Weekly (distribution list)

While risk-taking remains in fashion and more stimulus is on the way, we are trimming back some equity exposure. We now forecast some tempering in the outlook ahead (Chart A, below) after a long stretch of improving conditions. As a result, we reduced stock exposure to 67% from 80% and increased bond exposure to 33% from 20%. CONQUEST tactical asset portfolios remain overweight stocks versus bonds, only less so. Chart A WCA Fundamental Conditions Barometer High Hopes Since the governments and central  banks around the world went “all-in” to save the economy from the pandemic last spring, wealth has exploded….

Read More ›

Viewpoint 2021

Many are expecting vaccinations to lead to a robust recovery this year. Return to normal and restart of the in-person economy should encourage growth and be celebrated. At the same time, the return to growth could also weaken the case for continued fiscal and monetary ease. And once restarted, the globe faces challenges. The tensions and ailments that existed before the pandemic are still with us. The path appears to be forward but it will not likely be a straight line. Last year’s pandemic-induced downturn was out-and-out different from recessions past. For this reason, we should see recovery as a…

Read More ›

Valuations, Revisited

The stock market is on a historic run, with U.S. stocks eclipsing $42 trillion in value for the first time ever last week. The broad market, measured by the S&P 500, continues a decade of strong returns with the rolling 10-year real return for the market above 10% (Chart A, below). Chart AS&P 500 Trailing 10yr Real Annualized Return Market of Stocks Many of this year’s “stay at home” themes are playing out and the technology sector is on a tear. Yet, this year reminds us it is not so much a “stock market” as a “market of stocks.” Even…

Read More ›

After rising in October, Muni yields fell dramatically in November, outperforming yields on U.S. Treasuries. Munis rallied with Treasuries after the election results were announced but did not track the selloff in Treasuries after successful COVID vaccine trials were revealed. Issuance slowed in November to only about $20 billion, causing a renewed supply and demand imbalance, a dramatic shift after October’s issuance broke monthly records and pushed total 2020 issuance to a yearly record. Even with yields resetting lower, Muni mutual funds continued their streak of inflows, taking in another $6 billion in cash. Credit spreads continued to fall as…

Read More ›

Boom

A month after the announcement of the first highly effective COVID-19 vaccine, positive momentum is building. Potentially game-changing vaccines, a new round of government spending, and continued, pedal-to-the-metal monetary policy are nurturing a boom environment as we end a most challenging year. While COVID-19 cases grow globally, and in the wake of the election, it is easy to lose track of market trends. In no particular order, here are a set of observations about recent trends worth noting. Observations: The value of all U.S. stocks is nearing $42 trillion, or 2 times the whole economy’s size ($21 trillion GDP). High…

Read More ›

To The Bone

Interest rates on bonds are at very low levels. The decline in the United States rates follows those of other sovereigns like Germany, the United Kingdom, and Japan (Chart A, below). In turn, global rates are following a long-established, declining secular trend. That trend leads to “negative” rates with more than $17 trillion in such debt circulating globally (Chart B, below). The defeating of inflation and worries of deflation may be behind this trend. Still, other factors may also be at work. Chart A U.S. Long-Term Treasury Yields vs. Average Foreign Yield (Germany, United Kingdom, Japan) Chart B Aggregate Global…

Read More ›

For years, stock investors have fixated on “style,” which means investing in “growth” or “value.” “Value” in this context is usually defined as buying stocks with low price-to-book or low price-to-earnings ratios. Some are now rethinking the very foundations of this framework as the return to value indexes continues to shrink (Chart A, below). Others are leaving behind simplistic notions of “style” investing and looking for all sorts of new factors to find performance. In our view, adding a multitude of new factors to the mix is also the wrong approach. The right perspective simply relates price to a few…

Read More ›

In October, Muni yields crept higher, rising by 6-9 bps across the curve, echoing the move higher in US Treasury yields. Muni Mutual funds recovered from a single week of outflows and took in over $5 billion for the month. After the election results were announced, how-ever, both Muni and U.S. Treasury yields fell dramatically as expected gridlock in the split legislature diminished the prospects of a massive stimulus package and higher inflation. The main story in Munis was record monthly supply in October as issuers rushed to market prior to the election.

Read More ›

A Good Decade

Investment returns are the reward sought by all investors, not small returns or unpredictable returns, but large and guaranteed ones. Unfortunately, those sorts of returns are imaginary. This is not to say that estimation, a more respectable form of imagination, is not in widespread practice. All investors imagine some sort of plausible future of some kind, with some sort of expected reward. These imaginings are behind every dollar invested in the world today. “By the end of the next decade, quite a way off, there will be a pandemic, and stock investors will achieve record wealth.” These words, if uttered…

Read More ›

Shifting Ground

The news of a Biden/Harris election win and heightened prospects for a COVID-19 vaccine are being digested by markets today. As for the former, news agencies declared Democrat Joe Biden president-elect and control of the Senate is to come down to two run-off races in Georgia. For the latter, hopes of a COVID-19 vaccine linked to an announcement of progress toward a vaccine sent global stock indices soaring this morning. The ground beneath this year’s two most dominant themes — politics and pandemic — is moving. The political shift is assumed to be toward the “middle” with an expectation of…

Read More ›

Today, The Wall Street Journal ran a front-page, above-the-fold article titled “Dividend Darlings Trail Stock Market Despite Pumped-Up Yields.” The authors point to underperformance by dividend payers within the S&P 500 Dividend Aristocrats index, an equally weighted index consisting of all S&P 500 companies that have increased dividends every year for the past 25 consecutive years. The article highlights some iconic dividend payers with large yields suffering large share price drops this year. So says The Wall Street Journal: “Exxon Mobil Corp., whose dividend yield is sitting at a near-record of more than 10%, has declined 51% in 2020… AT&T…

Read More ›

Emerging Opportunity?

Roughly 160 of the world’s nearly 200 countries are considered emerging markets (EM), and approximately 6 billion people, or 85% of the world’s population, live in emerging economies (map, below). Thus, there are plenty of reasons not to ignore emerging markets in a portfolio. But there are special considerations unique to emerging markets. These include currency movements, different political and legal systems, greater exposure to commodity prices in some cases, and periodic debt troubles. However, none of this is new, and many emerging markets are evolving from immature, rapid growth toward more mature, slower growth. Even though growth may be…

Read More ›

As we start the fourth quarter, the major U.S. stock market averages hover around a 0% return for the year. That unexciting performance masks extraordinary volatility — a 35% February-March decline and a 50% March-August bounce back. Other assets demonstrated similar volatility (graph, next page). Through September 30, Long-term U.S. Treasury bonds returned over 20%, and Bloomberg Barclays Aggregate U.S. Bond Index returned 6.5%. Short-term T-Bills returned about 0.7%, and gold is up 24%. Volatility again ruled the roost in 2020, and diversified portfolios generally did better than all stock portfolios. As we head into the final quarter of 2020,…

Read More ›

The Municipal curve steepened in September, with yields on the short end essentially flat and 10+ year yields higher by 5-6 basis points (bps). Inflows into Muni Mutual Funds continued, with an additional $6 billion added this month. With rates so low, the market appears to be reaching for yield and focusing on lower-rated credits, resulting in spreads continuing to fall. We expect new issuance to pick up prior to the election and the market’s focus to remain on these lower-rated issuers, presenting a good opportunity to invest in the higher-grade sectors and credits that we prefer.

Read More ›

Buying the Big Five?

Imagine an investment strategy wherein you might seek out the most successful and valuable companies. We will refer to this as the “big five” portfolio. Further, imagine that this “big five” portfolio bought the five most valuable companies in the Standard & Poor’s 500 index at each year’s end starting in 2000. Imagine further that this process was repeated each year ever since. How might this strategy of buying big and valuable stocks have done? The strategy produced positive returns, but the journey would have been painful and frustrating (chart A, below). Investing in the “big five” at the start…

Read More ›