What Makes Us Different...Matters

FIVE THINGS YOU SHOULD KNOW

1. Equity Markets – rose this week with U.S. stocks (S&P 500) up 1.27% while international stocks (EAFE) gained 2.14%
   
   
2. Fixed Income Markets – were mixed this week with investment grade bonds (AGG) down -0.11% while high yield bonds (JNK) gained 0.35%
   
   
3. Additional Vaccine Rollout – President Biden announced this week that the U.S. had secured deals with both Pfizer and Moderna for more than 100 million additional doses each and that the delivery will be expedited. In the last week an average of 1.62 million doses were given per day, an average that if not improved would mean it would take 9 months for 75% of the population to receive the vaccine, a time-table the administration is trying to drastically decrease.
   
   
4. Fed Update – Chairman Powell spoke this Wednesday in regards to the Fed’s outlook on the economy, reiterating that the U.S. jobs market remains a long way from full recovery and that monetary policy would remain very accommodative until there was “substantial further progress” on employment and inflation. This news has been used by the pro-stimulus crowd to combat concerns from others that additional stimulus could overheat the economy.
   
   
5. Key Insight – [VIDEO] Tim and Jake discuss one key aspect of what makes TEN so different, and how we approach relationships is so critical to helping people achieve their dreams. [ARTICLE] While everyone is focused on whether there is a stock market bubble, many are failing to take into account the dangerous “bubble” that never really pops … inflation. We discuss where we think stocks are, as well as why cash isn’t a great alternative.
   
   
6. abandoning their risk tolerances to chase stocks higher, and/or
7. getting too apathetic about the ever-present risk of volatility and “over-reacting” to the next sell-off (e.g. the hyperbole around the Gamestop saga, or
8. on the other end of the spectrum allowing all the doomsday/bubble talk to drive them into cash, gold or treasuries right as inflation and interest rates are picking up.

INSIGHTS for INVESTORS – The Bubble That “Never” Pops

Intro

The question on many investors’ minds these days is “is the stock market in a “bubble”?”

The more important thing to ask oneself is “is that even the right question?!”

Markets of course move up and down, and corrections (a drop of 10% or more) happen on average about every 18 months. The problem is many people assume “on average” is the same as “on time” and that the market acts according to some kind of schedule. There’s also a lot of subconscious application of the old axiom of “what goes up, must come down.”

However, as we discussed back on January 8^th of this year, the market doesn’t have to do anything and in fact often acts the opposite of how one would expect.

Our concerns are less about “bubbles” than they are with investors:

To those of you who are worried about bubbles and can relate more to the mindset reflected in bucket “c” above, we wanted to highlight a few key points to hopefully help you “keep the faith” or at least “stay the course” along with a discussion regarding why the nearly ever-present reality of inflation must be addressed as well.

Bubble Talk Isn’t Real Analysis

First, understand that “bubble” is not any kind of truly measurable or knowable piece of analysis. It’s mostly for pundits and the media to throw about to garner clicks and views. To the degree that people will talk about equity valuations their “analysis” usually fails for a few key reasons:

• they lump all stocks into a discussion of the market as a whole thus ignoring parts of the market that aren’t at high valuations,
  
  
• they don’t take into account unique events and their transient effect on earnings instead projecting them out as a new normal (e.g. while earnings tanked for some companies during the shutdown they are set to spike back to near normal and thus their P/E’s will likely mean revert)
  
  
• they don’t recognize that market strength usually begets market strength and thus even extended valuation, or good market runs can continue much longer than one would expect.

On this last point, Goldman Sachs recently noted that “(t)he S&P 500 has recovered 70%+ from its March 2020 low. While investors may be concerned about staying invested following the strong rally, history suggests that there is more room to run. During past US economic expansions, investors have enjoyed positive one-year returns 87% of the time, and >10% drawdowns only 4% of the time.”

Bespoke spoke to this same reality with this stat, “Of the five prior breakouts to new highs, the S&P 500 went on to rally anywhere from an additional 2.3% to 10.8%. Averaging all five prior periods together, the average spread between the prior high and the next high was 7.8% and the median gain was 8.5%. Applying the average and median gains to the current period would equate to a level of about 4,170 on the S&P 500. Obviously, that doesn't guarantee anything about the current leg higher, but we think it helps to provide a blueprint for what has been 'typical' in this current market environment.”

Bubbles Don’t Pop When Growth and Inflation Are Accelerating

Risk assets (stocks, high-yield bonds, real estate etc.) feed off of growth and inflation. True this don’t go up forever, but you’d be hard pressed to ever find a time when risk assets sold off for a sustained period when both of these components were trending upwards as they are right now.

Not only is global GDP trending upward off of the COVID shutdown lows, but earnings per share growth and the CRB commodities index are up 25% and 20% respectively in just the last quarter! Those are big numbers.

About that Inflation, It’s Hunting You

I get it, many of you are scared. As always there are some menacing unknowns out there, we are all still reeling from this COVID saga, and all you hear in the news is about the next crash.

People tend to fixate on the stock market as their gauge for all things investing and while there are some good reasons for this, the primary one for the press is that is creates the most “newsworthy” events.

The result for many is that they panic and try to time the markets by heading into cash in anticipation of the next crash. I’ll spare you today all the stats that show how misguided trying to time markets is, but you need to keep in mind the true ever-present lurking monster that almost NEVER relents … inflation!

While heading to the sidelines and tucking your hard-earned savings in the proverbial mattress might sound safe, the reality is that it is actually a GUARANTEED way to lose money over time due to inflation constantly reducing one’s purchasing power.

This has never been truer than it is today, with interest rates for savings and CD’s still far below current inflation levels that are only picking up steam.

I’ve shared another great article by Brian Wesbury below, and the current situation with inflation that is a wonderful and quick read.

Don’t let the talking heads mess with you. The truth is as a well-diversified investor with a solid financial plan you have little to worry about so long as you don’t do anything extreme. Whether you want to readdress your plan or just talk, we are always here for you.

Have a great holiday weekend!

Tim and the team at TEN Capital