Calm on the Surface, Paddling Like Mad Underneath - Adviser Investments

Calm on the Surface, Paddling Like Mad Underneath

July 19, 2021

Please note: This update was prepared on Friday, July 16, 2021, before the market’s close.

Today’s stock market resembles a duck gliding across a pond—placid on the surface but rapidly churning below. This week that picture came into sharper focus.

While the S&P 500 index coasted along at or near record levels with a nothing-to-see-here ease this week, stocks of smaller companies, as measured by the S&P SmallCap 600 index, sank 3.2% through Thursday. Meanwhile, the market’s fickle favor pivoted swiftly from value back toward growth as energy stocks fell more than 5% and stocks of companies in the consumer staples sector gained nearly 1%.

On a total return basis, the Dow Jones Industrial Average is up 15.4% for the year through Thursday, while the broader S&P 500 has gained 17.0%. The MSCI EAFE index, a measure of developed international stock markets, has returned 9.2% through Thursday. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.42%, up from 1.12% at the end of 2020. Overall, the U.S. bond market has declined 0.9% year-to-date.

Is the Ax Coming for Inflation? 

The prospects for and evidence of inflation have dominated financial headlines for a good part of 2021. This week was no different. The Consumer Price Index, the Bureau of Labor Statistics’ headline measure of inflation, jumped to 5.4% in June—the highest year-over-year reading since the end of the Great Financial Crisis 12 years ago.

Ominous? Only if you spent too much time listening to the pundits pontificate. A closer review reveals that the high headline inflation figure is being driven up by a handful of sectors. Compared to this point in 2020, prices for sports tickets are up 42% and hotels and airfare have about doubled (up 93% and 115%, respectively), while used car prices have nearly tripled (up 190%) and car rental prices have spiked even higher, more than 250%.

Most of those components represent businesses that suffered mightily during the pandemic and are now seeing a strong resurgence of demand at the same time they are facing limited supply. Such supply/demand imbalances and the sharp price spikes they engender aren’t sustainable. In fact, auto sales have fallen two months in a row, after skyrocketing in March and April.

A couple of months ago, inflation hawks’ focus landed on the rising cost to build new homes, and in particular the price of lumber. In early May, lumber prices hit about $1,670 per thousand feet of board. Now? Prices have fallen under $600—more than 60% below that high, and they’re continuing to sink. We believe there’s a lesson here for other “commodities” that have spiked higher and driven inflation figures up over the short term.

We don’t take our cues from the Federal Reserve, but we must admit we’re in agreement with Fed Chair Jerome Powell on this issue. He told Congress this week that, once again, the Fed’s view is that the current high level of inflation is “transitory.”

Sources: NASDAQ, Adviser Investments.

Long on Jobs, Short on Labor

We’re seeing a bit of a mismatch in the jobs market these days. Businesses are rushing to reopen, but many are having trouble hiring workers. Meanwhile, many workers say they’re having trouble finding suitable jobs. As of June, 9.5 million Americans remained unemployed—that’s nearly 4 million more than before the pandemic. Yet the most recent hiring report showed 9.2 million job openings in May.

Pundits have pointed to higher unemployment benefits as the culprit, saying these entice low-wage workers to stay home collecting their checks rather than moving back into the workforce. But there may be other factors keeping people on the sidelines.

Economists see signs that the economy may be suffering from a skills mismatch—the jobs that have come back quickly post-pandemic (think food and package delivery) aren’t the same ones that downsized rapidly during the pandemic (event-planning, waitstaff). Some workers may not be able to find positions that suit their skillsets, while others with in-demand skills may have moved on to different types of jobs.

Another mismatch may be location. A recent The Wall Street Journal article highlighted a surge in people moving from cities to suburbs and exurbs during the pandemic. Now, demand for certain types of workers has risen in areas without enough people to fill those jobs (the example the story gives is a shortage of restaurant staff in a booming vacation town that lacks housing for workers and permanent residents).

Some of these factors will subside with time. Enhanced and extended federal unemployment benefits are rapidly winding down. Other trends accelerated by the pandemic may last longer. That could mean hiring difficulties will persist, exerting long-term upward pressure on wages—and, therefore, inflation.

Putting a damper on these inflation flames is the fact that fewer people pulling down a paycheck could also lead to lower consumption. Simply put: Inflation is complex. The massive disruption to the U.S. economy caused by the pandemic, followed by its swift reopening, is the source of a lot of noise in the economic data.

For now, pricing pressures have yet to quell the enthusiasm of consumers and business owners. Still, a sputtering labor market could put a crimp in our recovery and reintroduce volatility in the second half of the year.

Podcast: Wiener and Lowell’s Mid-Year Market Recap

The pandemic recovery couldn’t be going much better, as far as the stock market’s concerned. But we think there are some challenges ahead. Chairman Dan Wiener and Chief Investment Officer Jim Lowell take a look back at the first half of 2021 as well as the risks that remain in the months to come. Their wide-ranging discussion covers:

  • The recent spike in inflation and whether it will last
  • The stock market’s turn from value to growth
  • Whether investment opportunities in China are worth the risks
  • How investors should think about the bond market’s low yields

Tune in to get Dan and Jim’s informed take on the trends we’re seeing in today’s markets and how Adviser Investments is prepared to tackle them. Click here to listen now!

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Financial Planning Focus
4 ‘Human Errors’ Investors Should Avoid

To err is human. Research in behavioral economics has shown that investors are just like other people—well-intentioned but fallible. Even experienced investors can make costly mistakes with their money.

Here are four everyday behaviors that can lead to a financial faux pas—and how to avoid them.

  1. Buying based on limited information. Choosing to invest based on incomplete information can negatively affect your portfolio. Say you hear about a company on your favorite financial podcast. Over the next few months, their name keeps popping up on the same program—always in a positive context. You ultimately pull the trigger to invest and the decision seems informed. But by only listening to a single source, have you really done the requisite research?

Economists call this bounded rationality—making “rational” decisions based on limited information, not realizing that what you think you know may be incomplete or biased. One of the best ways to avoid this pitfall is to proactively expand the resources that you turn to when researching an investment. Seek out alternative takes on the company, especially from sources you don’t typically read or listen to. After that, talk to investment experts you trust to get a broader picture of the sector or industry that’s piqued your interest before taking the plunge.

You’ll never have perfect information, but if you kick the tires and do your homework, you’re far more likely to make an informed decision. (If this sounds like a lot of work, it is—and there’s also the danger of information overload. We see this conundrum as one of the greatest values we as wealth managers bring our clients—we do the research and closely track your portfolio to make sure that yesterday’s decision is still a good one today.)

2. Falling prey to FOMO. As financier J.P. Morgan once said, “Nothing so undermines your financial judgment as the sight of your neighbor getting rich.” Seeing other people strike it rich in the latest fad investment—think, bitcoin, SPACs or meme stocks—can cause even the most disciplined investor to feel like they are missing out. But positive short-term performance is seldom a guarantee of lasting profitable results. We call the belief that today’s good times will extend into tomorrow “recency bias.”

The best way to avoid following the fast crowd over a cliff is to maintain your diversification discipline. A well-diversified portfolio reduces your risk when the flavor of the moment experiences an inevitable correction.

3. Beating a hasty exit based on fear. Investors can get spooked and sell out of the market for fear that a correction is coming. Alternatively, when an investment does particularly well, people may exit early in fear of a sell-off. But hasty exits can have tax ramifications, not to mention the loss of future gains.

Corrections in individual stocks, funds or entire markets are inevitable and no one can predict exactly when they’ll occur. We believe that spending time in the market—rather than trying to time the market—is the smarter, more profitable path to meeting your investment objectives. A solid way to avoid hasty exits is to set rules for yourself. Choose a target price or a time frame that’s tied to your financial goals. When it comes to returns, discipline trumps fear.

4. Getting cocky. Investor overconfidence becomes contagious when a bull market runs long. It can cause investors to take risks in their portfolios that they would otherwise avoid. The best remedy is to engage with your financial adviser, candidly discuss your risk tolerance, and create a comprehensive financial plan that will meet your needs over the long term. Be disciplined and stick with it.

As always, your situation and outlook are unique. We encourage you to speak with your wealth management team here at Adviser Investments whenever you have questions about your investments or your financial plan. We’re The Planner You Can Talk To and we’re here for you.

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Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income

No trades this week.

AIQ Tactical Global Growth

Sold iShares U.S. Healthcare Providers ETF (IHF). Bought iShares U.S. Medical Devices ETF (IHI).

AIQ Tactical Defensive Growth

No trades this week.

AIQ Tactical Multi-Asset Income

Sold SPDR Bloomberg Barclays Convertible Securities ETF  (CWB). Bought Vanguard Dividend Appreciation ETF (VIG).

AIQ Tactical High Income

No trades this week.

Adviser Investments’ Market Takeaways

In this week’s Market Takeaways, Research Analyst Liz Laprade discussed the new CPI numbers, while Vice President Steve Johnson broke down the week’s increased volatility.

Looking Ahead

Next week brings several reports on the red-hot housing market, with homebuilder sentiment, permits, starts and sales. We’ll also get some broader-picture peeks at the economy, with leading economic indicators due out as well as reports on demand for manufacturing and services.

As always, you can visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.


Please note: This update was prepared on Friday, July 16, 2021, before the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Purchases and sales of securities listed above represent all securities bought and sold in each strategy during the period stated. Each strategy’s portfolio generally includes more holdings in addition to the transactions listed above and in some cases the securities listed above may only represent a small portion of the particular strategy’s complete portfolio. Further, the securities listed above are not selected for listing based on their investment performance; thus it should not be assumed that any of the securities listed above were profitable or will be profitable, nor should it be assumed that future recommendations will be profitable. Clients and prospective clients should only make judgements about a strategy’s performance after reviewing the strategy’s composite performance information. There is no assurance that each security listed above will remain in the strategy’s portfolio by the time you have received or read this email. Securities are listed for informational purposes and are not intended as recommendations. Existing investor accounts may not participate in all transactions listed above due to each account’s particular circumstances.

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