Happy Holidays from the shepard FINANCIAL team.
We wish you a wonderful holiday season.
Please scroll down for Tom's summary from his
Open Office Hour Zoom call earlier this week.
Open Office Hours:
We talked about Omicron, Outlook for Markets and the economy for 2020, various issues with China, Pandemic vs Endemic, The evolution of risk NFL vs Rugby, Relative returns YTD, Fundamental vs Technical Market movements.
When we look at what the market has experienced in the last couple of weeks, its not one thing that has caused the volatility to jump. Covid and the Omicron Variant played a role but so do did the Fed Talking about rates and bond buying as well as the congressional debate again about the debt ceiling. Some of that is just noise, but in the absence of significant earnings news the airwaves and beltway take over. A shortened trading day and light volume with a limited amount of buying interest on Black Friday added to market volatility.
China’s struggle in dealing with their own COVID outbreak has influenced their market. More so, however; China’s central government fast track rule making has had an impact too. They are concerned about covid and certain types of social problems and powerful tech companies. Part of being an emerging market country is this propensity to experiment with rules and power. China can undo the rules a lot faster and reissue new rules when negative and unintended consequences arise compared to our form of government. In addition to Chinese government angst, our own government rules and perceptions of those rules have influenced the Chinese markets. As a place to invest, it is attractive but how to invest has been infused with a degree of uncertainty. Possible delisting of Chinese companies on US markets has caused several Chinese stocks to drop. Chinese corporations can list their stock in China, Hong Kong, London and/or New York. A company listed on NYSE- as an ADR is a very convenient way to own Chinese stocks. The problem the market is trying to sort out is this. American policies are asking Chinese corporations to provide more transparency. The US Gov is asking them to disclose information like how much is owned by the Chinese gov’t or be delisted. Discussions are ongoing between American and Chinese political leaders about what that looks like. It is possible that stocks will be delisted if not meeting requirements in 3 years. That idea has grabbed to attention of the market. Some of the angst from Chinese markets is driven by misunderstanding of what could happen, which leads to opportunities to buy stocks that are beaten down. It is Interesting to watch how different forms of government make different decisions and how it impacts markets. More likely seen in Emerging markets, experimental of transitory stories like this led to greater volatility in that asset class.
LPL has put out their 2022 Outlook
Here’s our take on it. Covid started out as a PANDEMIC where we didn’t know how it was transmitted. Remember Clorox wiping of food packages and mail parcels? Certain stocks were great place to have your money in March 2020, and terrible ever since. As COVID becomes an ENDEMIC, and we all learn how to live with it, the economy will continue to recover and gain momentum. LPL’s opinion is that more folks will return to a normal sense of business. Some sectors of economy will perk up that are currently holding back GDP growth. The travel and leisure sector has not yet returned to normal, which are usually booked on credit cards. When people start traveling and spend on leisure and entertainment it helps drive economic activity. We expect to see these types of businesses improvement next year. When economic growth is slow people tend to want to invest in companies that are growing. When economic growth speeds up its can be good to tilt your portfolio towards Value stocks and types of investments that do well when pandemic winds down or morphs into an Endemic. The annual flu is an example of an endemic. Small and Mid-size business do better when economy is expanding. Our opinion is outperformance of large cap US companies over last several years will give way to catching up by smaller companies and international markets. Bottom line - Have a diversified portfolio- whatever has done well, consider rebalancing or reallocating.
In the LPL outlook there remains the conviction that you are better off in stocks than bonds. Negative returns YTD on US treasuries support this idea. There are times you want to be in bonds - when everything goes to hell. Other types do better when the economy expands. Municipal bonds yield 4-5%. US Gov’t bonds yield 1-2 % and international bonds have at times been negative. In a rising interest rate environment with worries about inflation its not compelling to invest in bonds.
Superintendent of Schools
I received a letter about COVID cases in our local schools. Last year because of where we were the numbers would have led to code red and in home learning. Now with vaccinations, boosters, treatments, policies, protocols, and procedures we have more information we can use to start un-scaring ourselves. We each have to recognize “Are we at risk?” “Are we socially distant?” “Are we vaxed and boostered?” “Are we following protocols that keep us and our families safe?” Omicron may spread faster but is it overwhelming hospital systems? It is starting to look like the flu? As it changes, we have to do a constant reassessment. We are beginning to grapple with how to go about your business in ways that move us toward a new normal. There is a pattern to the way previous pandemics go. We develop technology, policies and procedures, individuals decide on their own when it is over. It’s happening – slowly.
Football vs. Rugby
Over the weekend, Cryptos tanked. They are not currencies; they are speculative vehicles. Trading Futures contract to deliver a certain number of crypto currencies at a future date at a future time means you no longer have to buy them to make money on them (or lose money). Derivatives are supposed to be insurance that help investors manage risk, but their very existence can create more risk to the underlying assets. An Analogy: Equipment/TOOLS are sometimes made to protect us, often they make us feel more invincible. In the NFL the health risks magnified as the equipment improved. The athletes got bigger, stronger and faster. The playing surfaces and helmets led to more violent impacts. In rugby there’s less gear but the injuries are often less serious. Similarly in the financial markets, money, money passing through corporations, stocks, bonds, derivatives that are designed to protect owners are like tools and equipment. It is no coincidence that the housing market imploded about the time the industry created a derivative that allowed investors to hedge their residential real estate holdings. For those who owned real estate the derivative was insurance. For some however it was a way to bet on the direction of the Real Estate market with leverage. Many didn’t anticipate the unintended consequences. Part of the 2008 financial crisis was impacted by tools and equipment invented to make markets less risky for some but instead made the market riskier over all.
Last week
S&P was down about 1% for the week. From it’s high point it was about a 5% correction.
NASDAQ down @2.6%
Small Caps down @4%
Tech down @4%
Foreign Stocks down @1%
BIG WINNER EMERGING Markets up about .25%
Energy #1 performing sector YTD
Staples/Defensive performing worst YTD but still positive
GDP this past quarter was about 2% - not growing fast. Number is comparing year over year. Second quarter 2020 had worst part of pandemic. Compared with 2021 GDP was up around 6%.
Fourth quarter may also disappoint but looking beyond we think the expanding return of business to more normal conditions could lead to better economic and market performance.
See you next month at our January Open Office Hour Zoom on Wednesday, January 12th at 4:30p ET.
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.