Top Weekly Themes
- What the “Tech” is Going On? Last week was difficult for Growth stocks. Growth stocks, particularly companies with sky-high valuations, continue to come back to Earth. Zoom, the poster child for what worked in 2020, is now down 50% from its high…and it is far from the only one. We have discussed this dynamic for months, but our view continues to be that “growth at any price” is dead. The market has made a clear shift toward fundamentals. The stocks that are performing best are the ones with strong earnings revisions, high EPS surprises, high free cash flow (FCF), and at least somewhat sensible valuations. According to Empirical Research Partners, in ’19 and ’20 tech stocks without earnings outperformed those with earnings by the largest amount in the prior 30 years. In addition, companies with the lowest FCF margins trounced those with the highest, a rare occurrence. This has changed in a big way, and we will continue to point portfolios away from stocks in which expectations (i.e. prices) have divorced from reality.
- Inflation – How Concerned Are We? Not terribly. Although the 0.9% increase in the core consumer price index last month was the largest since 1982, it was concentrated in areas that are experiencing a revival after the 2020 lockdowns (airline fares, hotel prices, car rentals) or sectors with large supply shortages. Both of those drivers should be temporary. In addition, the reading is an indication that the economy is on solid footing. Demand is strong and massive stimulus is super-charging the recovery. These numbers will undoubtedly catch the Fed’s attention, but with more cyclically oriented price gains (like housing rents) still muted, the Fed will continue to believe current spikes in inflation are “transitory”. Inflation gains may broaden over the next few months, but the Fed will likely maintain its dovish posture with the labor market still 8 million people short of pre-pandemic levels. As long as the Fed isn’t forced to blink, any stock market volatility should also be fleeting.
- Rates Still Biased Higher. Predicting the direction of interest rates may be one of the hardest things to do in all economic and financial market punditry. Many have tried, and most have failed to provide accurate forecasts consistently. That is why we believe the best thing to do is take our cues directly from market prices. We believe the market is telling us that U.S. interest rates are likely to drift higher from current levels. For example, the copper versus gold price ratio continues to move higher, consumer staple stocks continue to underperform, financials continue to outperform, and European bond yields are trending higher. Taken in combination this would support the idea that U.S. rates are likely to increase, or at the very least, not move meaningfully lower. This then supports our view that value and cyclically oriented areas of the stock market are best suited for the current environment. We will maintain our bias toward such areas until these facts begin to change.
Returns Table
| Equities | Week(%) | YTD(%) | 1-Year(%) | 3-Year(%) | 5-Year(%) | Div Yield |
|---|---|---|---|---|---|---|
| S&P 500 | 0.6 | (0.8) | 26.1 | 24.25 | 17.94 | 1.22 |
| Russell 1000 Value | 1.2 | 1.5 | 22.7 | 16.79 | 11.35 | 1.77 |
| Russell 1000 Growth | 0.0 | (3.5) | 23.4 | 30.79 | 23.83 | 0.64 |
| Russell 2000 | (0.8) | (3.1) | 3.3 | 16.00 | 11.25 | 0.94 |
| MSCI EAFE | (0.5) | 0.7 | 10.3 | 12.91 | 9.74 | 2.51* |
| MSCI EM (Emerging Markets) | 3.7 | 2.9 | (4.0) | 11.03 | 10.03 | 2.38* |
| Fixed Income | Week | YTD | 1-Year | 3-Year | 5-Year | Div Yield |
| Bloomberg Barclays US Aggregate | (0.3) | (1.5) | (1.9) | 4.21 | 3.16 | 1.98 |
| Bloomberg Barclays US High Yield – Corporate | (0.2) | (0.6) | 4.6 | 7.50 | 5.93 | 4.45 |
| Bloomberg Barclays Municipal Bond | (0.7) | (0.9) | 0.7 | 4.30 | 3.74 | 1.31 |
| Bloomberg Barclays Global Aggregate x US (Country) | 0.3 | (0.3) | (5.8) | 2.44 | 2.94 | 1.15 |
| Commodities | Week | YTD | 1-Year | 3-Year | 5-Year | Current Level |
| Crude Oil WTI (NYM $/bbl) Continuous | 6.2 | 9.9 | 55.3 | 17.0 | 9.3 | 82.6 |
| Natural Gas (NYM $/mmbtu) Continuous | 16.6 | 21.6 | 59.8 | 13.7 | 5.1 | 4.3 |
| Gold NYMEX Near Term ($/ozt) | 0.1 | (0.0) | (0.9) | 12.4 | 8.8 | 1,827.2 |
| Copper Cash Official LME ($/mt) | (1.2) | (0.2) | 21.1 | 17.7 | 10.9 | 9,665.0 |
| Currencies | 1 Week Ago | YTD | 1-Year Ago | 3-Years Ago | 5-Years Ago | Current Level |
| U.S. Dollar per Euro | 1.13 | 1.24 | 1.22 | 1.15 | 1.07 | 1.14 |
| Japanese Yen per U.S. Dollar | 115.79 | 115.16 | 104.20 | 108.41 | 114.03 | 114.85 |
| U.S. Dollar per British Pounds | 1.36 | 1.35 | 1.36 | 1.28 | 1.22 | 1.37 |
Chart of the Week: Who Wants to be a Crypto Millionaire?
Takeaways
- Everyone wishes they bought Bitcoin years ago, even after the most recent 21% decline.
- It is hard to watch others double, triple, or quadruple their money in such a short period of time.
- Arguments for or against Bitcoin aside (see Bryn Mawr Trust’s paper entitled Bitcoin: What to Know Before Investing, investors must remember a primary feature of being a successful crypto investor – the ability to withstand huge volatility.
- During the period covered in the chart above, an investor would have turned a $1 million investment into over $3 million…but not before watching that initial investment dwindle to $175,000 during the first 12 months.
- Volatility alone is not particularly harmful, only when it causes bad behavior. Most of us think we have a higher tolerance for volatility than we really do.
- The lesson is simple: be honest with yourself regarding your ability to withstand large price swings before making an investment in any risky asset. The success or failure of that investment will depend on it.
Commentary – Winners and Losers
Last year we talked a lot about not following the crowd. High multiple, large-cap tech, stay-at-home stocks ruled the day and it was hard to resist throwing better judgment to the wind. Sacrificing performance in the near term to preserve both performance and prudent risk management in the long term is never easy.
Last Wednesday marked an unusual occurrence, underscoring the benefit of our dedication to diversified, value-conscious investing. Holding the line, and not chasing 2020 winners has been a significant benefit to our portfolios, and we believe this will continue to be the case for the foreseeable future.
Wednesday the S&P 500 fell 0.87%. However, we also saw the highest percentage of stocks at 52-week highs in over 30 years! The market is bifurcated, there are winners and losers, and being diversified is finally starting to pay off again. The ‘average stock’ is winning and that is a big reason why our recommended asset allocation has outperformed over the past year. At times last year (and many times over the past few years), it looked like that would never be the case again. Per our foundational principles, extremes never last, and reversion to the mean is the iron law of finance.
Occasionally reminding ourselves of this is always important.
