Stock Market

Endure Volatility for Future Rewards!

2022 Q3 Market Commentary…

There are a lot of shoes dropping now on the U.S. economy that we have been forecasting in previous newsletters. Inflation is running hot. Economic growth, as measured by GDP, is slowing. Interest rates are climbing. Supply chain bottlenecks still exist. Gas prices remain elevated. Housing demand is cooling. Residential rental rates are climbing. Consumer credit is at an all-time high. Consumer confidence is weakening. You get the point. The list is long.

When markets are under extreme duress, the one question we all really want answered is “How much lower will the stock and bond markets go before we bottom out?” While we await the answer (which only ever reveals itself in hindsight), we are forced to grapple with the prospect that markets could get worse before they get better. To further complicate matters, we get brief rallies in markets – called “bear market rallies”- that play with our psyches and create more confusion about market direction.

In the second quarter, economic conditions turned on a dime for the worse. There is no sugarcoating it. The stock market showed it. The bond market showed it. In fact, the first half of 2022 was the worst performing first half of a year since 1970. Here are the 2022 first half performance numbers through June 30:

 

 

The Federal Reserve is walking a tightrope between staving off a recession and getting inflation under control. If they raise interest rates into a weakening economy, it can accelerate recession risk. If they don’t raise them, they risk inflation spiraling higher. After more than a decade of “low interest rate, easy credit” monetary policy, investors around the globe are feeling the negative effects of this policy shift.

Unfortunately, asset values suffer greatly from the Fed’s conundrum, and those values may stay in the pressure cooker until inflation subsides significantly enough. It’s not easy to unwind inflation without crushing economic growth. The process can be choppy and stressful, and I would expect that to be the case between now and the end of year.

Allow me to drop a few promising facts to keep you looking at the bright side…

  • Every bear market in history has been usurped by a stock market recovery to new all-time highs
  • Adding to 401k’s, IRAs and Roth IRAs in bear markets offers you attractive entry price points
  • Stock and bond markets often anticipate and price in recessions before they occur
  • The average length of a bear market is 11.3 months while the average length of a bull market is 4.5 years (*1)

In 1997, I was driving up Interstate 10 in Arizona and saw a vanity license plate that read “Dow 20K”. It seemed like such a stretch to me then since the Dow was barely trading above 7K at the time. Look at where it trades now. We’ve lived through a tech bubble burst, a terrorist attack of 9/11, the financial crisis of 2008, the COVID crash of 2020, and we are in the middle of another one. Yet, we’re still north of “Dow 30k”.

Investing requires fortitude. As investors, volatility is what we must endure to gain future reward. Don’t let the short-term economic events of today derail your long-term vision for your financial future.

Source (*1): First Trust – History of Bull and Bear Markets

Future BrightEndure Volatility for Future Rewards!
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Quite a Ride!

Q2 2022 Commentary…

As expected, it was a very choppy first quarter for the stock market. As we turned the calendar over to 2022, the market gave us that stomach-churning feeling you get when you realize you are at the apex of the rollercoaster climb and now see what’s in front of you. From January 1, it was a swift ride down to a low point in early March before climbing about halfway back up by the end of March.

All of the same economic headwinds from the second half of 2021 have carried over into 2022 with a couple of new ones to boot. Rising gas and food prices, supply chain backlogs, increasing mortgage rates, and slowing economic growth have continued to stymie some of the excitement investors had previously held for the “Post-COVID re-opening” economy. The major differences between 2022 and the last half of 2021 is that some of the largest mega-cap growth stocks began to show cracks in their armor. When heavyweight stocks fare poorly, the index performance usually reflects it. That’s been the case so far in 2022.

In 2022, an overseas war and an inverted yield curve have further stirred the economic pot. A handful of years ago, I had written about the consequences of an inverted yield curve. This occurs when the interest rate the government is paying on a 2-year treasury bill exceeds the interest rate it is paying on a 10-year treasury bill. It’s an unusual occurrence that is the result of investor sentiment inferring the U.S. economy is likely to experience a recession in the near future. An inverted yield curve has preceded every recession since 1956 in the U.S.

Per our silo investing methodology, the rate of change on GDP and Inflation should both be falling if we are anticipating an economic recession, and they are. We’ll get inflation data next week. Then later in April, we’ll get an advanced read on how GDP is faring. With that data, we’ll get a better picture on what the rest of 2022 looks like. Right now, things look choppy.

We think the market will remain volatile for the rest of 2022 and test lower market levels this year. As the saying goes, “only proctologists can pick bottoms”. We’ll leave the ill-advised “top” and “bottom” calling to the fortune tellers on television. Our goal is to position portfolios to mitigate some of the downside risk in challenging markets but also to build positions in areas of the market that can lead us out of this tough market environment when the data changes for the better.

Company News

We are thrilled to announce that we’ve added a fourth advisor to our team in Fargo-Moorhead! Her name is Meagan Dee Gelinske. She is a native of North Dakota and graduated from North Dakota State University. She most recently served as a biosciences expert for the Northern Plains Fund and also was employed full-time for the last thirteen years at Aldevron, Inc. She is a fantastic addition to our team at Future Bright as an advisor and equity research analyst.

Future BrightQuite a Ride!
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“2021” Was a Strange Year!

Q1 2022 Commentary…

Happy New Year! It’s only fitting that our quarterly newsletter would be affected by supply chain issues. If you didn’t notice the difference, we can only credit the capabilities of today’s laser printer technology. Unfortunately, ordering official letterhead in late November did not allow for a lengthy enough window to receive a fresh stock by January 1.

2021 was a strange year in so many respects. Here’s a reminder of some oddities we experienced…
• American workers were incentivized to not return to work
• COVID variants ran amok
• Inflation reached its highest level in 40 years (CNBC.com)
• 2/3 of stocks that make up the S&P 500 Index hit 52-week lows while the S&P 500 index set all-time highs (Leon Tuey, Financial Post)
• 93% of companies on the S&P 500 saw their shares slide 10 percent or more at some point in 2021 (Taylor Telford/Rachel Siegel – Washington Post 12/31/21)
• Crude oil prices roared back into the mid-80’s in October due to reduced supply (Yahoo Finance – historical prices)
• Krispy Kreme became publicly traded again (let’s call this one a blessing and a curse)
• Dogecoin advanced 3,400%, and most people don’t even know what it is

We could fill a whole page with oddities, but I’ll spare some space for commentary. Predicting market outcomes in 2021 seemed as challenging as ever. Even the brightest and the biggest hedge funds out there struggled to navigate this past year’s market. According to Bloomberg, 37 of the 40 largest hedge funds underperformed the S&P 500 index in 2021. The year just didn’t feel as good as it turned out.

During the dot-com bubble of the mid to late 1990’s, ex-Fed Chairman Alan Greenspan coined the phrase “irrational exuberance”. He was referring to the extremely bullish sentiment that investors had for stocks whose prices were way out of sync with their intrinsic values. Moreso than in any year in recent memory, we get asked if we are reaching that level of insanity again. “Is the market setting up for a crash?” If we could foretell the answer to that question, we’d either be in 100% cash on the sidelines or all-in 100% on the stock market.

As elevated as markets seem, we don’t feel like we are living in the age of over-hyped sock puppet companies. Back in 1999, many stocks climbed astronomically without producing a dime of company revenue. It was truly a bubble of unproven ideas and ventures, most of which failed to produce any long-term results. Most of the technology companies that are worth their salt in discussion these days do have actual revenues to back up their words. The market is also narrower now with less than half of the companies in existence today than there were back then. This downsizing of the stock market has also caused it to get very top heavy – more dollars chasing fewer companies. Apple is a great company, and its market cap (stock price X number of shares in circulation) just hit $3 Trillion. It now accounts for 7% of the S&P 500’s total weighting.

Heading into 2022, we will keep watching the GDP and inflation data as our two primary determinants of market direction. So far, the high inflation has not led to significant demand destruction. Wages have also increased in 2021, and that has offset some inflation pressure. Our hope is that inflation doesn’t become too hot for American consumers to handle. Best case scenario would be to see inflation peak in 2022 and GDP to keep growing. Worst case scenario would be to see the opposite occur. Let’s hope for a good, albeit unpredictable, outcome.

Cheers to a great 2022!

Future Bright“2021” Was a Strange Year!
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What is the U.S. Debt Ceiling?

Q4 2021 Market Commentary…

What is the U.S. debt ceiling? It’s simply a dollar cap limit that the US Government places on its own authority to raise money by issuing government bonds to continue to meet its obligations like social security payments, tax refunds, interest payments on existing debt, government employee salaries, military salaries, just to name a few. Since 1917, Congress has raised the debt limit 78 times (See Citation 1).

The U.S. government hit the debt limit of $28.4 Trillion (yes, with a T) in July 2 (See Citation 2). In fact, the debt load is a few billion over that as I write this newsletter, and the U.S. Treasury is pushing to get it raised by October 18. Since the U.S. Treasury debt is over the limit, something needs to get done, lest they are forced to default on the payments. Of course, members of congress rarely let that happen. They typical play hard ball with each other and then usually get it done in the 11th hour.

Raising the debt ceiling is not a healthy thing. It’s a necessary evil. With each dollar the government borrows, it steals purchasing power from future generations, and it makes all of us poorer for it. Unfortunately, the alternative is that the government defaults on their obligations. We each know hundreds of people who count on government payments, and no one wants those recipients to be adversely affected by a problem they didn’t create. Beyond the debt, we have other concerns…

• Will the $3.5 Trillion infrastructure bill get passed in Congress?
• Will higher inflation be transitory or here for a longer period?
• How much will the supply chain shock delay or reduce future earnings of companies?
• How will future employment numbers be affected by the corporate vaccine mandates?

As investment advisors, we grapple with questions like these constantly. Our only practicable response is to revert to economic data as it relates to outcomes of these uncertainties. As you know, we have adopted the silo method, by which we view the market through the lens of growth (GDP) and pricing (inflation). We spent most of Q3 in Silo 3 (decelerating GDP + accelerating inflation), and the stock market started to show signs of exhaustion in September as the S&P 500 Index 4.8% (See Citation 3) of its value.

If forthcoming GDP re-accelerates, it might indicate that the recent market swoon was episodic and not a reversal of bullish trend. The combination of accelerating GDP and accelerating inflation would put us back in a reflation condition (Silo 2), and that could be positive for stock prices. However, if GDP continues to decelerate, we could be in for a bumpy ride in Q4. When we get higher prices on goods and services amidst a period of lower economic output, future corporate earnings suffer. If economic recovery becomes less certain, investors get uneasy and market volatility appears. Let’s hope the post-COVID recovery data in October surprises us to the upside.

Citation 1 – https://en.wikipedia.org/wiki/History_of_United_States_debt_ceiling
Citation 2 – CBO.gov/publication/57371
Citation 3 – Yahoo Finance: S&P 500 Index Historical Return data

Future BrightWhat is the U.S. Debt Ceiling?
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Has inflation fully kicked-in yet?

2021 Q3 Commentary…

In last quarter’s commentary, we addressed inflation as an increasing headwind on the stock market. Just how much inflation is in the offing and whether it is transitory (i.e. – temporary and manageable) has been the hot public debate in financial circles during the second quarter. Anecdotally, I’ve heard from many of you about the rising cost of 2 x 4’s, tires, used cars, gasoline, and even Burger King chicken sandwiches. I paid $4.09 for an order of large fries at McDonald’s in Moorhead this week! Perhaps the only real takeaway there for me is that by making better diet choices, I could help stave off inflation.

Has inflation fully kicked-in yet? That’s what investors want to know. The uncertainty makes for a Jekyll and Hyde market. Admittedly, there have been days this quarter in which the markets have made our reflationary investment thesis (aka – Silo 2) look foolish and other days it has made us look genius, but we must stick to our guns on the data we have in hand. The alternative is to become like the dog who chases its tail, and that doesn’t end well when investing.

Two byproducts of an economic recovery are higher prices and higher wages. Since the economy has not fully recovered to pre-COVID levels, it’s very possible that there is more inflationary pressure coming, despite the Fed downplaying the concern. Economic growth, as measured by GDP, must gather enough strength in an inflationary cycle for the economy to absorb these higher costs. Any slowdown in GDP into an inflationary cycle puts us at risk for stagflation, and that can be a stiff headwind for asset values.

As of this print, the rate of change on both GDP and inflation data show that both are still accelerating. We read that as “two thumbs up” in our silo investing model, and we continue to stick with reflationary investment positions. The Federal Reserve has the unenviable job of trying to thread the needle on the timing of future rate hikes. If they hike rates too soon, they risk prematurely slowing the recovery. If they hike too late, they risk inflation running hotter than the economy can handle. The recent stock market performance reflects this quandary as there is not much conviction in the upward trend, and the market’s incremental gains have come on the backs of too few companies to call it another leg up in the rally.

Volume also matters. It’s been a thinly traded market in the second quarter, which further speaks to the lack of conviction. We think the coming inflation and GDP data will provide more certainty of a determinable trend in the 3rd quarter, and we will position assets accordingly. Our hope is that growth in GDP can match or exceed the strength of the inflationary forces so that we can continue to play offense in this market.

Future BrightHas inflation fully kicked-in yet?
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What happens when interest rates rise?

2021 Q2 Commentary…
Can stocks and interest rates go up at the same time? Yes, they can, and they often do. Right now, we are in a period of recovery from economic shutdowns across the globe. As companies are forced to raise prices in 2021 and meet a return in consumer demand, we are watching inflation like a hawk. Specifically, we pay very close attention to the 10-year treasury note yield as our sentiment barometer.

First, a quick education on why the 10-year treasury yield matters…
▪ Treasury securities are loans to the federal government. Maturities range from weeks to as many as 30 years.
▪ Because they are backed by the U.S. government, Treasury securities are seen as a safer investment relative to stocks.
▪ Bond prices and yields move in opposite directions—falling prices boost yields, while rising prices lower yields.
▪ The 10-year yield is used as a proxy for mortgage rates. It’s also seen as a sign of investor sentiment about the economy.

How high can the 10-year treasury yield go before we do see it adversely affect the performance of the stock market? Some economists predict it’s 3%. Others say it’s 2.5%. The truth is that their predictions don’t really matter. What matters to us is the rate of change in inflation data that typically drives the change in interest rates. If the rate of change of inflation is increasing quarter over quarter, it signals a robust recovery is afoot, assuming job growth and GDP are accelerating, as well.

When inflation becomes too large of a problem to ignore, we typically see it unfold. Take the current housing market, for example. There are hot pockets in this country where new and existing home prices have been climbing double-digits for three years running. The FOMO on low interest rates coupled with tight supply and rapidly rising prices on homebuilding materials are creating a perfect storm for a severe housing price correction, or worse yet, a crash. Translate that to the rapid rise in prices of technology stocks or “Covid-Friendly” stocks, and there is similar risk. We don’t see it in the data right now, but the risk is always present because the data can change quickly.

All signs are pointing to a strong economy in Q2. As quarterly earnings start getting released in mid-April, we’ll likely see the companies negatively affected by COVID at this time last year crush their prior years’ results. Will that recovery strength be broad enough and strong enough to fight the inflationary price wave coming? Again, we don’t know until the data shows us. What we do have to go on is the data in hand (GDP accelerating, Inflation accelerating), and we’ll continue to maintain positions we deem as favorable to own under those conditions, knowing it could turn on a dime at any time.

Future BrightWhat happens when interest rates rise?
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Using Data to Position Assets Favorably!

Q1 2021 Commentary…
2020 was a year full of alarming statistics. One you maybe didn’t hear was that over 10 million new brokerage accounts were opened by first-time investors in just the United States alone! This influx was the result of three things: stimulus checks, a pandemic-induced market selloff, and the elimination of trading commissions at brokerage firms such as Schwab, TD Ameritrade, and Robinhood.

2020 created a perfect storm to attract more individuals to invest, which is a great thing for market efficiency and liquidity. The dangerous part of this perfect storm is that many younger, new investors have not yet experienced a significant market crash, as most of this new money came into the stock market during its recovery. Significant gains were created by and for investors who were willing to take on the risk of buying assets some maybe didn’t even fully understand. New money was piling into SPACs, Bitcoin, LIDAR stocks, to name a few. (If these terms don’t ring a bell, it’s okay. We got you covered.)

In client accounts that could afford to take the risk, we benefited from the irrational exuberance of many of these first-time investors. In fact, we rode some of the waves they created. However, we know the tide can go out just as fast as it comes in, and as asset managers, we have to have a game plan in place for when markets aren’t turning up all roses. Discipline is often what marks the difference between casual, DIY investors and those of us who do this for a living in times like these.

If 2020 taught us anything at Future Bright, it’s that we have to pay attention to the raw economic data more than ever before. We’re not talking COVID numbers. We’re talking economic numbers. Specifically – GDP and Inflation – which are the two most telling indicators of what lies ahead for financial markets.

Currently, we’re in a “GDP up, Inflation up” environment. Certain investments work better than others under these economic directional conditions, and it’s our job to find them for you. It’s also critical to recognize these economic directional conditions will periodically shift. That’s just how economies ebb and flow. They endure four cycles: Prosperity, Reflation, Stagflation, and Deflation. If we know the current economic directional condition and can also see when that condition is changing, we can use data to position assets favorably under any condition.

Ironically, asset management in 2021 will be much more challenging than it was in 2020. We expect to see greater market volatility this year. (Honestly, we thought volatility would come in Q4 of 2020, but it never did.) Nonetheless, it is also a very exciting time to be an investor. The public policy response driven by COVID has actually accelerated many new market opportunities in technology, energy, healthcare, e-commerce, and other industries. As always, there will be winners and losers in the markets, but there are some great opportunities for wealth creation ahead borne out of both volatility and emerging investment opportunities.

Future BrightUsing Data to Position Assets Favorably!
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Recovery

Hello friends, Social distancing affords a person a lot of time to reflect on life, doesn’t it? This time spent at home with family has been a great blessing. Life’s pace has slowed down, and that’s the solace I didn’t know I needed. I hope you’ve found your own moments of solace amidst this abnormal reality, as well.

Ross AlmlieRecovery
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Individual Stocks – Are they for you?

2020 Q1 COMMENTARY:
Contrary to what logic might suggest, the most difficult time to be an investor is when the financial markets are in the late stages of a multi-year upward trend. As we witness market levels hit record highs, the appetite for adding new money to investments can start to wane for fear that the most opportune time to buy has already passed us by. It’s an innate thought process. Since we were little, we’ve all been taught that too much of a good thing is not always a good thing, and it’s a legitimate lesson that I’m sure we’ve all learned multiple times in our lives.

Ross AlmlieIndividual Stocks – Are they for you?
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What a Difference!

Wow, what a difference a year makes. Last year at this time, there was a fear that the economy was overheating and in need of continued interest rate hikes from the Federal Reserve. The 10-year U.S. Treasury note had just hit 3.25% and the service sector strength as measured by the ISM (Institute for Supply Management) measured its highest read in history.

Fast forward one year, and here we sit with the 10-year note sitting at 1.54% and growing fears of a recession. With a yield curve inversion, a trade war with China and other countries, and overall investor exhaustion from the daily deluge of news that moves markets some days and falls on deaf ears on others, it’s pretty remarkable that the market has maintained these levels.

Ross AlmlieWhat a Difference!
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