Insight & Commentaries

Buy quality stocks that increase dividends regularly. This simple strategy takes a long-term view of investing and focuses on the dividend, not the stock price. Passive income generated from dividend growth has two main benefits. First, it focuses your investment strategy on cash-generating, growing companies. Second, it tends to lead to quality businesses that are neither too young nor too old. Why is this so? Almost by definition, a dividend-growing company tends to cover expenses with rising cash flow. And which companies do these tend to be? They tend to be profitable, established companies in the middle of their corporate…

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Municipals continued to outperform in April, with yields falling by up to 16 basis points (bps) compared to U.S. Treasury yields decreasing by up to 9 bps. Key Points: • Muni Mutual Funds again added to record inflows for the month• Demand has been fueled by rating agencies revising sector outlooks to the upside, Federal Stimulus funds making their way to issuers, and plans for tax hikes.

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The U.S. stock market has been on a tear of late, rising 56% in value, or $18 trillion, in the last year. Two-thirds of the gain came in the six months since October. Surging stock values of late mirror last spring’s rapid plunge, leaving many feeling elated, unnerved, and anxious. Are expectations for the world ahead justified and fairly factored into stock prices? Or is the bull run reflecting unrealistically high hopes? A Pretty Penny In our view, valuations are full. By most metrics, we see stock values at high levels. Just look at the value of U.S. stocks at…

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Key Points: Vaccines Spur Growth Rebound U.S. Profits Recover to Pre-Pandemic Levels High U.S. Savings to Fuel Growth Stronger Dollar Favors Domestic Tilt Valuations, Rates, and Taxes are Risks Much has changed in the past quarter. A new administration and new congressional leadership has emerged in Washington. Meanwhile, a COVID-19 vaccination rollout is accelerating throughout the United States and some other parts of the world. Speculative fervor has rippled through some parts of equity markets while bond investors fret about rising interest rates. This quarter we address how these changes are shaping the environment, creating challenges and opportunities for tactical…

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Leverage and Quality

It is essential not to overlook critical assumptions. One of the most basic stock investing beliefs is that firms will continue to exist — firms do not live forever. Beginning as a start-up and ending in decline, firms undergo many changes over their lives. An idea becomes a business that generates growing profits and revenue. As a result of sound investing, the company continues to grow, finds new markets, and fends off competitors. At some point, the demand for the firm’s product or service slows, competition erodes advantages, and the business shrinks. In an age of rapid technological change and…

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Quality First

There is lots of discussion about the return of speculation. Cryptocurrencies, message board short-squeezes, soaring penny stocks, “blank check” companies, and record issuance of risky debt dominate today’s headlines. It is hard to imagine that, just under a year ago, financial markets were in freefall. Greed replaced fear in the span of a few short months, despite an ongoing pandemic. This week we return our focus to “quality” as a key factor in portfolio construction. Risk-On! Notice the chart below. It is a ratio of the most volatile stocks in the S&P 500 divided by the least volatile. When investors…

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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…

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Munis returned to outperforming in March, with yields falling by up to 5 basis points (bps) across the curve compared to U.S. Treasury yields rising by up to 30 bps. Inflows into Muni Mutual Funds are on their fastest pace on record to start a year. This unprecedented demand has caused Munis to maintain their rich valuations vs. other fixed income asset classes. In addition, the American Rescue Plan Act’s aid to Muni issuers is easing credit concerns, drawing back investors who may have been wary of the market.

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President Biden signed into law a $1.9 trillion Coronavirus aid package last week. New spending of $1.1 trillion is expected this year, with the remaining $0.8 trillion spread out over the coming years. The spending is on top of last year’s $3 trillion fiscal support program, sets up 15% annual deficits for 2020 and 2021, and increases debt to 110% of GDP.   Why should we care about such spending, especially when the economy is hobbled by COVID-19? Indeed, the package will indeed help many. There are $670 billion in checks and enhanced unemployment benefit checks on the way to…

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The Rate Conundrum

Since the Georgia Senate races went to Democrats on January 5, forward expectations of short-term rates have moved up sharply (Chart A, below). With nearly $2 trillion of anticipated deficit-financed spending now in the pipeline, long-term U.S. Treasury bonds are also selling off, causing long-term yields to rise too. Investors worry that massive new COVID-19 spending, happening when financial markets are already flashing “risk-on” signals, may be problematic. Typically, such large stimulus occurs only when an uncertain economic outlook is rattling markets. Chart AForwards Markets Start to Envision Higher Rates A High Bar But fear is not really the prevailing…

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After remaining relatively flat for the first six weeks of the year, Muni yields took a sharp turn higher in mid-February, finally beginning to catch up to the rise in U.S. Treasury yields. Improving economic growth numbers combined with the proposed $1.9 trillion Federal Stimulus Bill have resulted in continued expectations of increasing inflation leading to higher yields. Inflows into Muni Mutual Funds continued for the month but at a much slower pace and we expect lower inflows or even an outflow cycle over the coming weeks, resulting in reduced demand. Our defensive approach has held up through this selloff…

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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….

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Muni yields were virtually unchanged in January, continuing their outperformance of U.S. Treasuries, which sold off by up to 20 basis points (bps) on the long end of the curve, as Muni-to-Treasury ratios fell to all-time lows. Low supply combined with continued inflows into muni mutual funds have caused a renewed imbalance in the market. As a result, credit spreads have continued to narrow, leading to an underpricing of credit risk. We continue to focus on high grade credits as underlying economic risks still exist and rates remain at historic lows, leading to limited upside potential.

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