‘Risk Off’ as Recovery Stabilizes - Adviser Investments

‘Risk Off’ as Recovery Stabilizes

May 24, 2021

Please note: This update was prepared on Friday, May 21, 2021, before the market’s close.

The tug-of-war between growth and value stocks, large and small stocks, and “risk on” and “risk off” assets continued on Wall Street this week—with a myopic focus on inflation duration and policy tea leaves competing against a robust economic rebound that seems constrained largely by transitory disconnects between supply and demand.

Meanwhile, minutes from the Federal Reserve’s April meeting drew speculation about how soon policymakers would begin slowing the “easy money” train by trimming their bond purchases, creating a ripple in the market on Wednesday.

Inflation remains the worry du jour, yet we still see the recent uptick in consumer prices as likely ephemeral, driven by transitory pandemic-related factors. With unemployment claims falling to a pandemic low last week, Wall Street sentiment shifted toward signs of economic momentum instead of worries about runaway inflation.

Despite the volatility, the Dow Jones Industrial Average and S&P 500 index are less than 2% from the all-time highs reached at the beginning of the month. On a total return basis, the Dow is up 12.2% year-to-date through Thursday, while the broader S&P 500 has gained 11.4%. The MSCI EAFE index, a measure of developed international stock markets, has returned 8.7%. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.54%, up from 1.12% at the end of 2020. Overall, the U.S. bond market has declined 2.7% this year.

Bitcoin Backlash and SPAC Scrutiny

As the economy recovers and speculators envision a shrinking monetary safety net, some are beginning their retreat from risky bets on Bitcoin and SPACs.

Wednesday, in particular, was a dicey day for Bitcoin—and that’s saying a lot for an asset  accustomed to spectacular price swings. Intraday, Bitcoin was trading 29.7% under its Tuesday close. It bounced back for “just” an 11.4% loss on the day. Still, as of Friday morning, the cryptocurrency is down about 37% from the all-time high it set mid-April.

Concerns about increased regulatory scrutiny are part of what’s driving the cryptocurrency retreat. In a speech this week at a Financial Industry Regulatory Authority (FINRA) conference, U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler said that the SEC and FINRA should prepare to crack down on crypto “to ensure that bad actors aren’t playing with working families’ savings.”

The price plunge is also a sign that retail investors are jumping ship. Remember those $1,400 stimulus checks in mid-March? A survey found that nearly two in five stimulus recipients making less than $150,000 in household income said they planned to invest a portion of their stimulus, with about 60% of that number expecting to buy Bitcoin. Bad idea. Had they invested the full amount when the checks arrived, their investment would be worth roughly $950 today—assuming they didn’t pull the plug during Wednesday’s panic selling.

Bitcoin had company on the ride down. Shares of special-purpose acquisition companies (SPACs) have slid 30% over the last three months (based on the Defiance Next Gen SPAC Derived ETF) and are sitting at a six-month low.

What’s causing investors to flee from SPACs? Much the same dynamic at work in the crypto market: Concerns that the Fed’s borrower-friendly policy may be on the way out combined with increasing regulatory scrutiny.

Note: Chart shows value of hypothetical $100 investment in Bitcoin and SPACs (represented by the Defiance Next Gen SPAC Derived ETF) between 12/31/2020 and 5/20/2021. Sources: Morningstar and Coinbase.

We’re on the record saying that highly speculative investments like Bitcoin and SPACs are only acceptable risks if you’re investing money you can afford to lose. We do not believe they should play a part in a long-term investment strategy, however. Caveat emptor.

Shortages Stymie Homebuilders

Not only has it become difficult for willing buyers to find existing homes for sale, but builders are also facing their own shortages. The lack of building materials and available labor has prevented the sector from meeting growing consumer demand.

Lumber prices are more than four times their pre-pandemic level and sawmills are running at full capacity. New mills simply aren’t being built, so there’s little relief in sight. Wood production remains 15% lower than the 2006 peak, after which the housing bubble burst and crippled the lumber industry with closures and consolidation that rendered it slow to respond to spiking builder needs in the last year.

The upside to the construction crunch is a seller’s market for current homeowners. Prices were up nearly 20% year-over-year in April (a new record) to $341,600 (another record). The average purchase loan amount exceeded $410,000, the highest since February—even as historically low mortgage rates have begun inching up. Meanwhile, there were 20% fewer homes on the market than there were last April, which has created stiff competition among buyers.

Podcast: Financial Spring Cleaning

The darling buds of May are in full blossom, and most people are taking some time to shake off the dust and straighten up. When you do, make sure you include your finances. Financial Planners Andrew Busa, JonPaul McBride and Diana Linn take to the mic this week to bring you six steps you should take to make sure your financial plan is up to date, including:

  • Cleaning up your credit
  • Setting your employee benefits straight
  • Pruning old accounts
  • Raking in unclaimed money
  • …and more

Keeping things trim and on track is even more important for your pocketbook than it is for your perennials. But a few quick tips can keep you in bloom. Click now to find out more!


Financial Planning Focus
Easing the Burden of Student Loans

Student loan debt was a topic of debate during the 2020 presidential election, and the Biden administration has since signaled a willingness to explore it further during his first term in office. In the meantime, there may be a light at the end of the debt tunnel courtesy of the federal Public Service Loan Forgiveness program (PSLF).

PSLF is aimed at helping college graduates who choose careers in public service (defined below). If a qualified borrower makes 10 years’ worth of timely payments on their loan, they are eligible to have the remainder of their loan balance wiped out.

The four steps below can help you or your loved ones navigate the maze-like qualification process.

  1. Qualifying Employment: The first requirement for PSLF is to work in a public service position when you are making payments. This means a civil service, 501(c)(3) or a private non-profit employer that provides public services such as early childhood education or health care. Your employer will be able to tell you if they are a government or non-profit organization. (To learn more about jobs and employers that fit the bill, click here.)
  2. Loan Eligibility: Not all student debt is eligible for forgiveness. To qualify, it must be a federal direct loan. This includes direct subsidized and unsubsidized loans, PLUS loans and direct consolidations. Private loans do not qualify. However, you can consolidate non-eligible federal student loans into a direct consolidation loan to make them eligible for PSLF. We recommend speaking with a financial adviser before making that move.
  3. Repayment Plan: The next qualifier is making 120 loan payments after October 1, 2007 under what is called an Income-Driven Repayment (IDR) plan. The various IDR plans base your payments on factors like income, family size and debt size. Typically, the higher your income, the higher your monthly payment.
  4. Timely Payments: Finally, your payments must be made on time and in full while you hold a qualifying job. It is important to note that these payments do not need to be made consecutively. If you leave one qualifying employer and return to another later, you can continue building toward that 120-payment hurdle.

Requirements for student loan forgiveness are subject to change over the next few years. In the meantime, the PSLF may be a useful option to help you lower your debt burden and meet other savings goals.


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 Fidelity MSCI Communication Services Index ETF (FCOM). Bought iShares Core S&P 500 ETF (IVV).

AIQ Tactical Defensive Growth

No trades this week.

AIQ Tactical Multi-Asset Income

No trades this week.

AIQ Tactical High Income

No trades this week.

Adviser Investments’ Market Takeaways

In our latest Market Takeaways, Research Analyst Liz Laprade looks at whether increased inflation is here to stay, while Vice President Steve Johnson envisions opportunity in the tech sector’s recent slump.

Looking Ahead

Next week, we’ll get manufacturing and service sector gauges, construction spending and car sales, factory orders and consumer credit, ADP private sector and non-farm payrolls jobs reports.

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.

About Adviser Investments

Adviser Investments is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.

Please note: This update was prepared on Friday, May 21, 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.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.

The Adviser You Can Talk To Podcast is a registered trademark of Adviser Investments, LLC.

For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here.

© 2021 Adviser Investments, LLC. All Rights Reserved.

Adviser Investments' logo is a registered trademark of Adviser Investments, LLC.