and no collapse. Builders started 1.605 million homes last year and we expect total housing starts to exceed that in 2022. However, starts for the full year will probably lag the 1.713 million annual pace of January and February.

But starts are not the whole story when it comes to home construction. The total amount of construction can rise as builders move toward completing homes they began months ago. And remember: home building includes not only single-family homes but also multi-family units, which captures building designed for people who want to rent.

The US has underbuilt homes for the past decade. Higher mortgage rates don't change that, although they may shift around the share of the population that rents versus owning. Monetary policy is now getting less loose; that's going to lead to some indigestion. The real problems won't start until policy actually gets tight. And for that we have longer to wait.

Data, Just the Data

Data points this week included:

• U.S. Jobless Claims – rose slightly off of the previous 50-year low with 185,000 initial claims last week. Meanwhile continuing claims have hit a new post-pandemic low of 1.475 million.
  
• U.S. Retail Sales – rose by 0.5% in March following February’s upward revision to 0.8%. While consumer spending remains strong, sales largely increased due to surging prices for gasoline and food.
  
• U.S. Consumer Sentiment – saw a surprising uptick in April to 65.7 following March’ 11-year low of 59.4. The expectations component also surged by 18%.
  
• U.K. Industrial Production – saw contraction for the first time this year with production down -0.6% in March compared with expectations for a 0.3% increase. Output still remains below pre-pandemic levels in 3 of the 4 major production sectors.
  
• U.K. Employment – the unemployment rate fell to 3.8% in February for the lowest level since the end of 2019. Job vacancies also came in at 1.288 million for Q1, a new record high.
  
• U.K. GDP – saw a 1% improvement in the three months through February, with the services sector providing the majority of growth.