Supply Chain Issues: Market Commentary

Kris Venezia, VP of Investments

I have been getting a lot of questions recently from clients about the housing market.

Mortgage rates have risen a lot from 8 months ago, with the average 30-year above 5%.

There has been indications of a small cooling off. We are seeing some evidence from Zillow and Redfin of price reductions which is new.

Real estate agents are also reporting that things are getting a little more normal. In 2021, homes were being snapped up in bidding wars and sometimes without inspections.

Agents are reporting that bidding wars are less intense. With less bidders, things like inspections are becoming more common.

While there's evidence of some softening in the housing market, it's still a tough environment for buyers. The main issue is a lack of supply.

There is not a big incentive at the moment to sell a home. Many people are now in homes with a sub 3.5% mortgage rate. With a mortgage that low, it's difficult for them to find a reason to sell. If they sell their home, they have to find a new place to live. The new place to live will come with a plus-5% mortgage rate.

Home builders are trying to get more supply, but supply chain problems are causing delays. Builders have reported having trouble getting garage doors, windows, and cabinets. A tight labor market has also caused challenges for home builders.

It's a positive to see the housing market start to behave more normal, but like I said before, it's still a tough situation for people who want to go out and purchase a home. And that doesn't appear to be changing any time soon.

Daryl Eckman, President

We can expect the trade deficit to remain volatile from month to month. It'll stay large for months ahead as the U.S. as recovered faster than other countries from Covid-19. Europe and the shutdowns in parts of Asia have been headwinds for global trade. The stimulus that was implemented and reopening will mean demand most likely exceeds supply. The supply chain challenges are making it difficult for supply to catch up to that demand. Supply chain problems are robust right now. There is reporting coming out that the ports are still having a tough time catching up to unloading ships. I did not realize how much Ukraine impacts food supply. Globally, unfortunately, it looks like there may be food shortages in parts of the world. Oil prices also continue to be high. We're looking at over $5/barrel at the bump and diesel fuel prices keep going up. We have a number of things pointing in the wrong direction. The conflict in Ukraine is having large global trade issues. It's really having an impact on the supply chain in various ways. The stock market is serving as an indicator for the future. It's showing that a slowdown is anticipated and happening right now. The market very recently has been very indecisive. It's been flip flopping and bouncing around a little bit. We anticipate analysts lowering their guidance because of the global challenges. We have been sitting on cash positions and are looking for opportunities to put that to work. It still feels premature to really get that cash to work in a meaningful way.

Clint Carpenter, Director of Operations

I thought I’d just end our conversation today by touching on the subject of Midterm elections - something we’ve just recently started getting some questions on. It’s interesting, we typically see the midterm conversation start much earlier, but with all that’s going on in our world, this particular news cycle has really just now started to churn.

We know we can’t rely completely on the past to inform our future decisions, but it can be interesting to look at patterns. -I’ll be brief here and then I’ll be happy to share any details with clients that are more curious. Basically, looking back at about 80 years of elections and market data, we can start to see a pattern: stock markets tend to drop before midterm elections and volatility is elevated for most of the year, before and after the actual election. This is true without regard to the current level of political infighting or the president’s approval rating, it seems to happen regardless because elections simply exacerbate uncertainty.

What’s also interesting is that after this period of volatility, we typically see markets bounce higher in the two quarters after the midterm election. Average returns on the S&P 500 in the 4th quarter of a midterm year are 6.1%, followed by an average gain of 7.5% in the first quarter and 4.2% in the second quarter of the following year. It seems that a lot of time is spent worrying about the uncertainty of the outcome, and once the result are in investors relax.

So, there’s just a very high-level overview of how midterms effect the markets. As I said, I’ve been looking into these patterns and would be happy to share more detail with anyone that’s curious.

Managing Portfolios In A Correction: Market Commentary

Clint Carpenter, Director of Operations

As we enter the month of May we are still near or beyond correction territory on each of the major indices. The DOW is off 9% YTD, the S&P 500 has retreated 12.8% and the NASDAQ sits at negative 20% so far this year.

Markets are down, but bond yields are up - the 1-year treasury crossed the 2% mark in recent days. The 10-year treasury is paying 3% and the 30-year has also crossed 3%. The average 30-year mortgage rate is currently 5.27% APR.

The volatility we’ve seen this year has gold prices up, currently at $1,861 per ounce. WTI and Brent Crude oil are both hovering around $106/bbl.

Kris Venezia, VP of Investments

I want to point out some numbers and data for context on corrections.

The S&P 500 has an average drawdown each year of about 16%. Of course, every year and every situation is different, but that number is a good reminder that markets are volatile.

It's also a reminder the corrections, as painful as they are, are not as rare as we might think. If you are a long term investor, you have to know that downturns are part of the game. We know that if you stay in the game for the long term, you have a great chance to have success.

When I have talked to clients recently, I have heard them talk about how this feels like a bad downturn. I think part of the reason for that is how long this correction has lasted.

The correction with the S&P 500 has lasted for more than 100 days. If we look at corrections going back to 2009, we have rarely seen corrections last for more than 100 days. We have tended to see a market drop, sometimes, like in the case of 2018 or March 2020, a swift deep drop. However, the market tended to recover fairly quickly.

The S&P 500 has struggled in 2022 and has stayed negative compared to many other corrections in the last 13 years.

The other reason why this feels worse than usual is we had a full year where the market didn't show much weakness. In 2021, the worst drawdown in the S&P 500 was about 5%. It was a positive year with very little downside.

Daryl Eckman, President

Very few people remember the last correction, even if it was a short time ago. History shows us that we have had corrections that have lasted for long periods of time. We have had recessions that took awhile to recover from. Can we make money during those times? Yes. Is it painful? Yes. Is it difficult to buy when the market is down? Yes. But those are the times we want to buy, when things are low. Real estate is a comparison I use because it's easier to digest and has less mystique than the stock market. Do you want to buy a house when prices are high, or do you want to buy when they're low? It's the same principle we use with stocks. We use construction as a way to understand cycles. We see building amping up in all parts of the country. We use this as a leading indicator that the economic cycle might be slowing down. We have had one quarter of negative economic growth, if the next quarter has negative economic growth, it will officially be a recession. There is a decent chance that happens. We have been talking about a slowdown, and we did a good job of trying to ease you out of bonds. We have been slipping out of Treasury Inflation-Protected Securities recently. We have also slightly reduced some of the positions in stocks in some of the portfolios. We are ready to reposition the portfolios during the downturn because this is how we can make money during the long term. If we nibble during the tough periods, as we see bargains appear, that's when we make you money. Thank you for listening to our market commentaries, we appreciate that. We know more of you tune in when the market is struggling. Please, if you are feeling uncomfortable with the portfolio, give us a call. We do our best to make phone calls and stay out front, but if you want to personally talk with us, call us. Don't fear what is going on right now, and don't worry about politics or even some of the global issues. It's difficult to watch, personally, but our job is to focus on what's best for the portfolio and how you can be successful in the long term. I have personally been doing this since the mid-80's and have seen a lot of downturns. I know it's important to stay level headed to navigate through these periods.

Clint Carpenter

When times are good, we are constantly monitoring to make sure asset allocations in client portfolios are such that we can take advantage of those good times, but we’re also always preparing for when those good times will end and the markets turn negative.

That could mean rebalancing stock positions, or it could mean exchanging within different types of bond portfolios.

For example, and I’m speaking generally here as every client is different, but for example, we entered 2020 with healthy corporate bond positions that we made nice profits on, and then exited before the effects of rate cuts took effect.

We took that money and moved it into inflation protected securities as we saw the inflation outlook set in. Now that rates are back on the rise, we’ve exited our inflation protected positions and are looking to install lattered maturity bond programs in portfolios.

I say all of this because it’s important to understand that asset allocations may look static when looking at percentages, you know, like a 60/40 bonds/stocks portfolio, but within those percentages are a lot of dynamic changes that are responding to current conditions.

Making up our fixed income side of portfolios with individual bonds makes sense for current conditions because it will give us greater control over market value fluctuation and rate changes. This is different than something we would have done two years ago.

As for the stock side of things, there are some deals to be had for our younger clients with longer time horizons, but as Daryl mentioned, we’re fine to be much more patient with our more conservative clients’ stock positions.

Now, I’ve spoken very generally, so I’d like our clients to know that we’ll be reaching out to you to speak in more detail about your specific portfolios, and encourage you to give us a call in the meantime if there’s anything you have on your mind now.

Market Commentary 02-24-2022

Daryl Eckman, President

I will talk about what is happening with Russia and Ukraine and how it impacts the economy and markets.

I want to say that I don't mean to sound disrespectful. I very much understand that war is horrific, but we have to keep our composure when evaluating the portfolios. Our focus is how this will impact the portfolios we manage.

If you look at history, during these periods of time, there is an initial panic and pull back. People want to take money out of the stock market. In the future, people then return those funds to the market. In times of conflict, if you zoom out, those have been good buying opportunities.

Our plan is to do some small buying. We don't view this as a massive buying opportunity. The expectation is that the conflict with Russia and Ukraine will have longer term impact and we want to be careful with the portfolios.

It's hard to predict what Vladimir Putin wants to do. Nobody knows exactly what is going to happen, and we are not going to try and make some big proclamation because it would be guessing.

Historically, war has been good for markets. Governments tend to put aside differences and work together to spend money on items like technology.

We are keeping track of what's going on. We will be reaching out more often than usual as this plays out. If you are having anxiety, give us a call. We can go much more in-depth as things unfold.